Medicare softens hospital rate cuts

September 1, 2006

Washington, D.C.-Physicians caring for seniors face a 5.1% reduction in Medicare rates next year, unless Congress reverses that decision, as it often does. The Centers for Medicare and Medicaid Services (CMS) announced the cut last month as part of its effort to contain rapidly rising outlays in its healthcare program for the elderly and handicapped. The new rate structure would result in $61.5 billion in payments to doctors for 2007-still up about 10% as physicians continue to increase the volume and intensity of services provided each patient.

WASHINGTON, D.C.-Physicians caring for seniors face a 5.1% reduction in Medicare rates next year, unless Congress reverses that decision, as it often does. The Centers for Medicare and Medicaid Services (CMS) announced the cut last month as part of its effort to contain rapidly rising outlays in its healthcare program for the elderly and handicapped. The new rate structure would result in $61.5 billion in payments to doctors for 2007-still up about 10% as physicians continue to increase the volume and intensity of services provided each patient.

The American Medical Assn. says that nearly half of doctors will either decrease or stop taking new Medicare patients if the cuts go into effect; physicians are using that threat to press Congress to increase-not decrease-Medicare payments. What Medicare pays doctors and hospitals directly affects Medicare Advantage plans that contract with many of the same providers.

At the same time, hospitals would receive a 3% payment increase for outpatient care next year (to $32.5 billion) under a proposed CMS rule designed to make hospital payments more accurate. The total would go up, but not as much as this year's 12% jump in Medicare expenditures. The proposed rule also includes changes to encourage expanded use of ambulatory surgical centers. And, as part of the agency's efforts to promote higher quality and value in patient care, the full rate increase would go only to those hospitals that report a broader set of quality measures.

These changes are part of a broader effort by CMS to revise its formulas for calculating hospital and provider rates in order to reduce the "very rapid growth and large variations in hospital outpatient services," explains CMS Administrator Mark McClellan, MD. "Doing nothing is not sustainable from the standpoint of Medicare costs and beneficiary premiums."

CMS also is revising how it pays for inpatient hospital care, which amounts to some $125 billion a year. However, it announced earlier that it would slow down implementation of significant changes in its inpatient hospital reimbursement formula that would have resulted in sizeable hospital rate cuts next year for some services.

Instead of fully establishing the new reimbursement method that was proposed last April, CMS now is reducing the planned payment cuts and stretching out implementation over three years. The new system aims to adjust payments to fit actual costs more accurately, basing rates on hospital costs instead of inflated charges, and accounting more accurately for severity of illness. The old system, say Medicare officials, has encouraged hospitals to perform more profitable treatments more often, generating a cadre of "specialty hospitals" that provide a limited range of certain high-cost services.