In April the Centers for Medicare & Medicaid Services published its proposed rule governing how it plans to pay hospitals for Medicare-covered inpatient services in FY 2017. The rulemaking process includes an invitation to stakeholders to submit comments on what CMS has proposed.

NAUH submitted extensive comments in response to the proposed rule, addressing six aspects of what CMS proposed:

• Medicare disproportionate share (Medicare DSH) payments
• the Medicare hospital readmissions reduction program
• inpatient rates
• observation status/the two-midnight rule
• the outlier threshold
• reporting data for the Medicare area wage index

This week the NAUH blog presents NAUH’s comments. Our schedule is as follows:

• Monday – objections to the proposed new methodology for calculating Medicare DSH uncompensated care payments
• Tuesday – NAUH’s own proposed alternative methodology for calculating Medicare DSH uncompensated care payments
• Wednesday – NAUH’s concern about the size of the proposed Medicare DSH uncompensated care pool
• Thursday – the Medicare hospital readmissions reduction program
• Friday – inpatient rates, observation status/the two-midnight rule, and the outlier threshold

Find NAUH’s complete comment letter here.

Medicare DSH Issue 2: An Alternative Proposal for a New Methodology for Calculating Medicare DSH Uncompensated Care Payments

(As an alternative to using the S-10 in its current form, NAUH respectfully proposes another approach to calculating hospitals’ uncompensated care and determining their Medicare DSH uncompensated care payments.)

In addition to the technical challenges posed by using the S-10 to determine hospitals’ uncompensated care for the purpose of calculating Medicare DSH uncompensated care payments, NAUH believes that even accurate, verifiable uncompensated care data would not achieve what Congress intended when it passed the Affordable Care Act. That law called for this calculation, which is currently “Factor 3” in the Medicare DSH uncompensated care payment calculation, to be

…the amount of uncompensated care for such hospital for a period selected by the Secretary (as estimated by the Secretary, based on appropriate data (including, in the case where the Secretary determines that alternative data is available which is a better proxy for the costs of subsection (d) hospitals for treating the uninsured, the use of such alternative data))…

CMS’ proposed methodology uses estimated charity care and bad debt costs as a proxy for the costs that subsection (d) hospitals (that is, hospitals covered by Medicare’s inpatient prospective payments system (IPPS)) incur when treating the uninsured as the basis for distributing Medicare DSH uncompensated care payments to eligible hospitals. NAUH believes this is not a good proxy because using an estimate of hospitals’ actual incurred costs runs counter to the philosophical foundation of the IPPS, which was created specifically to avoid cost-based reimbursement. Instead, that system aspires and works to reimburse providers for the cost of providing services at an efficiently run hospital. The current IPPS establishes average costs per case through DRGs and then adjusts payments to reflect factors that affect different aspects of hospitals’ costs – factors such as labor costs, teaching programs, percentage of low-income patient served, and severity of patient illness. Additional adjustments offer incentives for improving hospital performance, such as adjustments for readmissions, hospital-acquired infections, and specific aspects of value in the care hospitals provide. The resulting rate is based in part on hospitals’ costs but also on their efficiency and quality.

The proposed methodology for calculating Medicare DSH uncompensated care payments does not do this. Instead, basing such payments in part on hospitals’ uncompensated care costs as reported on the S-10 bases those payments strictly on hospital costs without regard to efficiency or quality. In fact, distributing Medicare DSH uncompensated care payments based strictly on hospital costs incurred caring for individuals without third-party coverage has the potential to reward inefficiency.

A better approach, NAUH believes, is to create a proxy for cost-adjusted discharges attributable to uninsured patients. The process for doing so would begin by revising the S-10 to require hospitals to report the number of discharges and outpatient visits attributable to individuals with no third-party health care coverage – that is, the uninsured. The form would require hospitals to report four values associated with services delivered to this population: 1) number of discharges, 2) number of outpatient claims, 3) charges, and 4) payments, doing so separately for patients who are and who are not covered by state or local indigent care programs. In addition, hospitals would need to report total outpatient claims. Reporting this data on the S-10 would give CMS a reasonable data source for identifying uncompensated care for use in distributing Medicare DSH uncompensated care payments. If nothing else, it would provide CMS with a standard unit to compare the reasonableness of reported uncompensated care costs across hospitals.

