

Looming Provider Cuts: A Closer Look
The focus in Washington is repositioning to an expected year-end package, with lawmakers starting discussions on what policy items to attach to either another continuing resolution (CR) to fund the government or an omnibus bill with full fiscal year funding (or some hybrid of the two). A healthcare section will likely be included to address multiple areas, including looming provider cuts set to take effect in 2023. In this report, we provide an overview of some of these cuts and our take on where things go from here. Ultimately, we believe some cuts will be averted for 2023, but potentially not all; the extent to which cuts will be averted will depend on how much Congress is able to find in funding offsets we refer to as payfors.
Overview of Provider Cuts
Multiple provider cuts are set to take effect at the end of this year without congressional action. Examples of the several looming cuts in Medicare include:
“PAYGO” cut
A 4% across the board cut due to debt on the so-called PAYGO scorecard, such as debt related to American Rescue Plan costs, has been delayed until 2023, but will take effect next year without additional action. Congress has a history of delaying these types of cuts, as they had with the sequester until recently.
We believe the delay of the PAYGO to be the highest congressional priority on the list of provider cuts. We believe there is an 80% likelihood Congress negates these pending cuts. In February 2021, before the PAYGO cut was delayed from 2022 to 2023, the Congressional Budget Office (CBO) estimated the impact for 2022 would be a $36 billion cut due to the American Rescue Plan.
340B
The Supreme Court’s decision in American Hospital Association v. Becerra that CMS improperly reimbursed 340B hospitals at a lower rate (ASP minus 22.5% vs. ASP plus 6%) could have an overall impact on hospital payment rates. The CY2023 Outpatient Prospective Payment System (OPPS) final rule, which has yet to be released (the last three years it came on 11/1, 12/1, 11/2 respectively), will likely need to account for the increased reimbursement for 340B hospitals, which in turn could negatively impact the overall OPPS payment rate, a hit especially for for-profit hospitals. Additionally, the agency likely needs to pay 340B hospitals back plus interest for reduced reimbursement in prior calendar years (unless Congress bails them out on this), given that the cuts started in 2018, and this could also possibly result in a lower rate if it leads to clawbacks from OPPS.
For CY2023, the rate change is estimated to result in an additional $1.96 billion for 340B hospitals. Avalere conducted an analysis and found that “if the agency reverses the 340B drug payment reductions next year and offsets that reversal by reducing reimbursement across other (non-drug) services, 80% of all hospitals will experience a net decrease in payment. Specifically, 86% of rural, 79% percent of urban, 99% of non-340B, and even 52% of 340B hospitals will see a reduction in total OPPS payments. On average, payment decreases will be between 1.7% for rural hospitals and 1.24% for urban hospitals if 2023 reimbursement for 340B drugs is finalized at ASP + 6%. Among 340B hospitals, Rural Referral Centers are estimated to experience a 1.1% reduction on average, while Sole Community Hospitals would see a 2.3% decrease in Medicare Part B payment on average compared to maintaining current reimbursement levels.” Please note that due to a recent court ruling (see note here), CMS also has to provide 340B hospitals with the regular reimbursement rate for the remainder of 2022, which brings up questions regarding budget neutrality. If CMS needs to figure out how to pay back 340B hospitals for previous years,this could lead to an added cut, for 2023 and/or future years. The Supreme Court case dealt with the years of 2018 and 2019, but AHA is arguing in court to include the 2020-2022 cuts.
We fully expect CMS and the hospitals to ask Congress to help avoid harm coming to other hospitals as a result of what the Court ruled were improper previous payments. Offsetting these previous payments could cost up to $10 billion. Whether Congress will have enough funds this year to help soften the potential decreased payments remains an open question. We believe there is a 65% likelihood at this time that Congress steps in to help offset some of the cuts resulting from the Supreme Court decision.
