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Long-term care hospitals (LTCHs)

July 12, 2011 in Hospitals, Medicare | 1 comment

Today I review how Medicare pays for long-term care hospitals (LTCHs) based on information from MedPAC’s 2011 Report to Congress.

LTCHs furnish care to patients with clinically complex problems—such as multiple acute and chronic conditions—who need hospital-level care for relatively extended periods. These facilities can be freestanding or colocated with other hospitals as hospitals within hospitals (HWHs) or satellites. To qualify as an LTCH for Medicare payment, a facility must meet Medicare’s conditions of participation for acute care hospitals and have an average length of stay of greater than 25 days for its Medicare patients. Medicare is the predominant payer for most LTCHs, accounting for about two-thirds of LTCH discharges. In 2009, Medicare spent $4.9 billion on care furnished to roughly 400 LTCHs nationwide. About 116,000 beneficiaries had almost 131,500 LTCH stays.

Nationwide there has been marked growth in both the number and the share of critically ill patients transferred from acute care hospitals to LTCHs. Kahn and colleagues found that, though the overall number of Medicare admissions to acute care hospital ICUs fell 14 percent between 1997 and 2006, the number of Medicare ICU patients discharged to LTCHs almost tripled.

Since October 2002, Medicare has paid LTCHs prospective per discharge rates based primarily on the patient’s diagnosis and the facility’s wage index. Under this prospective payment system (PPS), LTCH payment rates are based on the Medicare severity long-term care diagnosis related group (MS–LTC–DRG) patient classification system, which groups patients based primarily on diagnoses and procedures. MS–LTC–DRGs are the same groups used in the acute inpatient PPS but have relative weights specific to LTCH patients, reflecting the average relative costliness of cases in the group compared with that for the average LTCH case.

Beginning in July 2007, CMS extended the 25 percent rule to apply to all LTCHs. The 25 percent rule limits the percentage of patients who could be admitted to an LTCH from any one referring acute care hospital during a cost-reporting period without being subject to a payment adjustment.

The number of LTCHs increased 6.6 percent between 2008 and 2009, despite a limited moratorium on new LTCHs and new beds in existing LTCHs from July 2007 until December 28, 2012. New LTCHs were able to enter the Medicare program because they met specific exceptions to the moratorium.

Unlike most other health care facilities, LTCHs do not submit quality data to CMS. The Patient Protection and Affordable Care Act of 2010 mandates that CMS implement a pay-for-reporting program for LTCHs by 2014. A panel convened by the Commission to provide input into the development of LTCH quality measures suggested that CMS begin with a starter set of 10 to 12 measures based on those that most LTCHs already use for internal quality monitoring.

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New Legislation affecting Medicare Hospital Payments

July 7, 2011 in Hospitals, Medicare | No comments

Recent Legislation

  • CMS completed its implementation of Medicare severity–diagnosis related groups (MS–DRGs) and cost-based relative weights in FY 2009.
  • TMA, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), the Congress mandated payment reductions of 0.6 percent in 2008 and an additional 0.9 percent in 2009 to offset the effects of documentation and coding improvements (DCI) projected by the CMS Office of the Actuary (actual hospitals’ DCI increased payments by 2.5 percent in 2008 and by a cumulative 5.4 percent by 2009)

PPACA (i.e., Health Reform) changes to Medicare’s inpatient prospective payment system (IPPS) for hospitals

Below are six key changes that the PPACA legislation made to hospital payments in the current and future fiscal years.

  • PPACA1: Congress mandated a 0.25 percentage point reduction in the payment update for the second half of FY 2010 and for all of FY 2011.
  • PPACA2: Congress temporarily expanded (through 2012) the policy providing additional payments to hospitals that have a low volume of Medicare (not all payers) inpatient discharges and are 15 miles or more from the nearest PPS hospital.
  • PPACA3: Instituted a new two-year program to provide additional payments to hospitals located in counties with relatively low levels of Medicare spending (age, sex, and gender adjusted, but not health status adjusted)
  • PPACA4: PPACA extended for all of FY 2010 the provision in Section 508 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which gave eligible hospitals an opportunity for a one-time reclassification to a different labor market and allowed this change to increase their payments.
  • PPACA5: The frontier wage index floor will guarentee that hospitals in Montana, North Dakota, Nevada, South Dakota, and Wyoming will maintain a wage index equal to no less than 1.0.
  • PPACA6: Beginning in FY 2011 a rural-floor budget-neutrality adjustment will be applied on a national level, rather than on a state level. CMS estimated that this policy change will increase payments for urban hospitals whose wage index is raised up to the state’s rural level and will decrease payments for other hospitals (including all rural hospitals), which pay for the floor through a budgetneutrality adjustment.

