t the end of their life, patients may turn to hospices
to alleviate the pain and discomfort associated with
their illness. The cost of providing palliative care
in the United States is subsidized by the social insurance
program Medicare according to its reimbursement policies.
This hospice benefit, which was set up in 1983, is widely
regarded as a success: It improves the quality of life of
patients who decide to forgo further treatment, while
saving Medicare thousands of dollars that would have
gone to more expensive curative care.
But the spate of hospice bankruptcies in recent years
has exposed critical weaknesses in Medicare's reimbursement
policies. Many hospices have been spending much
more than the yearly cap on revenues set by Medicare.
Overspending by several hundred thousand dollars can be
devastating to a small hospice provider. The reason for this
imbalance is that patients have been staying at hospices
far longer than expected. In fact, the proportion of cancer
patients—who typically stay a short time—has been falling,
while the proportion of longer-staying non-cancer patients
has been rising, and they also have been staying longer.
To keep a hospice afloat, its managers might be tempted
to actively recruit and discharge certain types of patients,
which goes against Medicare's objectives. "It's an undesirable
practice to seek a particular patient type," says Chicago
Booth professor Rodney P. Parker.
Indeed, a recent study titled "On Hospice Operations
under Medicare Reimbursement Policies" by Parker with
Bariş Ata of Northwestern University, Bradley L. Killaly of
Emory University, and Tava Lennon Olsen of the University
of Auckland, finds strong analytical evidence that the current
rules for reimbursing hospices produce distortions. In
particular, hospice managers tend to seek cancer and other
similar patients who are not expected to live too long and
discharge those who are still alive. "It was interesting to us
how a fairly simple reimbursement policy was having these
perverse incentives among practitioners," says Parker.
The study's results underscore the importance of
reviewing Medicare's hospice reimbursement policies to
prevent these unintended consequences. One potential
remedy, according to the authors, is to allow smaller hospices
to merge in order to increase patient volume and get
a better mix of shorter- and longer-living patients.
Another solution is to give hospices an extra year to
carry over any remaining cap allowance from the previous
Medicare year, which runs from November 1 to October
31, so they can have a better chance of recovering their
expenses. This simple modification permits a hospice to
continue consuming the remaining cap that would otherwise
disappear on November 1.
How Hospices Can Go Bankrupt
To be admitted to a hospice, a patient needs the signature
of two physicians on a document saying that he or she is not
expected to live longer than six months and that the patient
agrees to forgo any curative care. Medicare pays hospices
a maximum daily rate for every patient under care, which
is the first part of the hospice reimbursement policy. The
rates differ according to the type of care provided, but do
not depend on the disease of the patient. For instance,
a hospice typically receives a smaller subsidy for taking care
of patients in their homes rather than in a hospice facility,
but does not get more for patients with dementia compared
to those with cancer. About 95 percent of hospice days
reimbursed by Medicare are for routine home care.
The second part of the reimbursement policy is a payment
cap applied to the entire hospice. The cap starts at
zero at the beginning of the Medicare year and goes up by
a fixed amount for every new patient admitted (around
$23,874 per patient in 2010), and then goes down whenever
the hospice receives a payment from Medicare according
to the daily rate (around $147 per patient-day for routine
home care in 2011). It is possible for hospices to exceed
their cap because—although Medicare will keep paying
them for every day that patients stay in their care—the cap
does not increase if no new patients are admitted. The difference
between the reimbursed amount and the hospice's
cap must be paid back to Medicare. This negative cap could
be sufficiently large to force a hospice into bankruptcy.
In general, hospices can go bankrupt because of several
factors, the most important of which are patient volume
and mix. A hospice with insufficient volume cannot cover
its fixed costs and its profits will
be more variable. Moreover, a
hospice with too many patients
who stay a long time or one with
too many patients who do not
stay long enough, are both at risk
of going bankrupt—the former
because a hospice's revenues are
limited by the cap, but its daily
costs of care continue; and the
latter because patients die too
quickly to accrue sufficient revenues
to cover the fixed costs. It
would be difficult for a hospice to earn more than its fixed
costs if it only had patients dying from cancer, but it would
also have difficulty staying under its cap if it had to care
only for patients suffering from dementia.
An ideal mix of patients allows the hospice manager to
leverage the benefits of both types: cancer patients who
increase the cap and non-cancer patients who will allow
hospices to maximize the revenues accrued under the cap.
Thus, one way to ensure profitability, the authors propose,
is to allow hospices to merge. A merged hospice will not only
produce a larger volume of patients but, if well chosen,
the right match will result in a better mix of patients. For
instance, hospices in Alabama and Mississippi tend to
exceed their caps because patients stay exceedingly long,
while hospices in South Dakota have more patients that
stay for remarkably shorter periods. Moreover, because the
majority of hospice patients receive home care, there are
few physical facilities that need to be managed.
Although combining hospices comes with a few complications,
such as how to coordinate their shared resources,
the authors feel that this is a more socially equitable solution
than if hospice managers, in managing the cap, have to
adjust their mix of patients by actively recruiting the "right
type" or discharging patients who are still alive.
The Unintended Consequences of Managing the Cap
To avert bankruptcy, hospices with a poor patient mix may
resort to actively recruiting patients who are not likely to
live very long, and discharging those who have stayed too
long. Indeed, the authors show that hospice managers have
an incentive to engage in such tactics.
They find that as hospices become more constrained by
the cap, the rate of recruiting patients who are not expected
to live long—such as cancer patients—begins to dominate
the recruitment of non-cancer patients, especially at the
end of the Medicare year. Recruiting more cancer patients
is the optimal strategy for hospice managers because these
patients can bump up the cap, but are less costly to care
for than non-cancer patients because they have a shorter
life. Similarly, the study finds that managers trying to
keep a hospice from bankruptcy have an incentive to discharge
patients who are still alive, particularly non-cancer
patients, and will do so more consistently throughout the
year as hospices become more cap constrained.
To overcome part of the distortions created by the
current rules, the authors propose allowing a hospice to
continue receiving revenues for patients who are alive at
the end of a year until any remaining cap from that year is
exhausted. A simple way to implement this policy is to give
a hospice an extra "legacy" year, which would allow the
hospice to use the cap allocated in the previous Medicare
year provided that the patients moving on to the next year
are still alive and under its care.
While this type of policy will still generate different
recruitment and discharge rates for patients with different
diseases, it will at least remove managers' incentives
to recruit and discharge at varying rates throughout the
year. For instance, non-cancer patients will no longer be
less desirable at the end compared to the beginning of the
year because their contribution to the cap is carried over to
the following year anyway. This proposed policy is easy to
implement and can significantly increase access to palliative
care for all those who need it at the end of their life.
"On Hospice Operations under Medicare Reimbursement Policies."
Bariş Ata, Bradley L. Killaly, Tava Lennon Olsen, and Rodney P.