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MedPAC Discusses Short Stays, 340B Drug Pricing Program, Among Other Issues

November 7, 2014—The Medicare Payment Advisory Commission (MedPAC) Nov. 6-7 convened for its monthly meeting. The agenda included discussions of beneficiary access to hospital care and how service volume affects hospital costs; hospital short stay policy options; issues in Medicare Advantage; per beneficiary payment for primary care; the 340B drug pricing program; site neutral payments for inpatient rehabilitation facilities and skilled nursing facilities; and developing a payment policy to promote the use of services based on clinical evidence.

No recommendations were made during the meeting; however, MedPAC will provide draft recommendations on payment updates and will discuss these recommendations at the December meeting.

MedPAC staff presented policy options to address hospital short stay issues including the ambiguity of admission criteria; recovery audit contractors (RACs) focusing on one-day inpatient stays and the corresponding increased use of outpatient observation status; and concerns raised about the effect of observation status on skilled nursing facilities (SNF) coverage and beneficiary liability for self-administered drugs.

The potential solutions discussed included changing payment policy to reduce the payment differences between short inpatient and similar outpatient hospital stays, changes to the RAC auditing process, lengthening the time frame for rebilling for short stays, and addressing beneficiary concerns related to the three-day requirement for coverage of a SNF stay and the lack of coverage for self-administered drugs in the outpatient setting. Chairman Glenn Hackbarth indicated that MedPAC plans to make recommendations regarding these issues in one package that would likely not be ready for the March 2015 Report.

As a potential payment policy option, MedPAC staff explored the idea of creating one-day stay diagnosis related groups (DRGs), which would decrease payment rates for one-day stays and increase payment rates for stays longer than two days, but the payment changes would be budget neutral in aggregate. The policy would have trade-offs, in that it would reduce (though not eliminate) the payment cliff between outpatient and one-day inpatient stays but would create a new payment cliff between one-day and two-day inpatient stays. Making payments site neutral between the outpatient and inpatient setting would have a similar effect of eliminating one cliff but creating a new one.

Commissioners raised questions regarding how to evaluate the tradeoffs between having a cliff between inpatient and outpatient versus one-day and two-day stays, and whether the potential to unravel the DRG system would outweigh the benefits of the policy.  Others noted that there are good reasons for creating a lower acuity DRG to replace separate observation and short inpatient stay payments, particularly as lengths of stay continue to decline.

MedPAC staff also explored ways to address the targeted RAC reviews of short stays and the corollary appeals backlog. RAC review could be targeted to hospitals with the highest number of one-day stays. Another policy option presented would be to use ratios to determine hospitals with a higher proportion of one-day stays, observation stays, and longer observation stays, and apply a payment penalty to the hospitals with higher ratios. 

Other RAC reforms discussed by the commission included addressing problems that result in RACs denying claims after the rebilling window. As potential solutions, MedPAC staff proposed allowing hospitals to rebill denied inpatient claims as outpatient claims within a specified period after the RAC notice of denial or shortening the RAC look-back period for review of short stays. To address issues associated with RAC incentives, MedPAC staff suggested modifying RAC contingency fees to be based in part on the RAC’s overturn rate.

With respect to the three-day requirement for Medicare coverage of SNF stays, MedPAC discussed policy options including counting time spent in outpatient observation status toward the three-day threshold and requiring at least one of the three days to be an inpatient day. MedPAC also discussed the possibility of retaining the three-day threshold to avoid possible increases to Medicare spending, overuse of SNFs, and SNF coverage becoming a long term care benefit contrary to Congressional intent.

MedPAC also discussed a policy option to create a per beneficiary payment for primary care practitioners that would replace the current primary care incentive payments that were established by the Affordable Care Act and will expire at the end of 2015. Staff laid out a policy option with four criteria:

  • The payment amount would be set at the level of the current bonus.  MedPAC staff estimates this payment would be approximately $31 per beneficiary;

  • The bonus would be funded by reducing fees for all services not eligible for current bonus payment. The reduction would be 1.1 percent or 1.4 percent depending on how the commission defines eligible services;

  • The per beneficiary payment would be payable for prospectively assigned patient population; and

  • Payment would not be contingent on practice requirements.

MedPAC plans to review a draft recommendation on this policy during its Dec. 18-19 meeting.

During MedPAC’s discussion of the 340B Drug Pricing program, Chairman Hackbarth explained that the commission is working on this at the request of Congress, but MedPAC will not make recommendations regarding this issue. The presentation by commission staff focused on the growth of the 340B program, the broad language of the statute which allows many providers to participate, concerns with the scope of the program and oversight by the Health Resources and Services Administration (HRSA), and the ongoing debate between hospitals and drug manufacturers about the scope of the program.



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Washington Highlights, a weekly electronic newsletter, features brief updates on the latest legislative and regulatory activities affecting medical schools and teaching hospitals.

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Jason Kleinman
Sr. Legislative Analyst, Govt. Relations
Telephone: 202-903-0806