Did the Fiscal Cliff-SGR Bill Rob Hospitals?

This past December, the circus show known as the fiscal cliff finally left town — at least temporarily.

The American Taxpayer Relief Act of 2012, better known as the fiscal cliff deal, was the culmination of several months of posturing and huffing from Congress to avoid the self-induced situation of higher taxes and large-scale cuts to domestic programs. While the bill accomplished some things — raising taxes on individuals making more than $400,000 per year while saving some tax breaks for middle-class incomes — legislators also punted on the big issue. Sequestration, the automatic spending reductions to domestic programs, was delayed two months, until March, meaning Medicare providers dodged the initial bullet of massive cuts.

For healthcare professionals, the other pertinent aspect of the deal was the temporary patch of the sustainable growth rate — the formula that is used to determine Medicare payment rates to physicians. Every year since 2003, Congress has overridden the SGR so physicians would not have to endure sizable cuts to their Medicare pay. Physicians would have been subject to a 26.5 percent reduction effective Jan. 1, 2013, if a fix had not been included in the legislation.

Fixing the SGR always comes at a cost, though. This year, the patch cost about $25 billion, and many providers were left on the hook to pay for it. Dialysis centers and other end-stage renal disease providers lost $4.9 billion in future payments. The Consumer Operated and Oriented Plan program — composed of the non-profit health insurers that are part of the 2010 healthcare law and initially had $6 billion in federal funding — had its remaining $2.3 billion in funds rescinded. However, CO-OPs that had received startups loans will not lose those funds.

Perhaps no other category of providers lost as much as the hospital sector. The bill included a documentation and coding adjustment — meaning CMS would reduce future reimbursements to correct for Medicare severity diagnosis-related group overpayments that were allegedly made in the past. The total cost? Nearly $11 billion, as downward adjustments will be made to the Inpatient Prospective Payment System in fiscal years 2014, 2015, 2016 and 2017, according to the fiscal cliff bill. Hospitals also lost an additional $4.2 billion over the next decade in Medicaid disproportionate share hospital payments.

Hospital groups heavily criticized the deal, especially the documentation and coding adjustments. Rich Umbdenstock, president and CEO of the American Hospital Association said the organization was "very disappointed at the approach taken in this measure." Bruce Siegel, MD, president and CEO of the National Association of Public Hospitals and Health Systems argued that "solving one side of the provider equation must not come at the expense of the other." Chip Kahn, president and CEO of the Federation of American Hospitals, said the deal was nothing more than robbing "hospital Peter to pay for fiscal cliff Paul."

Several groups, not just those in healthcare, lost something financially in the fiscal cliff deal, but do hospitals have a legitimate gripe? Was this year's SGR patch an illusory solution?

Ken Perez, director of healthcare policy and senior vice president of marketing for management solutions firm MedAnalytics, has been studying the SGR for several years. He says while the one-year "doc fix" has technically been settled, the money expected to be recouped from the documentation and coding adjustments is nothing more than "fool's gold" — in other words, CMS will be recouping money it has already (mostly) recouped.

In 2008, CMS transitioned from regular DRGs to MS-DRGs, and as the transition unfolded over the next few years, the government paid hospitals more than it had expected. The transition was supposed to have a net-zero impact on total Medicare expenditures. Since then, CMS has implemented several documentation and coding updates in its annual payment updates to offset and correct the unintended impacts.

In CMS' final rule for the 2013 IPPS, the federal government included a documentation and coding cut of 1.9 percent. Essentially, CMS was making up for MS-DRG overpayments made to hospitals in 2008 and 2009.

In the same final rule, CMS also added a positive 2.9 percent adjustment back to hospitals, which represented a one-time reversal of an equivalently sized negative adjustment in FY 2012. CMS, which had recouped too much in documentation and coding adjustments that year, then said "with this positive adjustment, according to our estimates, all overpayments made in FY 2008 and FY 2009 have been fully recaptured with appropriate interest." As a result, hospitals were left with a 1 percent increase in documentation and coding adjustments.

Mr. Perez adds this 1 percent total increase in documentation and coding adjustments was higher than initially proposed because CMS left out a negative 0.8 percent adjustment to correct overpayments made in FY 2010. "If this adjustment had been applied to FY 2013, I estimate that it would have generated about $1.3 billion," he says.

So what does all this mean? Mr. Perez says the $11 billion in hospital documentation and coding adjustments in the fiscal cliff deal are a mirage. According to CMS' estimates, only $1.3 billion in adjustments remain, and therefore, the errors from the MS-DRG transition era are mostly bygones. However, Congress hammered home a deal that largely paid for the SGR override "with pyrite," Mr. Perez says.

"While this pay-for to cover the doc fix is presented as a reasonable adjustment to rectify an overpayment, the case for it is questionable at best and specious at worst," Mr. Perez says. "Since the only unfinished business regarding MS-DRG overpayments amounts to $1.3 billion, this latest fiscal cliff patch nevertheless takes $11 billion from hospitals — eight times more than can be reasonably justified."

More Articles on Hospitals and the Sustainable Growth Rate:

Health Subcommittee Leaders Cast Themselves in Party Roles
Congress Passes Fiscal Cliff, SGR Deal at Hospitals' Expense
9 Biggest Issues Surrounding the Medicare Sustainable Growth Rate

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