September 2009

The Medicare Reimbursement series continues with a look at physician reimbursement in more detail. The source of this information is MedPAC’s Payment Basics.

Physician Reimbursement
Physicians payment is based on 3 factors: RVU, GPCI and the MEI conversion factor.

• Relative value units (RVUs) measure the relative costliness of three types of resources used to provide different physician services: physician work, practice expenses, and expenses for physicians’ professional liability insurance (PLI). Each of these three components of the RVU payment is adjusted separately for geographic cost variation (see GPCI discussion below).
• Geographic practice cost indexes (GPCI): Measures payments based on variation in the costs of providing services across 89 different geographical areas. Thirty four of these 89 geographical areas are state-wide. GPCI’s have a national average of 1.0. The law requires that the GPCIs be revised at least every three years.
  • Physician work GPCI: based on the earnings of professionals (lawyers, engineers, and others) reported in the decennial census
  • Practice expense GPCI: constructed to account for geographic differences in nonphysician staff wages (40% of the GPCI practice expense), office space costs (27% of the GPCI practice expense), and equipment and supplies (33% of the GPCI practice expense).
  • PLI GPCI: based on data CMS periodically collects from the largest malpractice insurers in each state
• Medicare Economic Index (MEI): Changes in the input prices for physician services are measured using the Medicare Economic Index (MEI), a weighted measure of average national prices for inputs needed to produce physicians’ services.

The Medicare Reimbursement series continues with the big money payments: acute inpatient hospital care, long-term care facilities and critical access hospitals. The sources of this information is MedPAC’s Payment Basics.

Hospital Acute Inpatient Services

• Payments made under the acute inpatient prospective payment system (IPPS) totaled $105 billion and accounted for about 25 percent of Medicare spending in 2006. These payments provide about 20 percent of hospitals’ overall revenues.
• In 2008, beneficiaries are liable for a deductible of $1,024 for the first hospital stay in an episode, and daily copayments of $256 are imposed beginning on the 61st day.
• Hospitals receive payment based on 2 factors: i) patient diagnosis and treatment and ii) hospital location. Each patient admission payment is based on Medicare severity diagnosis related groups (MS–DRGs), which is then adjusted by a geographic factor which measures labor costs in each local area.
• Clinical conditions are defined by patients’ discharge diagnoses, including the principal diagnosis—the main problem requiring inpatient care—and up to eight secondary diagnoses indicating other conditions that were present at admission (co-morbidities) or developed during the hospital stay (complications). The treatment strategy—surgical or medical—is defined by the presence or absence of up to six procedures performed during the stay.
• The MS-DRG is determined by the following factors:
  • Discharge base rates: Hospital are reimbursed a flat amount per discharge for the operating and capital costs that efficient facilities would be expected to incur in furnishing covered inpatient services.
  • MS–DRG relative weights: Medicare assigns a weight to each MS–DRG reflecting the average relative costliness of cases in that group compared with that for the average Medicare case.
  • New technology payments.
  • Wage Index: Medicare’s base operating and capital rates are adjusted by an area wage index to reflect the expected differences in local market prices for labor.
  • Bad Debts: Medicare reimburses acute-care hospitals for 70 percent of bad debts resulting from beneficiaries’ nonpayment of deductibles and copayments.
  • Indirect medical education: Teaching hospitals receive an additional payment.
  • Disproportionate share payments (DSH): Hospitals that treat a disproportionate share of low-income patients receive additional operating and capital payments .
  • Rural hospitals: Rural hospitals can receive extra money if they are a sole community hospital (SCH).
  • Outlier payments: These are additional payments for very costly patient cases.

Long Term Care Hospitals (LTCH)

• Payments to LTCHs were about $4.5 billion in 2007; Medicare beneficiaries accounted for about 70 percent of these hospitals’ revenues. In 2006, almost 116,000 Medicare beneficiaries had 130,000 discharges from LTCHs, and 392 facilities were Medicare certified. In order to qualify for LTCH payment, hospitals must have an average length of patient stay longer than 25 days.
• Beneficiaries transferred to an LTCH from an acute care hospital pay no additional deductible. However, beneficiaries admitted from the community are responsible for a deductible—$1,024 in 2008—as the first admission during a spell of illness, and for a copayment—$256 per day—for the 61st through 90th days.
• Since October 2002, Medicare has paid LTCHs predetermined per discharge rates based primarily on the patient’s diagnosis and market area wages.
• LTCH receive a flat per discharge rate to cover operating and capital costs. Payments for patient care as based on MS–LTC–DRGs, which are based on principal diagnosis, up to eight secondary diagnoses, up to six procedures performed, age, sex, and discharge status.
• Short-stay and high-cost outliers receive altered payment rates.
• The 25 percent rule reduces payments for LTCHs that exceed established percentage thresholds for patients admitted from certain referring hospitals during a cost-reporting period.
• There is no mechanism in law for updating payments to LTCHs. CMS intends to update LTCH PPS payment rates based on the most recent estimate of the Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket index (which measures the price increases of goods and services inpatient rehabilitation facilities, inpatient psychiatric facilities, and LTCHs buy to produce patient care).

Critical Access Hospitals (CAH)

• CAHs are limited to 25 beds and primarily operate in rural areas. Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on 101 percent of each hospital’s reported costs.
• To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital or be declared a “necessary provider” by the state. However, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 eliminated states’ ability to declare additional hospitals “necessary providers” starting in January 2006.
• Medicare’s cost-based payments to CAHs were roughly $6 billion in 2006, representing 4 percent of all Medicare inpatient and outpatient payments to hospitals.
• Most rural hospitals are either CAHs (56 percent), sole community hospitals (SCHs) (18 percent), or Medicare-dependent hospitals (MDHs) (6 percent). CHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).
• There are two main differences between CAH and other forms of rural hospitals. First, CAH receive cost-based payment for inpatient and outpatient care, but SCH and MDH receive cost based payment only for inpatient care. Second, SCHs’ and MDHs’ payments are based on historical costs trended forward.

Ambulatory Surgical Centers

• Payments to ASCs were $2.9 billion in 2007, including both program and beneficiary spending.
• In January 2008, Medicare began paying for surgery-related facility services provided in ASCs using a payment system based on the hospital outpatient prospective payment system (OPPS). In contrast to the old ASC payment system, which had only nine procedure groups, the new ASC system has several hundred procedure groups. The unit of payment in the ASC payment system is the individual surgical procedure.
• In 2008, CMS substantially expanded the list of services that qualify for facility payment in ASCs. Medicare began paying for all procedures that do not pose a significant safety risk when performed in an ASC and do not require an overnight stay.
• The 2008 ASC conversion factor is 65 percent of the OPPS conversion factor ($41.40). The ASC rates are less than the OPPS rates because of the budget neutrality requirement.
• To account for geographic differences in input prices, CMS adjusts the labor portion of the ASC rate (50 percent) by the hospital wage index. CMS does not adjust the non-labor portion (the remaining 50 percent).
• CMS updates the ASC relative weights annually based on changes to the OPPS weights and the physician fee schedule practice expense amounts.