Proposed 3.2% hospital payment increase falls short of labor expenses, Premier says

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A Premier study shows that proposed Medicare inpatient payment updates are not keeping pace with spikes in labor costs.

The PINC AI analysis shows that the proposed 3.2% hospital payment increase will not cover the more than 6.5% increase in labor rates.

The Centers for Medicare and Medicaid Services is expected to release its final rule on payment rates in the Inpatient Payment Prospective System later this spring.

Premier, a healthcare alliance serving approximately 4,400 hospitals, is urging Congressional leaders to provide additional resources to providers that are financially struggling in part due to what Premier called inadequate Medicare payment.

In a May 19 letter to House and Senate leaders, Premier said hospitals and non-acute care providers continue to experience significant fiscal challenges due to the ongoing and lingering economic effects of the pandemic and skyrocketing labor costs. Providers are paying more to attract and retain scarce staff, a reality that is not expected to slow down as the pandemic subsides. 

WHY THIS MATTERS

In a proposed rule released in April, CMS proposed a 3.2% payment increase for hospitals in 2023 under the Hospital Inpatient Prospective Payment System proposed rule.

The rule is expected to be finalized later this spring.

Hospitals have realized a 6.5% increase in labor rates and those rates jumped 10 percentage points in the first two quarters of 2022 alone, Premier said. 

The proposed 3.2% rate increase for 2023 “falls woefully short of covering hospitals’ actual costs,” Premier said.

Healthcare providers are also dealing with Medicare sequestration cuts again. The 1% cut will end in June, followed by a full resumption of the 2% sequestration cuts on July 1. Also, provider relief funds have expired.

“Labor makes up about 67.6% of the CMS market basket calculation used to adjust hospital payments,” Premier said. “A very high payment update in FY 2023 will be needed to match the rates most acute care providers are now paying their staff.”
 
THE LARGER TREND

CMS updates hospital rates based on a wage inflation index that represents historical data. For FY 2022, this resulted in hospitals receiving a 2.7% rate increase, compared to a 6.5% increase in hospital labor rates, according to the analysis. Labor costs account for nearly 68% of hospital costs in calculating the IPPS payment update.

For 2022, CMS’s estimates of hospital spending growth using historical data represented less than the actual growth in the prices paid by hospitals for labor, supplies and services, Premier said.

For 2021, CMS applied an upward payment adjustment of 2.4%.

Hospital labor rates alone jumped 16.6% on a per-paid-hour basis since the fourth quarter of 2020, according to the data. 

Higher labor costs do not appear to be exclusively COVID-19 pandemic-related, as prior to the pandemic, clinical staff were in short supply, Premier said. 

Twitter: @SusanJMorse
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