Outpatient

  • Rural hospitals with 100 or fewer beds receive hold-harmless outpatient payments through 2011.  Thus, the switch from a cost-based to OPPS payment system will not effect reimbursement negatively for these providers.  In January 2012, the OPPS system is set to be instituted for these providers.

Source: MedPAC’s March 2011 Report to Congress.

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Medicare: Outpatient costs rise, inpatient costs fall

July 1, 2011 in Hospitals, Medicaid/Medicare, Medicare | 2 comments

“From 2004 through 2009, the volume of Medicare outpatient services per FFS beneficiary increased at roughly a 4.3 percent annual rate for a cumulative increase of 23 percent over the six-year period. During the same period, Medicare inpatient discharge volume declined at roughly a 0.9 percent annual rate, and inpatient discharges per FFS Part A beneficiary decreased by about 4 percent from 2004 to 2009.”

Will this trend save or cost Medicare money?

According to MedPAC’s March 2011 report, there are two key reasons for this. The first is a shift in the site of service from inpatient to outpatient units. For instance, many routine surgical procedures can now be conducted in the outpatient setting. This development likely reduces cost per treatment, but may increase costs if individuals are more likely to receive invasive treatments. Alternatively, if physicians are more likely to have an ownership stake in the outpatient facility, surgery rates per diagnosis may increase.

Another reason for the rise in outpatient costs is hospital acquisition of physician practices. Hospitals want to acquire physician practices for two reasons: first, it makes their patients more likely to use their hospital, and second, fees for visits to physicians in hospital-based facilities (consider outpatient) are more lucrative to visits in free-standing facilities. Specifically, “When patients visit a physician office that is part of a hospital’s outpatient department, Medicare pays a facility fee to the hospital and a reduced fee for the physician’s services. The combined fees paid for visits to hospital-based practices are often more than 50 percent greater than rates paid to freestanding practices.”

Thus net effect of the shift to outpatient services, thus, has an ambiguous effect on total Medicare payments.

Maximizing utility for end-of-life care

June 20, 2011 in Hospitals, Nursing Homes | 1 comment

Hospitals in Sacramento were concerned about the large number of nusring home transfers to its facility.  Were many of these tranfers unnecessary? Did patients with little chance of recovery benefit from these hospital stays?

To reduce end-of-life tranfers to hospitals from nursing homes, 3 Sacramento-area hospital systems and 18 nursing homes instuted the Preparing Residents for End-of-Life Plans and Respecting Endof-Life Decisions (PREPARED) project.  In the project, the hospital systems provided clinician educators with expertise in end-of-life care to work part of their time each week in nursing homes. The PREPARED intervention included provided advance care planning (ACP) education to patients as well as nursing home staff and administrators.

The study found that the initiative decreased hospitalization rates, increased nursing home as the the site of death, and improved perceptions of quality of care by family members.

How do family members perceive quality of care? The study shows that family members prefer the more intimate setting of a nursing home to a hospital, but this preference is likely conditional on a fixed death date.  By this I mean that if a family knew there loved one would die with certainty on a given date, the nursing home would be the preferred setting. If hospital care could extend the patient’s life, however, (i.e., more realistically not conditioning on death date) then family members may prefer to send their loved one to the hospital even though it is a less intimate setting.  A lot of these preferences may have to do with provider education. Providers who tell family members that their loved one has a chance (albiet small) of recover may be more likely to go the hospital route than those whose providers tell them there is basically no chance of recovery.

Further, most people would rather commit an error of commission than omission.  For instance, by not sending a loved one to the hospital, family members may feel guilt that they didn’t do all they could to save the patient.  However, sending the loved one to the hospital has its own risks (hospital acquired infections, complications, medical errors), but it seems that generally family members feel less guilty about death due hospital-related care.

Thus, although the study shows that family members are more satisfied when their loved one dies in a nursing home compared to a hospital, I do not believe that this is strong evidence of a long-term trend towards less hospitalization of terminally ill patients.

Source: Kathy Glasmire and Kathleen Kerr. Be Prepared: Reducing Nursing Home Transfers Near End of Life. CHCF, March 2011.

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Negotiating Power

June 14, 2011 in Health Insurance, Hospitals, Physician Compensation, Supply of Medical Services | No comments

On Monday I attended a talk at AcademyHealth on the impact of market consolidation on the cost of health care.  Particularly interesting was Robert (Bob) Berenson’s analysis of the effect of provider consolidation on negotiating power and health care prices.  Particularly, provider have been gaining market power of late, according to recent CTS site visits.  There are three main reasons for this:

  1. A failure of employers to agree to “narrow networks” of providers and thus be able to drive down prices
  2. The end of the oversupply of hospital beds
  3. Provider clout due to name recognition (only for the “have” hospitals, not the have nots.

Further industry consolidation has taken three main forms over the last few years:

  1. Multi-hospital chains are buying more hospitals,
  2. Hospitals are employing more physicians directly, and
  3. Physicians are consolidating into groups.

