A few months ago, a Vermonter on Medicare came to state regulators with a roughly $11,000 bill for a knee replacement they’d received at one of the state’s smaller, rural hospitals. Curious, staff at the Green Mountain Care Board began looking into the matter.
They ultimately discovered that this same patient, receiving the same procedure, would have paid $1,676 if they’d gone to a larger hospital. The reason? A little-known federal rule that regulators believe is costing some Vermonters on Medicare tens of millions of dollars a year.
“You're talking about a lot of money out of our rural seniors’ pockets that is unnecessarily paid,” said Owen Foster, the board chair.
The problem has to do with how Medicare patients are charged for outpatient services they receive at what are known as critical access hospitals. Eight of Vermont’s hospitals are designated as such by the federal government, meaning they have 25 beds or fewer and are sufficiently remote.
Though the issue affects patients all over the country, Vermont, with its aging demographics and rural landscape, is disproportionately impacted. And state regulators and hospitals are now at loggerheads about what to do about it.
Hospital leaders say there likely isn’t much they can do at the local level without further imperiling the already-precarious finances of Vermont’s smallest providers. A fix, they say, must come from Washington.
“This is a federal problem that needs a federal solution,” Mike Del Trecco, the head of the Vermont Association of Hospitals and Health Systems, said in an interview.
Foster admits he hasn’t yet found a tidy state-level remedy. But he thinks that hospitals are wrong to assume there’s nothing they can do unless Congress steps in.
Given the financial impact on Vermont seniors and people with disabilities, "it is inexcusable to come to that conclusion before we finish doing the homework,” he said.
The problem boils down to how a Medicare beneficiary’s 20% coinsurance — what they must pay towards a service — is calculated.
At critical access hospitals, it’s based on a hospital’s “charges” — their sticker price, which is typically significantly marked up. At other hospitals, that 20% is based on the amount Medicare calculates the service actually costs the hospital, which is much lower than what the hospital charges.
Take a joint replacement. If a critical access hospital charges $26,000 for it, a Medicare recipient would be on the hook for $5,200. At a larger hospital, where certain out-of-pocket protections also apply, that same patient would have paid $1,676 last year. That’s even if that larger hospital charged the exact same amount.
Medicare, meanwhile, doesn’t pay hospitals based on sticker prices. They reimburse providers based on that lower number — the estimated cost of care. And before the federal government pays hospitals its share, it first deducts what the patient owes.
That means at critical access hospitals, as the sticker price goes up, patients pay more, but Medicare actually pays less.
Technically, critical access hospitals could lower their sticker prices. That would immediately reduce what Medicare beneficiaries owe, and increase what Medicare pays. But a hospital’s contracts with commercial insurers are also pegged to those prices, and lowering them could trigger a cascade of lower reimbursements. Rural hospitals, some of which are already operating in the red, warn they could go bankrupt.
The Green Mountain Care Board has sought to pressure hospitals to explore potential solutions, including renegotiating with commercial insurers how they calculate their reimbursements.
But hospitals say there’s no way insurers will renegotiate these contracts. And they’ve lobbied state lawmakers for legislation that would block regulators from taking action on the matter during their upcoming budget-setting process. The measure has passed the Vermont Senate, although it faces a tough road in the House.
Rep. Alyssa Black, the Democratic chair of the House Health Care Committee, is opposed to it — and incensed at how hospitals have reacted to regulators’ concerns.
“I think this is an alarming issue. I am frustrated and perplexed that various entities are not taking it seriously,” she said.
The federal government has long been aware of this problem. The Medicare Payment Advisory Commission, or MedPAC, which counsels Congress on the public insurance program, has been raising the issue since at least 2011. In 2014, the inspector general at the U.S. Department of Health and Human Services found that the cost-sharing rules meant Medicare beneficiaries at critical access hospitals were paying between two and six times more for outpatient services than patients at other hospitals.
Jeff Stensland, a former analyst for MedPAC, told state lawmakers last month there was a simple reason Congress hadn’t acted yet: money. If Medicare beneficiaries pay less, and hospitals are held harmless, then the government will need to make up the difference.
“At the time, in 2022, it was estimated that it would be something like $3.2 billion of increased federal spending just to make that change,” Stensland said.
Vermont’s Chief Health Care Advocate, Mike Fisher, agrees that a federal fix would be ideal. But he also believes waiting for one, instead of looking for local solutions now, will just mean nothing happens.
“Hospital folks who say and others who say, ‘Well, this needs a federal fix.’ Dream on. I don't see any landscape where that can be helpful today,” he said.
