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CMS Clarifies Effect of Sequestration on Payment Rates for Medicare Advantage Organizations

The Final Payment Amount is Reduced, Not the Payment Rates

In an April 17, 2014 letter to the American Hospital Association, the Centers for Medicare & Medicaid Services (CMS) clarified the application of the sequestration by Medicare Advantage Organizations (MAO) to reduce payments to providers.

The CMS letter was drafted in response to a request for clarification by the American Hospital Association, joined by 17 state hospital groups. The American Hospital Association explained that MAOs “are erroneously passing along to hospitals a two percent reduction in contracted payment amounts without regard to the terms of their contracts with those providers.” More precisely, the MAOs had been reducing their payments to providers that use Medicare fee for service (FFS) rates as a reference point in the contract between the two entities.

The trade organization argued, “CMS has not changed the published payment rates to implement hospitals’ share of sequestration cuts.” Hence, according to the American Hospital Association, the MAO’s billing procedures are counter to CMS’s intention. The discrepancy in interpretation of the law has resulted in numerous individual disputes between MAOs and providers.

Understanding the Origins of the Discrepancy

The Budget Control Act of 2011 mandated across-the-board budget cuts in federal spending. Congress set the implementation of sequester for March 1, 2013. On that date, President Obama issued a sequestration order to apply to federal agencies, including the Centers for Medicare & Medicaid Services.

CMS issued a guidance letter the following May that referred providers and MAOs to their own contracts to determine payment terms in light of the sequestration. Confusion soon followed, with hospitals and MAOs each interpreting the implementation of sequester in a differing manner.

CMS Says Payment Terms Are Determined by Contract

The CMS’s April 17th letter reiterates that sequestration does not alter the Medicare FFS fee schedule, as the American Hospital Association asserted. Yet, the CMS took a hands-off approach, stating, “We are prohibited from interfering in the payment arrangements between MAOs and contracted providers.” The federal agency directed MAOs and hospitals to refer to the terms of their contracts to accurately calculate payments.

However, the letter does offer some guidance to providers and plans to interpret the contract language in light of sequestration. CMS explains:
“Payment adjustments required under sequestration are applied to all claims after determining the Medicare payment . . . All fee schedules, prices, etc., are unchanged by sequestration. Only the final payment amount is reduced.”

What Should Providers and Plans Do Now?

CMS recommends that hospitals contact MAOs directly to address discrepancies in payments. Although this is sound business advice, providers and plans may still fail to see eye-to-eye on the application of sequestration to their payment arrangements. MAOs and hospitals should carefully review their contracts, especially in regards to whether Medicare FFS rates are used as a benchmark in payment terms.