CapitalSource | Commercial Lender 

March 2012

  Wheelchair Image
Healthcare Changes on the Horizon Healthcare Alert home page >>
Third-Party Reimbursements for Medicare >>
Medicaid and States News >>


As many are aware who monitor governmental payments for healthcare services, health programs face a number of substantial payment and policy modifications in the future, many of which will reduce Medicare and Medicaid reimbursements, impact coverage, alter cost-sharing, and change the structure of prospective payment systems and associated policy.  Fortunately, there also is some good news in that the Affordable Care Act (“ACA”) has freed up about $3 billion in grant money to states looking to keep elderly and disabled individuals out of long-term care facilities which are in the form of higher matching payments for certain states that meet defined criteria.1 

But with regard to reimbursement contraction, the failure of the Congressional super committee last fall is set to trigger automatic sequestration reductions, although the Medicare and Medicaid programs have protections and safeguards under the law.  The automatic cuts will not affect Medicaid payments, and Medicare spending would be cut by not more than 2% under sequestration as it relates to payments to hospitals and other healthcare providers.  The stated effective date for sequestration cuts is 1/1/13.

In late February 2012, President Obama signed the Middle Class Tax Relief and Job Creation Act of 2012 (the “Act”).  Depending on one’s point of view, the centerpiece of this legislation was either a) the avert of the significant pay cut of 27.4% on Medicare payments for physician services that was to have taken effect March 1; or b) the extension of the “payroll tax holiday” as some call it through the remainder of 2012.  Without this measure, the temporary social security tax reduction of 200 basis points that was previously approved by Congress would have ended on 3/1/12.  Among other relief measures, select sections of the Act reforms unemployment insurance depending on a state’s unemployment rate and grants various Medicare extenders. 

Some of the more discussed extensions include the exceptions process for the Medicare Part B therapy caps (with updates to the cap rates) through 12/31/12; extension of the hospital Medicare outpatient hold harmless provision that was to have expired on 2/29/12 through 12/31/12 (except for sole community hospitals with more than 100 beds); extends certain hospital geographic reclassifications that were authorized under section 508 of the Medicare Modernization Act through 3/12/12 that would otherwise have expired on 12/1/11; extends the ability of independent labs to receive direct payments for the technical component for certain services through 6/30/12; and extends the add-on payment for ground and air ambulance services, including those providers in super rural areas, through 12/31/12.

The aforementioned extenders as well as others not listed above carry a substantial cost, which is generally funded by imposed offsets, often referred to as “pay fors.”  Some of the more relevant health program offsets are associated with Medicare payment policies which are summarized as follows:

Reduction of Medicare Bad Debt Payments – This impacts hospitals and skilled nursing facilities (“SNFs”) as well as other providers and the allowable reimbursement for unpaid Medicare beneficiary cost-sharing (i.e., deductibles and coinsurance amounts that meet certain defined criteria for deeming such amounts as uncollectible).  Under current law, Medicare will pay for 70% or 100% of the uncollected amounts depending on provider type and whether the Medicare patient is a dual-eligible, which is one who also qualifies for Medicaid coverage. 

The provision will drop the bad debt reimbursement factor to 65% beginning in FY 2013 for providers who are currently being reimbursed at 70%, while phasing-in the reduction to 65% over three years for those who are reimbursed at 100% of their allowable annual bad debt amounts.  The phase-down period would begin on 10/1/12 with factors of 88%, 76% and 65% respectively for rate years 1, 2, and 3 and thereafter.  The CBO estimates that this provision would reduce spending by $6.9 billion from 2012 through 2022, and discussion has circulated that the reduced percentage may be further taken down to 25%.

Reset of Clinical Laboratory Payment Rates – The Medicare program reimburses clinical lab services under carrier-specific fee schedules subject to national payment limits, with most labs receiving the national payment.  This provision reduces payment rates for clinical lab services by 2% in 2013.  As the 2% reduction is applied after the update is calculated, the resulting 2013 update amount becomes the new reset base on which the 2014 update will be applied.  CBO estimates this provision would reduce spending by $2.7 billion from 2012 through 2022.

Rebasing Medicaid Disproportionate Share Hospital (“DSH”) Allotments – Supplemental DSH payments provide funding and monetary assistance to hospitals that serve a disproportionate number of low-income patients.  The ACA reduced DSH payments in 2014.  This provision extends the DSH payment reductions from the ACA for one additional year, and would rebase the allotments for FY 2021.  CBO estimates this provision would reduce spending by $4.1 billion over the next 11 years.

Technical Correction Relating to the Medicaid Federal Disaster Matching Rate – The ACA included a provision known as the “disaster-recovery FMAP” designed to help states to adjust to drastic changes in FMAP (Federal Medical Assistance Percentages) following a statewide disaster.  Section 3204 of the Act makes a technical correction whereby the “Louisiana Purchase” funding that was contained in the Health Care Reform Bills is eliminated in 2014.  CBO estimates this provision would reduce spending by $2.5 billion from 2012 through 2022.

Reduction in the Prevention and Public Health Fund – This Fund, established by the ACA and intended to shift the focus of the health care system to prevention rather than treatment and also known as the Harkin Fund, provides the Secretary of HHS unlimited authority to spend above and beyond appropriated levels for any activity authorized by the Public Health Service Act.  The applicable provision of the Act reduces the trust fund over a ten-year period.  CBO estimates this provision would reduce spending by $5 billion.

And if the above cuts are not enough, many providers are concerned about the potential for further negative implications that could be forthcoming from the proposed Federal Budget for 2013 as well as from many states that continue to face their own budget woes.  Although specific spending cuts by individual provider type are not yet listed, overall the Federal Budget as proposed requests for a combination of higher Medicare premiums for “beneficiaries who an most afford them” and reduced payments to providers and drug manufactures for a total of $364 billion in anticipated healthcare savings over 10 years. 

Medicare payments to long-term care hospitals and nursing homes would be reduced by about $63 billion over ten years; with payments for graduate medical education incrementally reduced each year beginning in 2014, for a total of $9.7 billion in savings over ten years.  The proposal also includes a plan to work toward a permanent and fiscally sound resolution to the Medicare’s sustainable growth rate (“SGR”) formula for physician payments, although specific strategies are not yet detailed.2 

A report3 issued a few months ago projects that margins for SNF providers, on average, which are nominal at 0.75% based on analysis of 2009 Medicare cost report data, could easily become negative with the proposed freeze on the market basket index, additional reimbursement cuts from the Medicare program, bad debt reimbursement levels lowered to 25%, a copy of 5% on covered days 1-20 on SNF care, and a possible decrease in the Federal cap on Medicaid provider tax revenues of 3.5%.

1Source: An article published at McKnight’s online dated 3/2/12.
2Source: A Summary of President Barak Obama’s Fiscal Year 2013 Federal Budget Proposal prepared by The New England Council.
3Assessing the Financial Implications of Alternative Reimbursement Policies for Nursing Facilities by The Moran Company, as commissioned by the American Health Care Association issued December 2011.

back to top >>
Healthcare Alert home page >>
Third-Party Reimbursements for Medicare >>
Medicaid and State News >>


CapitalSource | 5404 Wisconsin Avenue, Second Floor, Chevy Chase, MD 20815 | 1.866.590.1566 | 301.841.2700 |