Healthcare Spending Update
The Centers for Medicare & Medicaid Services (“CMS”) Office of Public Affairs released data in early January indicating that the rate of healthcare spending in the U.S. in 2007 exhibited the slowest growth rate since 1998. Spending grew 6.1% in 2007 to approximately $2.2 trillion or about $7,421 per person. Although these are astounding numbers, the growth rate was actually 0.6% lower than the growth factor in 2006. Despite the growth rate being the lowest since 1998, the healthcare spending share of the nation’s Gross Domestic Product (“GDP”) continued to climb, reaching 16.2% in 2007, up by 0.2% from 2006.

A separate report issued by the Congressional Budget Office reports that Federal spending on Medicare and Medicaid will rise from about 4% of the GDP in 2009 to nearly 6% in 2019 and 12% by 2050, with the majority of the increase coming from increasing costs as opposed to the aging of the population. The CBO also projects that the number of uninsured will increase from around 45 million in 2009 to about 54 million in 2019, an increase of 20%.

Some key takeaways from the CMS report:

• Healthcare spending continues to outpace overall economic growth, which grew by 4.8% in 2007.
• Medicare spending grew 7.2% in 2007, substantially less than the 18.5% growth in 2006 which had the one-time impact of the implementation of the Medicare Part D program.
• Total Medicaid spending grew 6.4% in 2007, up somewhat from 2006 primarily due to growth for hospital care, home health, dental, physician and clinical care services, all of which were accelerated in 2007 as states increased provider payments and continued efforts to provide, and shift, care toward home and community-based services as less costly alternatives to institutional care.
• Spending for nursing home and home health services accelerated in 2007, with CMS noting that freestanding nursing homes exhibited a 4.8% spending growth in 2007 compared to 4.0% in 2006 due mainly to faster price growth. This has been noted as a CMS concern in that the cost of care, and continued high acuity RUG creep, continues to cause Medicare payments to nursing homes to be greater than CMS’s expectations.
• Total healthcare spending by public programs, inclusive of Medicare and Medicaid, grew 6.4% in 2007 compared to 8.2% in 2006. In comparison, healthcare spending by private sources grew 5.8% in 2007 compared to 5.4% in 2006.
• Federal healthcare officials estimate that the struggling economy, impacts of the underinsured and non-insured, and continued depressed market conditions will likely speed up by one to three years the exhaustion of the Medicare Trust Fund covering hospital and nursing home care.

CMS Launches Nursing Home Rating System
Around mid-December of 2008, CMS officially implemented and published a Five-Star Quality Rating System for nursing home providers. The rating system is designed to provide consumers with a straightforward assessment of nursing home quality. Key data source benchmarks used to rank providers on the 1 through 5 scale (5 stars being best) include 1) Health Inspections; 2) Staffing; and 3) Quality Measures. These three data measures are weighted to derive an overall rating for each of the nations 15,800 nursing homes that participate in either the Medicare or Medicaid programs, and are presented as part of the CMS Nursing Home Compare website at www.medicare.gov.

Several industry organizations find the 5-Star rating system problematic, and have indicated the process has limitations and does not present accurate comparisons. For instance, staffing data is self-reported rather than collected and reported by an independent agency, and is based on data reported once a year reflecting staffing over a 2-week time frame – not necessarily representative of the overall and current staffing levels of a nursing home facility.

Nonetheless, nursing home providers will be so rated, and it is important to note that the system is not a substitute for visiting the nursing home and investigating other resource data that may be available to better evaluate a facility and reach an informed decision pertaining to quality and in gaining an understanding of the reasons for questionable ratings.

MedPAC Recent Testimony
The Medicare Payment Advisory Committee (“MedPAC”) presented testimony to Congress in early January 2009 over a two day period on the state of Medicare payment systems, with a report to be issued in March that will formalize MedPAC’s recommendations. As stated in the past, despite the annual report’s recommenda-tions, historically CMS often does not incorporate the full recommendations in the CMS payment and policy updates by provider sector. However, with the new administration taking full ownership next week, healthcare reform and policy initiatives and the influence of CMS may take a new spin in the future.

Certain Democrats have already introduced requests to have the Government Accountability Office (“GAO”) conduct studies to identify best practices used in the healthcare delivery system, including other countries, that could be applied nationwide in improving health outcomes, cost efficacy, quality of care and in reducing waste in the healthcare system..

Some of the more salient points raised by MedPAC as reported in various policy briefs, the MedPAC presentations, or by industry analysts include:

• A complete revision of the payment methodology for hospice care, likely to occur via a phase-in transition process. The current payment system was initially implemented in 1983, and has evolved to resemble a long term care benefit versus care for the terminally ill with a short life expectancy or the actively dying. MedPAC contends that payment reform is needed in the ways hospices are reimbursed, as well as the establishment of accountability measures and improved data collection efforts. Expect revisions to occur in 2013 if the recommendations are implemented. MedPAC noted that since 2000, the majority of hospice care has been provided by for-profit hospice entities; hospice providers with long length of stays are more profitable; and the LOS in a for-profit hospice is about 45% longer than that of a not-for-profit hospice organization.
• Home Health Agencies would not receive a market basket index (“MBI”) increase for 2010, and would shift planned reductions for coding adjustments to FY 2010 from FY 2011. Estimated impacts would be a reduction of HHA reimbursements by 5.5% from FY 2009 levels. Other recommendations would require Congress to revise rates to account for the average cost of care, develop studies to determine payment measures to ensure quality of care, and establish incentives for delivery of such services.
• Rates for Skilled Nursing Facilities (“SNFs”) would be frozen, i.e., no MBI increase for 2010. The Commission believes the lack of a rate increase would not have a detrimental affect on beneficiary access to needed care. The MedPAC presentation indicated 2007 Medicare margins for all SNF providers averaged 14.5% based on preliminary data.
• Inpatient Rehabilitative Facilities or “IRFs”, would not be afforded an MBI rate increase for 2010. MedPAC contends that margins at IRFs (Medicare utilization is over 60%) are estimated at nearly 12% for 2007.
• MedPAC believes that the adequacy of the payment system for Long-Term Care Hospitals (“LTCHs”) needs to be examined, especially for the more medically complex cases. A recommendation for a 1.6% MBI rate hike to LTCH payments is expected for 2010.
• MedPAC will make a recommendation that would increase Medicare reimbursements to primary care physicians by 1.1% in FY 2010, and approved language that would redistribute relative value units for expensive imaging services to other physician services under Medicare.
• Acute Care Hospitals would receive a full market basket update for inpatient and outpatient care, a move that would increase payments for these hospital services by an estimated 2.7%. The full MBI is afforded to hospital providers who report requisite quality measures. To help fund the quality measures program, MedPAC approved a recommendation that would reduce certain extra payments for the indirect medical education to teaching hospitals by one percentage point for each 10% increase in the ratio of hospital beds to the number of medical residents.
• Dialysis Facilities would receive an increase to the composite rate for end-stage renal dialysis services by 1%.

Additional detail and or supplemental clarifications will be provided upon review of the MedPAC annual report expected to be released in March

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