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MedPAC contractor report: Hospice does not lead to lower Medicare spending

by MedPAC Staff | Jul 10, 2015

Today the Commission released a contractor report that looked at the question: does the hospice benefit increase or reduce Medicare spending? Hospice proponents often argue that hospice is a valuable service not only because it provides coordinated, patient-centered end-of-life care, but also because it reduces Medicare spending for patients at the end of life. However, today’s report concludes that hospice does not appear to produce lower aggregate Medicare spending. The Commission believes hospice is an important service that allows patients to choose end-of-life care consistent with their preferences and values. But the Commission also believes that reforms to the hospice payment system, which MedPAC first recommended in 2009, are urgently needed.  The current hospice payment system gives some providers an incentive to enroll beneficiaries who are likely to have very long stays and who may not meet the eligibility criteria. These incentives are not in the interest of some beneficiaries (who may be forgoing conventional care when not in the last phases of life) and taxpayers (since very long hospice stays result in a net cost to the Medicare program).

The report, “Spending in the last year of life and the impact of hospice on Medicare outlays,” took three approaches to answering the question of whether the Medicare hospice benefit increases or reduces Medicare spending.

First, it looked at trends in spending and hospice enrollment over the last decade. Hospice use rose from 26 percent of elderly decedents enrolled in traditional Medicare in 2002 to 47 percent in 2012. Over the same time period, the share of Medicare spending for beneficiaries in their last year of life increased 1.1 percentage points per decade on average. A study of national averages is not a very strong test of hospice impact. That said, nothing in the national averages suggest that hospice reduced Medicare end-of-life costs over this period.

The report next looked at the current literature on hospice use and cost. On its face, recent literature on hospice and cost is mixed on the question of whether hospice saves money. Some studies have found large cost savings due to hospice, while others have found little or no savings overall. However, a closer examination suggests that these conflicting results are largely due to differences in methodology. The report finds that the large hospice cost savings found by some studies may be an artifact of the difference in methods used to identify the study period for the hospice and non-hospice decedent populations, rather than a reflection of the effect of hospice on Medicare spending. 

Four studies that looked at a fixed time period prior to death (e.g., last year or half-year) showed small costs or small savings for hospice users, depending on time period and population studied. By contrast, two studies that looked only at the period of hospice enrollment (and compare it to a “pseudo”-enrollment period created for non-hospice decedents) showed very large (e.g., 24 percent) cost savings for hospice decedents. Because the date of enrollment/pseudo-enrollment will influence the calculated savings or costs, the report suggests that issues with the assignment of a pseudo-enrollment date to non-hospice enrollees make this methodology biased to find savings.

Finally, the report applies a new, market-level approach to estimating the effect of hospice on cost. Traditional studies have employed person-level methodologies, which compare individuals who enroll in hospice to those who don’t. However, a person-level approach has two significant shortcomings – first, it will never be able to address the issue that hospice and non-hospice enrollees may differ in ways that cannot adequately be captured in available data (e.g. propensity to consume healthcare). Second, it typically ignores the substantial fraction of hospice spending that occurs outside the last year of life (currently, about a third of total Medicare hospice spending).   Instead, the market-level approach employed in this report looks for a correlation between cost per decedent and hospice penetration across market areas and over time. In other words, it looks at markets with varying levels of hospice utilization, and compares their average costs per decedent. If hospice saved money, one would expect that a market with higher rates of hospice use would have lower average costs per decedent. This approach addresses both of the shortcomings of person-level approaches. Using market-level analysis, the report finds that higher hospice penetration is associated with modestly higher costs per decedent. 

Though hospice does not appear to produce aggregate savings for the Medicare program, the Commission believes that it is a vital service for beneficiaries at the end of life, and should be included in the Medicare benefit package.  However, the Commission has been concerned for many years that the current hospice payment system is flawed and may be incentivizing inappropriate use of the hospice benefit.  The hospice payment system currently pays hospice providers a flat per diem rate. The Commission has pointed out that this payment structure does not reflect the actual cost of providing hospice care: costs are higher at the beginning and end of a hospice episode, and lower during the middle of an episode. This means that long hospice stays are particularly profitable for providers, because the “middle” of these stays, when costs are relatively low, are longer. The high profitability of long stays may be spurring some providers to pursue business models that maximize profit by enrolling patients more likely to have long stays who may not meet the hospice eligibility criteria.  This is consistent with the contractor report findings that the share of total Medicare hospice spending on patients outside the last year of life has increased from 25 percent in 2002 to 32 percent in 2012.

To address flaws in the hospice payment system, the Commission recommended altering the hospice payment system so that per diem payments to hospice providers are greater at the beginning and end of a hospice episode and lower in the middle of an episode. This payment structure would better align hospice payments with the cost of hospice care. In 2010, CMS was granted authority to alter the hospice payment system in fiscal year 2014 or after.  In its proposed hospice rule for fiscal year 2016, CMS proposes to use this authority for the first time to raise hospice payments at the beginning and end of an episode and reduce them in the middle of an episode. The Commission commented to CMS that these changes are in the spirit of the Commission’s hospice recommendations. MedPAC supports moving forward with the proposal as an initial step, and continuing to refine the payment system going forward. 

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