Every quarter the Office of the Actuary at Health and Human Services sends out updated historical and forecast payment updates for Medicare providers. The estimates are based on a contractor developed model, smoothed and presented as a four quarter moving average. The model relies on proxies for things like labor and benefits (Employment Cost Index) and supplies (PPI) which are weighted using data from cost reports submitted annually.
The Prospective Payment System was developed in the late 1980s in response the effects inflation had on a cost plus system.
Since the late 1980s inflation in health care has remained pretty stable and payment updates generally hovering around 2%. The system was not designed to accommodate shocks like suddenly higher labor or supply expenses. CMS makes no apologies for that as they expect all providers to have sufficient capital to weather changing economic climate.
Last week, the Office of the Actuary released their most recent estimates. The good news is that CMS continues to update its estimates to accommodate inflationary trends. The Inpatient Hospital estimate for 1Q 2024 has increased from 1.9% to 3.1%. The bad news is that CMS grossly underestimated reimbursement rates for 2021 and, to a lesser extent, 2022 and 2023. It will probably do so again for 2024.
Only nursing facilities have a retrospective "forecast adjustment" that can account for inadequate and overly generous annual payment updates. For most sectors, there is no going back.
CMS' contractor appears to stuck in transitory-land where YoY changes in labor costs will revert to the mean of ~2%. It could happen. One day. As BLS data makes clear, wage increases are smaller but they are still there and supply costs are trending well above general inflation.
The issue very likely is one of the contractor trying to manage its client who is not going to be too excited about realistic forecasts that might become news stories. The conventional wisdom down the mall at the White House is that inflation has been tamed. That is the story and they are sticking to it.
Where does that leave Medicare providers? With few incentives to care for Medicare beneficiaries other than the ethical one. It does strengthen the case of providers for some Congressional intervention but that could take some time. More immediately it makes consolidation a necessity.
Emily Evans
Managing Director – Health Policy
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