How Medicare Budget Neutrality Impacts Hospice Payment

Medicare reimbursement is the lifeblood of hospice providers, and a clear understanding of policies like budget neutrality can help elucidate the payment systems that keep their businesses running.

The U.S. Centers for Medicare & Medicaid Services (CMS) is required by the Affordable Care Act to ensure that reimbursement rate changes are budget neutral. An earlier version of budget neutrality was phased out in 2016.

When CMS gives hospices a pay raise, the agency also must find a way to reduce costs by a comparable amount, typically through the wage index adjustment. These reductions occur within each service. For example, CMS wouldn’t cut hospital payments to increase rates for hospices.


“The intricacies of how they do those calculations are complex, but what’s important for hospices to know is that if we put money into one part of hospice reimbursement, we have to find money for it someplace else,” Mollie Gurian, vice president of home based and home- and community-based services policy at LeadingAge. “It has to be budget neutral relative to what would have happened if you kept the payments the same.”

The clearest example of how this works was the 2020 rebasing of payments for the four levels of hospice care.

CMS that year reduced routine home care (RHC) rates by 2.7% and increased amounts for continuous home care, general inpatient care, and inpatient respite care by the same percentage. Part of the impetus was the determination that the costs of providing those three levels of care exceeded the amount of reimbursement.


The payment increases were generally seen as a boon for providers, though some voiced concern about the cut to routine home care, which represents about 97% of the services hospices provide, according to the National Hospice and Palliative Care Organization (NHPCO).

One contingent of providers who benefited significantly from the rebasing were those who have respite care contracts with nursing homes, according to Judi Lund Person, NHPCO’s vice president of regulatory and compliance.

CMS budget neutrality rules apply to reimbursement for most health care settings. For hospice, the methodology has two components, one applying to overall payments and a second related to the service-intensity add-on (SIA).

CMS introduced SIA in 2016 to allow hospices to bill for RHC at the continuous home care rate on an hourly basis for registered nurse and social worker visits during the last seven days of a patient’s life. This is designed to give providers a financial incentive to improve performance on the quality measure for visits when the patient’s death is imminent.

“The 2016 rule says CMS is only required to apply their budget neutral factor in the first year of implementation. That’s for the regular budget neutrality; and then for SIA, they would be doing budget neutrality for each year,” Lund Person told Hospice News. “That’s the year that the final rule implemented the two-tiered payment rate for routine home care, one for 1-to-60 days and then another for 61-plus days.”

The two-tiered system was introduced to offset SIA costs to meet budget neutrality requirements, she continued. In its proposed payment rule for 2021, CMS entertained the possibility of eliminating the SIA budget neutrality factor, but that provision was not included in the final rule.

Budget neutrality has stirred up controversy in recent months due to its role in proposed payment cuts for home health care in Fiscal Year 2023. Though not yet final, the proposal included a 4.2% reduction in aggregate payments totaling an estimated $810 million.

If this proposal makes it into the final rule, it could have a ripple effect on organizations that also provide hospice or palliative care. But a similar move within the Medicare Hospice Benefit is unlikely. These home health budget neutrality adjustments are specific to the Patient-Driven Groupings Model introduced in 2020.

“On the home health side, they made some specific changes in the Bipartisan Budget Act of 2018,” Gurian said. “They made specific changes around home health payments and how the new payment system had to recapture money to meet the budget neutrality requirement.”

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