Physician consolidation is particularly interesting.  Physicians consolidate not only to gain negotiating leverage, but a larger practice allows for physicians to start performing ancillary services such as labs and imaging.

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Hospital VBP gains the attention of the New York Times

May 31, 2011 in Current Events, Hospitals, Medicare, Value-Based Purchasing | No comments

The Healthcare Economist has already commented on the impending Medicare implementation of a hospital value-based purchased (VBP) system.  Now, Medicare’s hospital VBP program has garnered the attention of the popular press.  According to the New York Times:

“The administration plans to establish ‘Medicare spending per beneficiary’ as a new measure of hospital performance…Hospitals could be held accountable not only for the cost of the care they provide, but also for the cost of services performed by doctors and other health care providers in the 90 days after a Medicare patient leaves the hospital…

In calculating Medicare spending per beneficiary, the administration said, it wants to count costs generated during a hospital stay, the three days before it and the 90 days afterward. This, it said, will encourage hospitals to coordinate care “in an efficient manner over an extended time period…

Medicare will begin computing performance scores in July, for monetary rewards and penalties that start in October 2012.“

Do hospitals like the plan? Some do, but many do not.

This plan has drawn fire from hospitals, which say they have little control over services provided after a patient’s discharge — and, in many cases, do not even know about them…Without opposing the change, lawmakers from higher-cost states like Massachusetts and New York say the payment formula needs more work…Kenneth E. Raske, president of the Greater New York Hospital Association, said the formula ‘tends to discriminate against inner-city hospitals with large numbers of immigrant, poor and uninsured patients.’

By contrast, J. Kirk Norris, president of the Iowa Hospital Association, welcomed the new plan. ‘Medicare ought to pay for value,’ he said.

Will Medicare adequately risk adjust provider payments? Can hospitals coordinate post-acute care once their patients leave the hospital? Will additional coordination lead to increased industry consolidation and–in the long-run–increased health care cost? Will hospitals be able to game the system? How will Medicare monitor quality?

I have discussed these issues in series of previous posts on value-based purchasing. Hopefully, Medicare will get it right this time and improve quality while reducing cost. At this point, however, with Medicare Trust Fund set to be exhausted in 2024, reducing cost may be the priority which trumps all others.

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Does WellPoint care about quality…or reducing cost?

May 19, 2011 in Health Insurance, Hospitals, Value-Based Purchasing | 2 comments

One large insurer is planning to begin paying hospitals based on quality.

“WellPoint is replacing the system it uses to help offset rising medical and other costs at hospitals in 14 states that serve its Blue Cross Blue Shield plans, which cover 34 million people. In recent years, it has raised its payments to those hospitals by an average 8% a year.

Under the new system, the company will pay increases only to hospitals that score high enough on a test based on 51 indicators of treatment quality. The indicators include whether the facility tries to prevent patients from relapsing after they leave the hospital, whether it follows a safety checklist and how satisfied the hospital’s patients say they are with their treatment.”

Does Well Point really care about quality?  The answer is maybe.

Improving quality of care could improve WellPoint’s bottom line.  If patients demand improved quality of care, implementing a hospital VBP system could attract more members. Further, WellPoint could just be altruistic and this may be an attempt to improve the health of its members (the Healthcare Economist is skeptical of this point).

It could also be the case the WellPoint does not care at all about quality.  High-quality hospitals will get the same annual increase they did before; low-quality hospitals will get less.  The chairman of the Federation of American Hospitals (FHA) accurately notes that hospital quality measures are far from perfect and are less-than comprehensive.  Nevertheless, even if the selected metrics measured quality inaccurately, certain hospitals would still receive lower payments and WellPoint would benefit either through increased profits or increased market share (by lowering premiums).

Rather than responding to pressure to increase qualityof care, WellPoint’s VBP efforts may in fact be a response to employer and beneficiary pressure to reduce premiums.

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Price Competition for UK Hospitals?

January 13, 2011 in Hospitals, International Health Care Systems, Regulation, Supply of Medical Services | 6 comments

Is health reform coming to the UK?  Since the middle of the decade, the NHS has used a tariff system which pays a fixed price per procedure. Now, however, the Financial Times, reports that the UK plans for “public and private hospitals to compete on price for the treatment of NHS patients.”  The reform calls for quality monitoring to ensure that quality does not slip.

What do British health economists think of the reforms?

