Medicare's no-pay rule has little financial impact

The Centers for Medicare & Medicaid Services has estimated that rules that took effect in October 2008 and denied payment for "reasonably preventable" hospital-associated conditions would save the government $21 million and encourage patient safety improvement.

But the savings probably will be much lower, according to a study in the September/October Health Affairs.

The nonpayment rules are likely to cost hospitals about $2.7 million -- $368 per facility -- raising the question of whether the no-pay policy will achieve Medicare's cost and safety objectives. Hospitals and physician organizations, including the American Medical Association, have objected to some of the conditions included in the no-pay list, saying prevention is not always possible.

"When hospitals get wind of these data, any efforts they have put into decreasing the frequency of these adverse events or identifying present-on-admission conditions that were generated by the policy are likely to erode," said Robert Wachter, MD, a leading patient safety researcher and chief of the division of hospital medicine at the University of California, San Francisco, Medical Center. He was not involved in the study.

"Many hospitals are working on preventing these adverse events for other reasons, including the ethical imperative to do so," Dr. Wachter said. "But it is obvious that the business case created by [the no-pay policy] in its present form is puny."

Peter McNair, MPH, lead author of the Health Affairs study, said the no-pay policy "is almost the perfect paper tiger" because it made hospitals step up safety efforts while limiting the financial sting.

"It's not having the financial incentive, but if you look back at the media coverage about this policy and the level of outrage that this brought about, that's good," said McNair, a visiting fellow at the Philip R. Lee Institute for Health Policy Studies at the UCFS School of Medicine. "What we want is to reduce the number of hospital-acquired conditions to begin with so nobody pays for that care."

Estimating the impact

To determine the financial effect of the no-pay policy, McNair and his co-authors examined California hospital discharge records in 2006. California is one of the few states that has long required hospitals to document what are now Medicare no-pay conditions, such as catheter-associated urinary tract infections, as "present on admission" in patients.

The so-called POA coding is part of implementing the new no-pay policy because it is a way for hospitals to signal a condition was not hospital-acquired and charge Medicare for related care. Researchers looked at eight of the 10 Medicare no-pay conditions, how often they occurred, and how deleting associated codes would affect the payment diagnosis-related group assigned to patients. Under the new Medicare policy, it is only when a hospital-acquired condition moves the patient into a more lucrative diagnosis-related group that the extra pay is denied.

The researchers concluded, "The annual number of cases in California affected by CMS's 2008 hospital-acquired condition payment policy is likely to be small, and the cost implications for hospitals minor."

The authors then extrapolated the results nationwide. California's rate of events, such as pressure ulcers and hospital falls, does not differ significantly from hospitals around the country. At most, the no-pay policy will cost all hospitals in the country $2.7 million, though the loss could be as little as $1.1 million.

The American Hospital Assn. said its members are committed to protecting patients from harm.

"Hospitals' top priority is improving patient safety," said AHA spokeswoman Elizabeth Lietz. "They are actively engaged in efforts to reduce infections and other errors in their ongoing mission to improve care. The Medicare payment policy change was an important reminder that we need to continue to be vigilant in our efforts to prevent rare, and potentially serious, mistakes."

CMS officials did not grant an interview request by this article's deadline. The agency's initial $21 million impact estimate amounted to a minor fraction of its $100-billion-plus annual outlay. Medicare will examine the financial impact of the no-pay rules next year. Doctor payments are not affected by the policy.

There could still be a way for Medicare to connect hospitals' bottom line with safety performance, said David Dranove, PhD, a health policy researcher and professor of management and strategy at Northwestern University's Kellogg School of Management in Illinois.

"The policy is easily expanded to more conditions," Dranove said. "I think hospitals have bigger battles to fight and will not likely block a plan to stop payment for catastrophic errors."