Time for Congress to Fix Medicare Hospital Rural Floor Payment 'Boondoggle'

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By Mike Abrams, Steve Brenton, Andy Davidson and Bill Pully

Abrams is president and chief executive officer of the Ohio Hospital Association (http://www.ohanet.org/); Brenton is president/CEO of the Wisconsin Hospital Association (http://www.wha.org/); Davidson is president/CEO of the Oregon Hospital Association (http://www.oahhs.org/); and Pully is president/CEO of the North Carolina Hospital Association (https://www.ncha.org/). The authors are members of the Alliance of America's Hospitals, who are joining to urge Congress to repeal the Medicare rural floor provision in the Affordable Care Act.

Since 2011, Massachusetts hospitals have benefited from more than half a billion dollars in additional payments through a one-sentence amendment in Section 3141 of the Affordable Care Act (ACA).

Added by then-Sen. John Kerry (D-Mass.), the amendment adjusted payments through an obscure Medicare funding mechanism designed to ensure that hospitals in urban areas are reimbursed at a level no lower than those of a state's rural hospitals. However, Kerry's amendment included a pernicious catch--rather than drawing from new funding to balance payments, it triggered a budget neutral adjustment.

Massachusetts' gain came at the expense of hospitals across the country--from hospitals that are struggling to care for Medicare beneficiaries in their own states. What has become known as the “Bay State Boondoggle” is more than an unintended consequence of an amendment. There's clear evidence that the state's hospitals worked to create a system to advantage themselves through what even the Obama administration in federal regulations called a “manipulation” of the Medicare “rural floor” payment system.

What triggered this opportunity was best summed up in a Boston Globe article in January 2013.

“Nantucket Cottage entered into the rural hospital payment system in 2008 after it was acquired by Boston-based Partners HealthCare,” the article said. “The Nantucket hospital previously had been paid under a different formula, but made the switch to the rural hospital payment system to help the rest of Massachusetts hospitals reap a financial reward even though its own Medicare reimbursement would decline as a result. Partners had ensured that Nantucket Cottage would be made whole financially because the rest of its hospitals would benefit greatly.”

A later Globe editorial affirmed, “Setting the wage floor in Nantucket resulted in the boon for the rest of the state.”

What makes this issue so troublesome is the fact that a decade ago when Congress approved the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, lawmakers worked to halt similar budget neutral adjustments. When a new round of adjustments were presented during consideration of this legislation, Congress moved away from the “robbing Peter to pay Paul” actions of the past and toward funding any adjustments with new money.

During the Bush administration, CMS called the action a direct “manipulation” of the payment system and moved to implement regulations in 2008 to prevent gaming of the wage index.

The “Bay State Boondoggle” turned the clock back a decade and it was bold--it improved payments by 8 percent for every hospital in Massachusetts. As noted, hospitals across the country, and the Medicare beneficiaries they serve, are paying for this overreach.

When these cuts are added to the Medicare cuts to hospitals through the ACA, sequestration and other subsequent legislation, they have contributed to layoffs, hiring freezes, service line reductions and cancelled capital projects at hospitals and health systems throughout the country.

The Medicare Payment Advisory Commission (MedPAC) noted in a June 2011 letter to the Medicare agency that this “… exception triggered in the state of Massachusetts will have a large impact on hospital payments … .” MedPAC, whose job is to offer counsel to Congress on Medicare policies, further stated that as a result of the budget neutral change, “… all hospitals--including rural hospitals--will absorb the financial loss… .”

The Centers for Medicare & Medicaid Services' suspicion of this maneuver isn't new; it's historical. During the Bush administration, CMS called the action a direct “manipulation” of the payment system and moved to implement regulations in 2008 to prevent gaming of the wage index.

The Obama administration reaffirmed this position during the 2012 rulemaking process, writing “as a result of actions not envisioned by Congress, the rural floor is resulting in significant disparities in wage index, and in some cases, resulting in situations where all the hospitals in a state receive a wage index higher than that of the single highest wage index urban hospital in the State” (76 Fed. Reg. 42,212).

Former acting administrator of CMS, Donald Berwick, was critical of the system's potential for mischief. Interviewed by the Globe, Berwick said the system was “complex” and “susceptible to gaming and manipulation.” Further, Berwick recognized the fundamental problem of the system, post-ACA, saying, “It's a zero-sum game. What Massachusetts gets comes from everybody else.”

Congress itself has moved to fix the “Bay State Boondoggle.”

In January 2013, Sens. Claire McCaskill (D-Mo.) and Tom Coburn (R-Okla.) introduced the Hospital Payment Fairness Act (S. 183) to sunset the provision of the ACA that adjusted hospital wage index payments through Medicare. The bill garnered 28 bipartisan co-sponsors.

In a better system, the rural floor would help support hospitals in states where an anomaly in wages occurs.

In March 2013, the senators offered a non-binding amendment to the Senate Budget Resolution to strike the provision. The amendment passed with 68 votes and strong bipartisan support, a rare feature in today's typically partisan environment.

In the House, Rep. Kevin Brady (R-Texas) introduced a companion bill (H.R. 2053), known as the Medicare Wage Index Equity Act, in May 2013. The House bill has 74 Republican and Democratic co-sponsors.

Although neither the Senate nor the House bill has received a stand-alone vote, pressure continues to build for action on the legislation. Collectively, the states we represent--North Carolina, Ohio, Oregon and Wisconsin--will forego $42 million in Medicare payments in 2014 due to the provision. The total for all hospitals represented by the Alliance of America's Hospitals is much larger.

According to the Congressional Budget Office, returning to the pre-ACA system isn't costly from a budgetary perspective. The wage adjustment index is budget neutral. However, returning to a more just system would reallocate $3.5 billion in payments to those states that are incurring the costs of care for their Medicare beneficiaries, but are purposefully being underpaid. At the same time, these payments will be reduced to Massachusetts and other wage index “winners” throughout 10 years.

In a better system, the rural floor would help support hospitals in states where an anomaly in wages occurs. CMS and Congress could work together to identify where changes were appropriate and fund those changes as needed. That's how it worked pre-ACA, and how it should work again. The wage index wasn't intended to raise hospital rates throughout an entire state based on the single highest rate in the state.

Without question, the hospital wage index system is flawed and cries out for meaningful and long-term reform. Until such time, fixing the Boondoggle provides one small step to restoring more accurate pricing for Medicare.

The pricing structure is important because mispricing can distort the market and lead to issues such as overutilization of services and a lack of flexibility to invest. Moreover, underpricing will harm hospitals' ability to implement important quality and efficiency programs like those embodied elsewhere in ACA, harming hospitals, beneficiaries and the Medicare program.

Funding for Medicare shouldn't be a zero-sum game. Creating winners and losers does nothing to improve the delivery of health care, reduce costs or improve health--the bedrock principles of health reform. And a better system would reduce the incentive for a financial arms race, with states and hospitals vying to capture revenue from other states or each other.

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