Medicare Reform

Medicare accounts for an increasingly large portion of all long-term acute care hospital (LTACH) discharges, with current estimates indicating that approximately two thirds of all LTACH discharges are Medicare discharges. Between 2004 and 2013, Medicare spending on patients in LTACHs increased from $3.7 billion to $5.5 billion.

These rising costs have not translated to improvements in patient outcomes. For example, though Medicare pays for 2,000 days of post-acute care (PAC) services for every 1,000 patients, roughly one fifth require readmission to hospitals, often for preventable conditions. By contrast, Kaiser Permanente averages just 600 days of PAC services per 1,000 patients, and enjoys much lower readmission rates.

In an effort to contain these rising costs, Medicare reform was introduced, dramatically altering the LTACH payment model with the Pathway for SGR Reform Act of 2013. This change, implemented in fiscal year 2016, aims to reduce the payment rate for certain discharges and will significantly impact LTACHs and the healthcare industry as a whole.

The most important change is the shift from a prospective payment system (PPS) toward a “site-neutral” payment model. Rather than prospectively defining reimbursement for groupings of patients with similar characteristics, Medicare will calculate payments as the lesser of two rates based on tighter patient characteristic criteria. The resulting payments will be similar to what Medicare pays in the acute care setting, and will either be calculated as an inpatient PPS (IPPS) comparable per diem amount, or the estimated costs of the case.

What Two Main Concerns Dominate the Debate Today Over Medicare Reform Policy?

So, what two main concerns dominate the debate today over medicare reform policy? The current debate is focused on two medicare reform issues: how to pay for the program (the need for a decrease in spending) and how to structure benefits (the need for comprehensive coverage).

On the issue of funding, there are two main options: either increase payroll taxes or reduce benefits. Increasing payroll taxes would require all workers, including those not currently enrolled in Medicare, to pay more into the system. Reducing benefits would mean changing the way Medicare pays for care, either by reducing payments to providers or by changing the benefits that Medicare covers.

On the issue of benefit structure, there are two main options: either increase cost sharing or change the way Medicare pays for care. Increasing cost sharing would require beneficiaries to pay more out of pocket for their care. Changing the way Medicare pays for care could involve moving away from a fee-for-service system, in which Medicare pays providers a set amount for each service they provide, to a system that pays providers a fixed amount per person enrolled in Medicare.

The debate over Medicare reform policy is complex, and there are no easy answers. The best way to make progress on this issue is to have an open and honest conversation about the trade-offs involved in any potential changes.

Bracing For Change

In an attempt to mitigate negative effects on the industry, the rollout of these changes has been gradual. The full force of the changes are expected to hit LTACHs and will have serious implications for LTACHs across the country, particularly those in the New England and West South Central regions. Research by Berkeley Research Group indicates that LTACHs in Texas, Louisiana, Oklahoma, and Mississippi will see a 19% drop in Medicare payments, while New England states could see drops as high as 38%.

A recent report by Standard & Poor offers a bleaker outlook: “We expect a material portion of the approximately 435 LTACH facilities nationwide to close over the next few years amid the phase-in of lower reimbursement.” With the second phase of payment changes still on schedule to roll out in 2018/2019, we must begin asking ourselves if we are truly prepared.

Future-proofing the LTACH Industry for Medicare Health Reform

There are many strategies LTACHs could employ to offset the effects of the recent Medicare health reform, such as

• Changing year-end reporting dates
• Diversifying through acquisitions
• Portfolio optimization
• Cutting costs
• Shutting down unprofitable facilities
• Attracting patients still eligible for the attractive LTAC-specific rate.

These strategies help optimize your census to maximize profitability.

Another strategy that can positively affect the survival of LTACHs is one you’ve likely already heard of: dedicated care coordination from pre-admission to post-discharge.

Historically, LTACHs have been slow to improve care coordination and reduce re-admissions, content to wait for the emergence of third-party companies that will specialize in care coordination… for a hefty fee. This is a mistake. Only aggressive action towards in-house care coordination will ensure the long-term survival of your business while significantly improving outcomes for your patients.

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For more, check out our new article in this series, Futureproofing: The Key to LTACHs and Coordinated Care