Physician fee schedule
A temporary increase in the Medicare physician fee schedule of 3% provided for by the Protecting Medicare and American Farmers from Sequester Cuts Act is set to expire at the end of the year without additional action. The CY2023 proposed payment rule, accounting for this expiration, includes an overall 4.42% cut, with the PFS conversion factor decreasing from $34.61 to $33.08 (this could change in the final rule, but likely not significantly given the need to account for the 3% decrease). House Representatives Ami Bera (D-CA) and Larry Bucshon (R-IN) introduced a bill, the Supporting Medicare Providers Act of 2022, that would prevent the 4.42% from taking effect in 2023 (essentially delaying the cuts for a year).
The amount of funds available will likely play a role in whether Congress offsets these cuts. The loss of the 3% add-on, which was given largely to help offset issues related to COVID, is less likely than other cuts to be prevented. We put the likelihood at this moment of Congress helping offset at least a portion of these at 55%. Offsetting these cuts likely comes with a price tag in the range of $3-5 billion.
Home health
The CY2023 home health proposed payment rule includes an aggregate 4.2% overall decrease in payments, largely due to a permanent behavioral assumption adjustment of -7.69% (more details below). The final rule’s rate might differ from the proposed rule, but a cut is still likely to take effect in 2023 without action. Separately, CMS is proposing a clawback of $2 billion that could result in cuts (potentially as soon as 2024, as CMS in the proposed rule said it is not proposing a temporary payment adjustment in CY2023 for this, but that it is soliciting comments on how best to implement a temporary payment adjustment). We believe the aggregate payment cut in the final rule will come in at around 3% and the $2 billion in clawback cuts will be spread out over a couple of years. Lawmakers have introduced the Preserving Access to Home Health Act of 2022, which would delay payment cuts for three years, until 2026. We are skeptical that, as drafted, this bill will ever become law let alone at the end of the year. However, if something does get attached to the year-end package, we believe it is likely to be a one-year delay or a gradual phase-in of the cuts.
The 4.2% proposed cut is estimated to amount to an $810 million decrease in overall payments, due to the -7.69% adjustment ($1.33 billion) and a 2.9% payment update ($560 million), combined with some other factors. The final rule may have a somewhat smaller decrease, but it will still likely be significant. Additionally, how to manage the $2 billion clawback will be a part of the debate. On the list of potential congressional actions, making home health agencies completely whole is towards the bottom of the list based on our analysis. Congress could help partially offset the cuts, but completely eliminating them is only a 35% probability in our view at this time.
SNFs
In the FY2023 skilled nursing facility (SNF) final payment rule, while there is an overall positive (2.7%) rate update, there is a -2.3% adjustment included in the calculation of the rate as a result of the recalibrated Patient Driven Payment Model parity adjustment, which is a 4.6% cut being phased in over two years. This negative adjustment will continue to take effect without action.
The 2.3% cut is estimated to amount to $780 million less in payments. We believe there is a 40% likelihood at this point in time that Congress will help offset these cuts.
Clinical laboratory tests
The Protecting Access to Medicare Act (PAMA), which made changes to the way that Medicare reimburses for clinical diagnostic laboratory tests under the Clinical Laboratory Fee Schedule (CLFS), will result in many tests facing up to 15% cuts in 2023 without additional action, cuts that have already been delayed twice. Lawmakers have introduced the Saving Access to Laboratory Services Act (SALSA) to make changes to PAMA implementation as well as to avert the cuts set for 2023. SALSA aims for a permanent fix, but if something does get attached to the year-end package, we believe a simple one-year delay is more likely.
We have not seen an estimate of what a one-year delay would cost; however we estimate it around $1 billion. We put the odds of a one-year delay at this point in time at 40%.
APMs
Due to a provision in the Medicare Access and CHIP Reauthorization Act, eligible clinicians who participate in an Advanced Alternative Payment Model (APM) and meet certain Qualifying APM Participant (QP) criteria will receive a 5 percent annual lump sum bonus based on performance (incentive payments) from 2017-2022. Under the current statute, after 2024, that bonus expires and QPs will instead only receive a 0.75 percent increase in Medicare Part B payments without action. The Value in Health Care Act, introduced in July 2021 by Representatives Suzan DelBene (D-WA), Peter Welch (D-VT), Darin LaHood (R-IL), and Brad Wenstrup (R-OH) would extend the incentive payments by 6 years, until performance year 2028; if Congress includes an extension, it could be for this amount of time or more/less years. This would likely impact Accountable Care Organizations (ACOs) most, as well as other providers.