  • Zack Cooper, a health economist at the London School of Economics, said introducing price competition “would be a hugely retro­grade step”. In ordinary markets, he said, people can see the trade-off between price and quality. “But in healthcare, it is difficult to measure quality, partly because the process is complex and partly because it may take days, weeks or even years for the outcome of treatment to become evident.” [In the U.S.], the use of fixed prices in the federally funded Medicare programme for the elderly has helped raise quality. “I’m very pro-competition in healthcare,” he said. “But price competition is not the right way to do it.”
  • Anita Charlesworth, chief economist at the Nuffield Trust health think-tank, said the evidence from the 1990s, when family doctors could negotiate on price, was that a huge amount of time and money went in to pricing rather than the appropriateness or quality of care
  • Nick Bosanquet, professor of health economics at Imperial College, London, argues in favour of price competition. “If you want a more flexible system it is illogical to have fixed prices, and after years of fixed prices in the NHS there is still a big variation in the quality of care.”

In my opinion, the value of price competition depends on your perception of how well patients and government can judge quality.  In a world without asymmetric information, it is clear that price competition is optimal.  The government could buy medical services by optimizing along a continuum of quality and price.  Even in the presence of asymmetric information, price competition can be a good thing especially if there are some observable–although imperfect–signals of quality.

If quality is completely unobservable, then providers would have an incentive to minimize quality and drive down price.   Unless of course, patients take price as a signal for quality.  In this case, higher priced providers could gain market share because of a false perception of quality.

In the case where the consumer would pay for medical services, one justification for fixed pricing would occur if the government is better able to measure quality than individuals.  For instance, individuals may be better at judging quality in terms of office amenities and the physician’s bedside manner, but policymakers can better judge whether providers follow best practices and have superior outcomes on average.  If society can agree that outcomes matter more than office amenities, than the government could regulate quality and counteract provider’s incentivize to drive down their costs to maximize profits.

It is not a foregone conclusion that the experts inside or outside the government can measure quality better than can patients. For instance, in the same FT article, Ms. Charlesworth, states that it “was  ’particularly worrying’ that GPs will set local prices for mental health services where quality is even harder to measure than in acute care.”  If quality is so difficult to measure, how can policymakers measure that quality has decreased after the implementation of price competition?

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Medicare Hospital Value-Based Purchasing

December 7, 2010 in Hospitals, P4P, Quality | 4 comments

The Health Reform (ACA) legislation mandated Medicare establish a hospital value-based purchasing (VBP) program by 2012.  In fact, the Deficit Reduction Act of 2005 already authorized Medicare to develop a plan to implement VBP for 2009.   How will they do this?  A CMS report from 2007 sheds some light on the topic.

Since 2005, Medicare began the Reporting Hospital Quality Data for Annual Payment Update (with the incredibly unintelligible acronym of RHQDAPU).  RHQDAPU at first just required hospitals to report quality measures.  The Health Reform VBP initiatives, however, will begin to pay hospitals based on their performance on these metrics.  The 2007 CMS report claims that any VBP plan should contain the following 7 components.

  1. A Performance Assessment Model that is used to score a hospital’s performance on a specified set of measures, generating a Total Performance Score for each hospital.
  2. Translation of the VBP Total Performance Score into an incentive payment.
  3. A measure development process, including selection criteria for choosing performance measures for the financial incentive, and candidate measures for VBP Program start.
  4. A phased approach to transition from RHQDAPU to VBP.
  5. Redesigned data submission and validation infrastructure to support the VBP Program requirements.
  6. Enhancements to the Hospital Compare website to support expanded public reporting of performance results.
  7. An approach to monitoring VBP impacts, including potential impacts on health disparities.

Below I discuss aspects of hospital VBP in more detail.

Read the rest of this entry »

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Defining a Hospital Catchment Area

November 23, 2010 in Hospitals, Labor Economics | No comments

From what areas does a hospital draw on to fill its beds?  There have been many attempts to define a hospital’s catchment area.  The Dartmouth Atlas Group uses hospital referral regions (HRRs) and hospital service areas (HSAs). One method is to determine a minimum admission rate for a given geographic unit (e.g., county, census tract, zip code).  For instance, a given zip code would be placed in a hospital’s catchment area if that zip code made up at least 0.5% of hospital admissions.  Conversely, one could include all areas where at least a certain percent of resident admissions were to the hospital in question.

A paper by Gilmour (2010) examines how to create a hospital catchment area using K-means clustering.  The goal of this process is to assign local authority districts to hospitals based on the how likely the individuals are to visit a certain hospital.  K-means clustering is used to partition n observations into k clusters in which each observation belongs to the cluster with the nearest mean. The author applies the standard K-means clustering algorithm as follows:

  1. Two cluster centers are chosen arbitrarily,
  2. Each observation is assigned into the cluster whose center it lies closest to,
  3. The center of the cluster formed by this assignment is recalculated, and
  4. The process is repeated until the cluster assignments cease to change.

Gilmour uses a multivariate approach to estimate “closeness.”  He uses principal components analysis to incorporate additional information such as the size and distribution of the hospital’s activity.

Although the K-means clustering captures a larger share of the hospital’s admissions, the catchment areas are generally much larger than is the case using the marginal methods.

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