Under NAUH’s proposed approach, the new Factor 3 would be equal to the quotient of a hospital’s cost-adjusted discharges for a base year divided by the average cost-adjusted discharges in the base year for all hospitals eligible for Medicare DSH uncompensated care payments in the payment year. This would create a single, auditable data source for determining hospitals’ uncompensated care for use in calculating hospitals’ Medicare DSH uncompensated care payments. Our ten-step process for arriving at this figure would apply to all hospitals covered by Medicare’s IPPS (except hospitals in Maryland and those participating in Medicare’s bundled payment initiative). Those ten steps are:

1. Identify the total number of inpatient discharges attributable to uninsured individuals in the base year.  For the purposes of this calculation, the term “uninsured individuals” includes all individuals to whom a hospital can attribute a claim for which there is no associated third-party payment. The term “third-party payment” includes payments from state and local government programs.
2. Identify the total number of outpatient claims attributable to uninsured individuals in the base year.
3. Identify the total inpatient revenue per inpatient discharge.
4. Identify total outpatient revenue per outpatient claim.
5. Multiply outpatient visits attributable to uninsured individuals by the ratio of outpatient revenue per claim to inpatient revenue per discharge.
6. Add the number identified in step 1 to the number identified in step 5 to calculate adjusted discharges attributable to uninsured individuals.
7. Identify the average per-discharge IPPS payment amount by applying the same logic used in the IPPS PC Pricer (the tool CMS offers hospitals to enable them to estimate what Medicare might pay for a given discharge) but substituting the hospital’s case-mix index in the base year for the relative value of the DRG and excluding the portion of payments attributable to uncompensated care DSH.  This would be the numerator to determine the hospital’s cost adjustment factor.  The denominator for the cost-adjustment factor would be equal to the weighted average numerator value identified in this step for all subsection (d) hospitals projected to receive DSH in the payment year.
8. Identify the hospital’s cost-adjustment factor by dividing the numerator calculated in step 7 by the denominator calculated in step 7.
9. Multiply the adjusted discharges calculated in step 6 by the cost-adjustment factor calculated in step 8 to determine the hospital’s cost-adjusted discharges attributable to the uninsured.
10. Calculate the hospital’s Factor 3 by dividing the hospital’s cost-adjusted discharges calculated in step 9 by the average cost-adjusted discharges for all hospitals projected to receive DSH in the payment year.

This methodology offers a number of advantages over the approach presented in the proposed regulation:

1. It would maintain the IPPS’s incentives for the efficient and high-quality delivery of health care services.
2. It would avoid the use of cost-to-charge ratios. The data currently used by CMS to identify uncompensated care requires the agency to employ a statistical trim methodology to alter reported cost-to-charge ratios for certain hospitals. This trim removes some of the clearly aberrant results in the calculation of Factor 3 but leaves others intact because it is limited as a bright-line trim that affects only those above a certain threshold, replacing them with an average, while leaving similarly but not as egregiously troubling ratios untouched. While such trims are reasonable for normalizing aberrations in the aggregate, the nature of the Factor 3 calculation means that every cost-to-charge ratio that is not accurately reflected either through a potentially inappropriate trim, or the lack of an appropriate trim, affects the amount of Medicare DSH uncompensated care payments to all eligible hospitals and not just to those with questionable ratios. NAUH’s proposal eliminates the need to use cost-to-charge ratios by employing a methodology that compares inpatient and outpatient revenues within a hospital without comparing revenue across hospitals.
3. It better aligns Medicare and Medicaid DSH. While NAUH recognizes that the Medicare DSH and Medicaid DSH programs are distinct and were created to address different concerns, they both now require CMS to contemplate a measure of the amount of care that hospitals provide to individuals without third-party health coverage. In the Medicare DSH program this measure affects the distribution of Medicare DSH uncompensated care funds while in the Medicaid DSH program it affects limits on federal financial participation for hospitals’ unreimbursed costs attributable to serving uninsured patients. While CMS specifically rejected the use of unreimbursed charity care and bad debt costs as a proxy for the cost of treating the uninsured in the Medicaid program, it is proposing that very same measure as a proxy for the costs of treating the uninsured in the Medicare program. NAUH’s proposed methodology would more closely align the Medicare definition of cost for treating the uninsured with the Medicaid definition of costs attributable to uninsured patients while still recognizing the distinct purposes of the two programs.
4. It better reflects the costs for which the Factor 3 data is intended to be a proxy as defined by Congress.

In summary, NAUH believes our proposed methodology, based on cost-adjusted discharges attributable to uninsured individuals, offers several important advantages: it would enable CMS to maintain the incentives built into the current IPPS; it would be based on data that would be easier to report, verify, and audit; it would avoid the arbitrariness of statistical trims; it would more closely align the Medicare and Medicaid definitions of “uninsured”; and it would more closely reflect what we believe to be Congress’s intention as articulated in the Affordable Care Act.

NAUH believes its proposed alternative – a proxy for cost-adjusted discharges attributable to uninsured patients – is superior to using the S-10 in its current form: it is more consistent with the spirit,purpose, and objectives of the Medicare inpatient prospective payment system, better reflects how Congress intended for Medicare DSH payments as part of implementation of the Affordable Care Act, avoids the use of highly questionable cost-to-charge ratios, and better aligns Medicare DSH and Medicaid DSH.

 Find NAUH’s complete comment letter here.