Reducing The Annual Update Factor

As lawmakers consider ways to pay for health reform, use our glossary of potential offsets to get caught up fast.

By Jason Plautz

Updated: January 1, 2011 | 2:18 p.m.
July 21, 2009

Glossary Of Offsets Efficiencies • Public Option • Health IT • Comparative Effectiveness • Medical Homes • Medicare Cost Sharing Taxes • Taxes For Noncompliance • Surtax On The Wealthy • International Tax Changes • Sugary Beverage And Alcohol Tax • Tax On Insurance Companies • Plastic Surgery Tax • Changing Tax Exclusion For Employment-Based Health Insurance Quality Of Care • Measuring Quality Of Care • Preventive Service • Expanding Disease-Management Services Provider Payment Revisions • Pay For Performance • Abolishing The SGR • Bundling • Reduce The Annual Update Factor • Partial Capitation • Penalties For High Readmission • Cut Payments To Medicare Advantage TOPIC PAGE: Health Care

Updated at 5:30 p.m. on Nov. 23 to reflect continuing legislation.

Definition

The annual increase in Medicare payments would be reduced slightly in a variety of arenas (among them fee-for-service payments, inpatient operating, post-acute care, home health care and skilled nursing facilities).

Executive Summary

Medicare pays efficient hospitals more than they spend on treatment, according to a March 2008 report to Congress by the Medicare Payment Advisory Commission.

Medicare's services are paid for according to a fee schedule, updated yearly to account for changes in health care costs and inflation. And overpayment occurs because the input costs are measured by market-based indexes that assume quantity and quality of inputs stay constant, which can often overstate the real increases in providers' costs.

Speaking on "Meet the Press" in July, Health and Human Services Secretary Kathleen Sebelius said that there would be significant savings found in reducing wasteful spending already in the Medicare system. Sebelius said "the president has a proposal that he hopes will be incorporated" that uses an "independent" MedPAC to "watch that cost curve and help us drive quality" over the long term.

Reducing the annual update factor would happen in small amounts in various Medicare services. In its December 2008 report, the Congressional Budget Office specifically identified five updates that could be reduced:

• Reform annual updates in fee-for-service payments to include an expected productivity gain equal to a 10-year moving average of all-factor productivity. According to the CBO report "this option would implement an annual update... that is equal to the MBI [market-based index] minus half of the expected productivity gains."

• Reduce by 1 percent the update factor used to pay hospitals a prospective sum for costs tied to inpatient services.

• Beginning in 2011, subtract 1 percent from the annual update factor used to pay post-acute care providers. MedPAC said that these providers are often overpaid and that updates for 2009 could have been eliminated without effects.

• Eliminate the update in home health care payments for five years to close the wide margin between costs and payments. MedPAC estimates that the excess of payments provided to home health care was as high as 15 percent in 2006.

• Reduce by 1 percent the update factor used to pay skilled nursing facilities.

Reduced payments could encourage hospitals to be more efficient with treatment, especially as other hospitals have reported overstated costs.

There are concerns, though, that hospitals will cut services or that reductions to fee-for-service payments will prompt providers to drop Medicare patients. Don May, vice president for policy at the American Hospital Association, said simply cutting an annual update factor without an offset will do little to help improve the quality of care.

"Just a pure market basket reduction without any additional support would definitely make it more difficult for hospitals to both improve care and maintain standards," May said.

"If you're in a place where you already get high value, why would you want to cut it?" said Dr. Denis Cortese, president of the Mayo Clinic. "If you're the payer and you do a 10 percent cut across the board, which group will feel it? Inefficient providers can make up that cut overnight."

Max Savings

In its December 2008 report, the CBO estimates that reducing all of the rates would save $60.7 billion by 2014 and $323.2 billion by 2019. The individual savings are:

• Reducing fee-for-service updates would save $18.9 billion by 2014 and $101.8 billion by 2019.

• Reducing inpatient operating payment updates would save $16.6 billion by 2014 and $92.9 billion by 2019.

• Reducing the post-acute care updates would save $8.9 billion by 2014 and $54.2 billion by 2019.

• Eliminating inflation updates for home health care would save $12.3 billion by 2014 and $50.3 billion by 2019.

• Reducing the skilled nursing facility update would save $4 billion by 2014 and $24 billion by 2019.

Plans

Both the Senate and House bills would work to find and eliminate inefficiencies in Medicare, largely through an independent panel tasked with identifying overpayments and ways to cut costs.

Links

• CMS report to Congress including information on inefficient hospital payments

• Transcript of Sebelius' appearance on Meet the Press

• December 2008 CBO report on health care budget options (proposed cuts are options 54-58)

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