Hospitals Say New Medicare Rule Will Cost Them Billions

WASHINGTON — A Bush administration plan to restructure Medicare hospital payments has drawn sharp opposition from the nation's hospitals, which claim the plan would mean a cut of more than $20 billion over the next five years.

The administration's plan, announced late Wednesday in a rule scheduled to take effect Oct. 1, calls for a 3.5 percent average increase in hospital payments for the fiscal year that begins then.

But the American Hospital Association says the increase will be only 2.3 percent next year, because another provision in the rule cuts payments by 1.2 percent in anticipation that hospitals will change the way they code patients in order to receive higher Medicare payments. The AHA says Medicare also plans to cut payments another 1.8 percent in both 2009 and 2010.

Don May, the AHA's vice president for policy, said the 2.3 percent increase would fall far short of the roughly 3.3 percent anticipated inflation in hospital costs next year.

May said Medicare's planned 1.2 percent cut was being implemented "with no real data. ... It's just a guess."

He said Medicare's action flies in the face of congressional intent.

The House voted 412-12 last month for a spending bill amendment that would block Medicare from implementing the cut. That provision has not yet been considered by the Senate, and would have to be accepted by President Bush in order to override the proposed rule.

The new Medicare rule changes the coding system for Medicare hospital patients, increasing the number of diagnosis-related groups from 538 to 745 with an emphasis on the severity of the illness.

According to a Medicare news release, the new codes will allow Medicare to pay higher amounts for more seriously ill patients and lower amounts for less seriously ill patients than under the current system.

In a fact sheet accompanying Medicare rule, the agency noted there is "substantial evidence ... that the adoption of new payment systems leads to an increase in aggregate payments without any corresponding growth in actual patient severity."

This expectation of "code inflation" by hospitals led the nonpartisan Medicare Payment Advisory Commission to recommend that Medicare build the 1.2 percent fee cut into the new rule.

Richard Foster, Medicare's chief actuary, said in a statement that without the adjustments, "the Medicare Part A Trust Fund (which covers hospital services) would be exhausted an estimated 18 months earlier than previously forecast." The trust fund is currently expected to be exhausted in 2019.