According to this letter to congressional leadership from health care groups, in 2020 CMS paid approximately $613 million in Advanced APM incentive payments, which might be a good indicator of future costs if this were to be extended. We put the odds of an offset to the cuts at this point in time at 35%.
Rural hospitals
The September continuing resolution to fund the government through December 16 extended the low-volume payment adjustment to Medicare hospital payments and the Medicare Dependent Hospital Program until December 16, but these will expire without further action. We believe Congress is likely to extend these payment adjustments for the remainder of the year and place the likelihood at 85%.
Our View and Possible Payfors
Committee and leadership staff are actively working to put together lists of what they would consider allowing to be cut versus what they want to offset. We believe that some cuts will be averted, but possibly not all given the need to identify payfors; especially with much of the savings from the low-hanging fruit of delaying the Trump-era rebate rule already utilized for the Inflation Reduction Act. Congress will need to decide how to come up with payfors (pretty significant offsets will likely be needed) and which groups to prioritize.
There is some money already set aside from previously passed legislation; however Congress has to find more. The Bipartisan Safer Communities Act passed earlier this year resulted in $7.5 billion in the Medicare Improvement Fund, though the continuing resolution decreased this number to $7.308 billion. This could be considered almost as a down payment on the year-end payment issues, as Congress can repurpose that money for the year-end package, but in our view they would probably need around $40-50 billion in total to offset most of the cuts set to go into effect. One potential payfor could come from a bill, the Restore Protections for Dialysis Patients Act, that aims to offset the Supreme Court DaVita dialysis decision. Specifically, following the Supreme Court’s decision in Marietta Memorial Hospital Employee Health Benefit Plan v. DaVita Inc., which was a loss for DaVita and dialysis providers overall (see note here), Representatives Jodey Arrington (R-TX), Buddy Carter (R-GA), Yvette Clarke (D-NY), and Danny Davis (D-IL) introduced “bipartisan legislation to ensure that individuals with End Stage Renal Disease (ESRD) continue to have equitable access to private healthcare and to provide protection of the Medicare Trust Fund.” However, we don’t yet know how much CBO will say it “saves” the government, which would impact the extent to which it could be used for payfor purposes and how much lawmakers will push for its inclusion in the year-end package (would likely need a relatively big CBO score for savings). Other payfors will need to be identified as well to avert multiple provider cuts. We believe the CBO is actively preparing scores for the dialysis legislation as well as others, and we will continue to track this issue as developments occur.
We believe some of the cuts will be offset, with the PAYGO most likely. It will all come down to how much money Congress can identify in offsets.
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For clients in Australia: Despite anything in this report to the contrary, this report is prepared for and distributed in Australia by RJFI with the assistance of RJA, and RJA at times will act on behalf of RJFI. This report is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. You represent and warrant that if you are in Australia, you are a “wholesale client”. This research is of a general nature only and has been prepared without taking into account the objectives, financial situation, or needs of the individual recipient. RJFI and RJA do not hold an Australian financial services license. RJFI is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) in respect of financial services provided to Australian wholesale clients under the exemption in ASIC Class Order 03/1099 (as continued by ASIC Corporations (Repeal and Transitional) Instrument 2016/396). RJFI is regulated by the UK FCA under UK laws, which differ from Australian laws. RJA is acting on behalf of RJFI with respect to distribution and communications related to this report.
For clients in New Zealand: In New Zealand, this report is prepared for and may only be distributed by RJFI to persons who are wholesale clients pursuant to Section 5C of the New Zealand Financial Advisers Act 2008.
For recipients in Taiwan: This report is being distributed to you from outside of Taiwan, and such distribution has not been licensed or approved by the regulators of Taiwan. No person to whom a copy of this report is provided may issue, circulate or distribute this report in Taiwan, or make, give or show a copy of this report to any other person.
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