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MedPAC Questions Effectiveness of New Short Stay Payment Policy to Address Long Observation Stays

September 12, 2014—The Medicare Payment Advisory Commission (MedPAC) Sept. 11 convened for a meeting which included discussion of short stays, Medicare trends and demographics, and Accountable Care Organizations (ACOs).

During the meeting, commissioners echoed AAMC’s conclusion on alternative short stay payment policies being considered to replace the Two Midnight rule.  The commissioners’ evaluation of potential payment policy options led to a growing consensus that modifying payment policy may not be the best course of action to address the longer observation stays that prompted adoption of the Two Midnight rule. 

The commission noted that the payment policy changes under consideration would undermine the DRG system, which has proven to be an effective payment system and has reduced overall inpatient spending. Several commissioners also acknowledged that short inpatient stays are not truly a problem because DRG weighting will obviate the need for payment changes by gradually correcting any overpayment for DRGs that are more frequently short stays. 

The commission’s observations aligned with several points that the AAMC has raised in comment letters to the Centers for Medicare and Medicaid Services (CMS) on the Two Midnight rule and alternative short stay policies.

Several commissioners agreed that if the real problem is that patients who should have been admitted are kept in observation because of decisions driven by increasing targeting of short stays and denials by recovery audit contractors (RACs), then a payment policy is not the optimal solution.  Rather, there is a need to reevaluate the financial incentives for RACs to deny claims and the absence of a penalty for inappropriate denials. Commissioners suggested that this could be paired with targeted audits focused on aberrant admission patterns on an institutional basis. 

A general consensus also emerged that the three day requirement for Medicare coverage of a skilled nursing facility (SNF) stay is antiquated and has negative impact on beneficiaries.  MedPAC is poised to explore ways to replace this policy and to better align the three year review period for recovery audit contractor (RAC) review and the one year period for hospitals to rebill denied Part A claims under Part B.  The commission acknowledged that the misalignment presents challenges for hospitals and should be addressed.

The meeting also included a presentation on Medicare spending trends and projections to provide context for the payment policy discussions. The commissioners concluded that the projections and analysis of their impact on the federal budget indicate that much more needs to be done to control health care costs.  Although per beneficiary spending has slowed since 2010, total Medicare spending continues to rise. This will be compounded by anticipated rapid growth in Medicare enrollment through 2050 while the number of workers per Medicare Part A beneficiary is projected to decline. 

Another topic discussed during the course of the two day meeting was an update on Medicare ACOs, which included a discussion of performance of the Medicare Shared Savings Program (MSSP) and Pioneer ACOs, the MedPAC comment letter and long term strategies for ACOs.  The commission identified several challenges ACOs are facing including the limitations on engaging beneficiaries, uncertainty regarding attribution and financial benchmarks, and burdensome quality reporting.  Additionally, several ideas were presented regarding how to make ACOs more attractive including reducing administrative costs (e.g., simplifying reporting), moving gainsharing up or down, creating a greater incentive to align the beneficiary with the ACO, or providing additional money up front to incentivize participation.

The commissioners grappled with the difficult tradeoffs involved in determining whether the goal should be to make the ACO program attractive to the greatest number of potential participants even though high performers may leave the program because of the challenge of achieving substantial savings. The alternative would be to make strategic decisions regarding increasing risk and incentives that result in smaller but more robust participation in the program.

The meeting also included discussions of whether to set the payment rate for Part B drugs using comparative clinical evidence, findings from beneficiary and physician focus groups, and the impact of home health payment rebasing on quality of care and beneficiary access.  No recommendations were made on any topics.


Mary Patton Wheatley, M.S.
Director, Health Care Affairs
Telephone: 202-862-6297


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