The Medicare Payment Advisory Commission is (likely) recommending to Congress a series of post-acute rate reductions (Medicare, Fee-for-Service) for federal fiscal year 2025 (beginning October 1, 2024, for most programs, January 1, 2025, for Home Health Agencies). Specifically, the MedPAC recommendations are as follows.
- Reduce the 2025 payment rate for home health agencies by 7%.
- Reduce the 2025 payment rate for skilled nursing facilities by 3%.
- Reduce the 2025 payment rate for inpatient rehabilitation facilities by 5%
The Commission will vote on the final recommendation to Congress in January of 2024. The rationale for the draft rate recommendation of a 3% cut for SNFs is found in the presentation at the Commission meeting (Dec. 7 and 8), available here: SNF-Dec-2023-SEC
What MedPAC bases their recommendations on are four categories of analysis – Access to Care, Quality of Care, Access to Capital, Medicare Payments v. Cost. The Commission only analyzes the traditional Medicare, fee-for-service program. Medicare Advantage is a different programmatic analysis and is agnostic to provider rate determinations.
The historic problem that I have with MedPAC is that its analysis for rate purposes is conducted in isolation from the real world and the dynamics therein. For example, their view of Medicare payment v. cost in an SNF looks at a section of days (total) representing 10%. In other words, Medicare pays for only 10% of the days of care in an SNF. Further, MedPAC does not take into consideration, the rapid program growth of Medicare Advantage as a payer and the impact that it has now and going forward on the SNF sector (lower payments, lower overall utilization, more denials of benefits, etc.).
Per MedPAC, the marginal profit on Medicare (not Medicare Advantage) in 2022 was 27%. For free-standing SNFs the margin was 18.4%. That data, however, has a wide disparity among provider ownership types with non-profit SNFs having an average margin of 1.1% and for-profit SNFs, margins of 22%.
For years, the below-the-surface issues regarding payment, access to capital, and service/capacity availability seem to continuously escape MedPAC.
- Access to capital for MedPAC means investor interest and views based on prices paid per bed in an acquisition. In reality, the price per bed is ridiculously skewed as of recent as the number of transactions is at a historic low. In terms of other access to capital such as borrowing for capital improvement, that issue escapes MedPAC’s analysis. In reality, capital access is as constricted as I have seen it in decades.
- In terms of bed availability/patient access, MedPAC looks at census changes across bed capacity noting that recent occupancy increases post-pandemic and continued bed availability are signs of sufficient bed supply. Two fallacies are present. First, bed availability and occupancy growth are a function of staff availability (can’t take more patients without adequate staff) and length-of-stay. As lengths of stay decrease, open bed counts expressed as total number of beds constantly occupied, decline. Turnover of patients does not beget solid, stable, constant occupancy. The second fallacy is that supply is equally available via location. In more urban and suburban markets, supply is generally good. In rural and inner-urban markets, supply is declining and access, particularly in rural areas, is becoming highly problematic (staff availability is particularly difficult in rural markets).
- Payments to cost is an interesting metric in so much as it has no real direct bearing on SNF viability when a facility has an average Medicare census of 10% or less. MedPAC only glances at the big economic picture, noting that average FACILITY margins are negative (-1.4%) and half of all freestanding SNFs had negative total margins. They indicate that the overall financial performance of the SNF sector is heavily influenced by MEDICAID payments. In 2019, Medicaid base payments covered on 86% of SNF costs.
MedPAC recommendations are non-binding to Congress and have rarely been adopted entirely as provided. This being an election year, it is unlikely that a rate cut such as MedPAC is likely to advise will occur. The SNF sector continues to face many headwinds including rising costs due to present economic conditions for energy, commodities (food, supplies), labor shortages, higher capital costs, etc. With average margins across the industry holding negative and continued closures in the cards, my view, is that Congress will “pocket” MedPAC’s recommendations.