Medicare Closes Loopholes in Fee Formula
Medicare’s top official is expected to announce as early as today an overhaul in the way Medicare reimburses hospitals for high-cost patients -- a move that would eliminate about $2 billion in payments this year to scores of hospitals around the country.
The change was spurred by recent disclosures that Tenet Healthcare Corp., the hospital chain based in Santa Barbara, received unusually large amounts of supplemental Medicare reimbursements for treating the sickest patients.
Thomas Scully, administrator of the Centers for Medicare & Medicaid Services, said that the revision will close loopholes that allowed hospital operators such as Tenet to “game the system” by manipulating a payment formula that used old hospital cost reports, among other flaws. The change in the rules is expected to take effect immediately upon its public release.
“We are going to remove the incentive up front,” Scully said in an interview. “We’re closing the door.”
Tenet and other hospital operators had been anticipating that Scully would issue new rules for determining these Medicare payments, which are known as “outliers” and totaled about $5 billion last year, or about 6% of the overall Medicare reimbursements for in-patient services. Nonetheless, the substantial reduction in outliers is likely to put financial strain -- which would be severe in some cases -- on hospitals that have come to rely on these funds. In particular, large nonprofit academic hospitals, such as UC Davis Medical Center, could lose an important part of their revenue stream.
Tenet, the nation’s second-largest for-profit hospital chain with 114 acute-care facilities, has deeper resources to withstand such a loss. In anticipation of Scully’s action, the hospital chain voluntarily stopped billing Medicare for outlier payments as of last month.
The company has disclosed that some of its hospitals, including those in Redding, Modesto and several locations in the Southland, got extraordinarily large outliers, which in turn drove a good chunk of the chain’s fabulous profit growth in the last two years. In fact, Scully said that Tenet accounted for about $600 million of the $2 billion in outlier payments that would be eliminated under the new rules.
Tenet has acknowledged that it boosted outliers by aggressively raising retail hospital charges, which few patients ever pay but which have been a key component in Medicare’s formula for calculating these payments. Tenet has denied breaking any Medicare rules, although the hospital firm currently faces an investigation by the Justice Department over its Medicare billing practices.
Other hospital operators have generally received little scrutiny over their outlier payments. However, Medicare officials said they have identified about 200 hospitals that may have received inappropriately large amounts of these Medicare payments. Medicare officials said 43 hospitals benefited by taking advantage of statewide averages in the payment formula, which Scully said would be eliminated under the new rules.
“It’s going to take a significant number of these hospitals from being financially solvent to financially insolvent,” said Joshua Nemzoff, a hospital consultant in New Hope, Pa., referring to a major overhaul of Medicare payment rules. “And it’s going to do it instantly.”
Since Medicare began a review of the outlier program last fall, executives at UC Davis Medical Center and other hospitals have expressed concerns that changes in outlier payments could disproportionately hurt academic research hospitals that provide a lot of charity care and services to the most ill patients.
Officials at UC Davis Medical Center declined to comment Monday. A recent analysis by Raymond James & Associates, a Florida-based investment firm, showed that outliers accounted for 55% of the UC Davis hospital’s total Medicare reimbursements last year. Nationwide, the average was about 6%, according to Medicare officials.
Raymond James reported the top 50 hospitals in the country with the largest exposure to Medicare outliers. The list included a dozen Tenet hospitals; most of the rest were nonprofit medical centers in the Northeast. John W. Ransom, the analyst who prepared the analysis, said nonprofit hospitals generally have slimmer profit margins and less access to capital compared with their for-profit counterparts. So there’s “less room to absorb hits from Medicare,” he said.
Don May, vice president for policy at the American Hospital Assn., said Monday that it would be unfortunate if there were dramatic cuts in outlier payments. “They are there to protect the sickest patients,” he said.
