Blog Post

The real threat to Medicare? It may be commercial price growth, MedPAC says

March 30, 2017

    With the Affordable Care Act repeal fight on pause, providers may now have time to pay attention to a message that the Medicare Payment Advisory Commission (MedPAC) has developed over the past several years. Tasked with ensuring the long-term viability of the nation’s biggest payer, the Commission has been suggesting that the real threat to the program may be commercial price growth.

    MedPAC is well aware that hospitals' commercial business has been thriving, at least at the national aggregate level. All-payer margins remained at record high-levels in 2015, driven by a 4% payment increase from private payers. But while Medicare has long relied upon high commercial payment to balance out hospitals' lower reimbursement from public payers, MedPAC appears to hold the opinion there can be too much of a good thing.

    High commercial rates may pose challenges to access for Medicare beneficiaries

    The Commission realizes that Medicare can't compete with commercial rate hikes without endangering the program's Trust Fund. In the long run, MedPAC worries that commercial payment will endanger beneficiary access, as "the difference between commercial rates and Medicare rates will grow so large that some hospitals will have incentive to focus primarily on patients with commercial insurance."

    The conclusion that "commercial payment rate growth will have to decline" in order to forestall that scenario should spark concern among hospital finance leaders, who have grown accustomed to Medicare's benign neglect of generous commercial payment.

    MedPAC's policy recommendations seek to inhibit consolidation

    While the Commission is relatively quiet about the solutions for the problem of commercial price growth, it is not shy about naming the culprit: consolidation, among both hospitals and physician groups.

    Citing a long list of studies, MedPAC argues that provider market power motivated private sector per capita spending growth that was more than triple Medicare spending per beneficiary between 2010 and 2014. The policy recommendations that arise from these concerns are familiar, but target the real problem only around the edges. MedPAC recommends a broader site-neutral payment policy to remove some of the skewed incentives promoting vertical consolidation and wants to keep closer tabs on freestanding emergency departments, a popular growth strategy for provider organizations in certain areas of the country.

    Yet the report might be better read not as a blueprint for future actions, but as an appeal to Congress and the executive branch to pursue legislative and enforcement actions that inhibit consolidation and drive provider competition. In today's political environment, a market-oriented strategy for restraining health cost growth might just have bipartisan appeal.

    What should providers take away from all of this? While it is important to recall that CMS is not bound to follow MedPAC's suggestions, steps to equalize payments both save Medicare dollars and disincentivize consolidation—and they need to be on providers' radar.

    We already received the first warning shot on site-neutral payments as part of the HOPPS Final Rule in late 2016, and CMS has substantial running room should the agency choose to be more assertive. We'll be watching this year's regulatory changes closely.

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