The Consolidated Appropriations Act, 2023 (P.L. 117-328) (referred to hereafter as 2023 CAA) runs more than 1,600 pages long in the official PDF version, so you would be excused if you missed a few key substantive health provisions that were included in the law.

Many of the substantive provisions of the law had been proposed as parts of other packages throughout the year, including the Infrastructure law, the FDA User Fee legislation and the Inflation Reduction Act. However, for one reason or another, these provisions were eliminated from the final versions of the laws that were passed.

The 2023 CAA included, among other aspects, changes to the Medicare payment program and sequestration requirements, additions to the accelerated approval process for drugs, a regulatory regime for cosmetics, and changes related to pre-approval communication of health care economic information to payors, formularies and similar entities.

This is the first in a series of posts exploring some of the more important policy aspects of the law. With part 1, we will explore the changes to Medicare payment rules.

Medicare payment changes

As part of the Medicare Physician Fee Schedule, and as a result of earlier statutory provisions, Medicare providers had been looking at a large percentage drop in their payment rates for 2023. This was a result of the combination of automatic sequestration brought on by the Budget Control Act of 2011, the institution of an automatic SPAYGO sequestration that was triggered by the cost of the American Rescue Plan in 2021 and the expiration of the provisions which had previously created an automatic percentage increase in Medicare payments to counteract the effects of the payment cuts on healthcare providers.

Many comments from stakeholders in the Medicare Physician Fee Schedule Rule for 2023 pointed out this perfect storm of cuts, which some had determined would result in a nearly 10 percent reduction in payments, and asked the Centers for Medicare & Medicaid Services to fix it. CMS refused, noting that the SPAYGO sequestration, Budget Control Act sequestration and expiration of the supplementary increases were all statutory requirements that the agency didn’t have the authority to alter.

Congress, however, did have that authority and they used it. They reinstated the supplemental increases, but with lower percentage increases that would fade out after 2024, and pushed the SPAYGO sequestration cuts out until 2025.

Conversion factors and supplemental increases

As a bit of background, the method by which Medicare calculates payments as part of the Physician Fee Schedule is a relatively complicated one that involves calculations of relative value units, a conversion factor and locality differences for all aspects of providing a service from the actual cost of the labor and materials, to the facility overhead and the liability insurance needed.

A key part of that calculation is the conversion factor which is the multiplier that allows CMS to convert those relative value units into actual dollars. The conversion factor is calculated annually by CMS as part of its rulemaking process and it takes into account the amount paid out for services by Medicare for the previous year, using the previous year’s conversion factor as a baseline.

Additionally, since by law Medicare cannot increase its spending by more than $20 million from year to year, CMS sometimes applies a “budget neutrality” factor to the conversion factor calculation to account for that. In 2023, the budget neutrality factor was a 1.6 percent reduction because of changes that CMS made to coding evaluation and management visits in 2021.

Two laws passed nearly a year apart, the Consolidated Appropriations Act, 2021 (P.L. 116-260) and the Protecting Medicare and American Farmers from Sequester Cuts Act, (P.L. 117-71) included supplemental percentage increases to be tacked on to Medicare payments in 2021 (3.75 percent) and 2022 (3 percent) as a way to ameliorate the effect of payment cuts. The same provisions required that the annual conversion factor calculation NOT include those supplemental increases. This results in a lower baseline conversion factor, albeit one that reflects the non-supplemented Medicare costs for the year.

The end result of this supplemental increase policy was to see reductions in the conversion factor brought upon by reduced spending and budget neutrality adjustments that were then smoothed out by the supplementary increases. For 2023, the conversion factor, calculated without the 2022 supplemental increase, was scheduled drop by approximately 4.5 percent. (Technically it would be a 4.6 percent decrease using those numbers, but the difference is in hundredths of a percent, so for rounding purposes it actually comes out to about 4.5 percent.)

2023 CAA Supplemental Increases

So, when the Medicare Physician Fee Schedule was released in November 2022, Medicare providers seeing a 4.5 percent decrease based on a conversion factor decrease in 2023. However, unlike in 2021 and 2022, where there had been a statutory increase of 3.75 percent and 3 percent respectively to offset the conversion factor drop, 2023 was not scheduled to have an increase to offset that reduction.

This generated a lot of commentary when the proposed rule was published and additional commentary when the final rule was announced.

Congress responded in the 2023 CAA by reinstating the supplemental increases for two years, adding a 2.5 percent increase in 2023 and a 1.25 percent increase in 2024. This would result in basically a net reduction of 2 percent for 2023 and, assuming that the budget neutrality reduction to the conversion factor stays the same for 2024, a net reduction of 3.25 percent for 2024.

SPAYGO sequestration delay

The Statutory Pay-As-You-Go Act of 2010 (P.L. 111-139, Title I) was signed into law by President Obama as part of the debt limit increase legislation in February 2010. SPAYGO, as it is called, requires that any new funding legislation that is outside of certain exempt categories to be effectively paid for over five or ten years.

If a law is passed that isn’t specifically exempt from SPAYGO and doesn’t have cuts and new revenue to offset its new spending over the average of 5 to 10 years, then it will trigger automatic sequestration sufficient to pay for that spending across a broad range of federal spending categories.

The American Rescue Plan Act of 2021 (P.L. 117-7) had estimated deficit increases of $1.9 trillion over 5 years and $2.0 trillion over 10 years. As the law was not exempt from SPAYGO requirements, it triggers those sequestration cuts. SPAYGO caps the amount that Medicare payments could be cut at a maximum of 4 percent.

Those cuts were scheduled to go into effect in 2022. However, as part of the Protecting Medicare and American Farmers from Sequester Cuts Act (the same law that gave us the 3 percent increase in payments covered in the previous section for 2022), the deficits for 2022 were added instead to the 2023 scorecard under SPAYGO.

So until the 2023 CAA passed, Medicare providers were looking at approximately 4 percent mandatory cuts from SPAYGO. But, the 2023 CAA kicked that can down the road by the same mechanism, adding the 2023 and 2024 deficit numbers to the 2025 SPAYGO Scorecard instead. Thus, healthcare providers will not have to face those payment cuts this coming year, or in 2024 for that matter.

What does this mean?

In 2023, as a result of the CAA, healthcare providers should see a total reduction in Medicare payments of up to 4 percent. This is because a second mandatory sequestration caused by the Budget Control Act of 2011 (P.L. 112-25) is in effect and will continue until 2031.

That cut is capped at 2 percent until 2030, when it increases for the final two years. Combine that with the conversion factor reduction and the supplementary increases for 2023 discussed above, and the final decrease in payment is approximately 4 percent.

This is certainly an improvement over the possible 10 percent reductions that healthcare providers might have been facing had the supplemental increases expired and SPAYGO sequestration gone into effect.

However, there is still a cloud on the horizon as a result of the 2023 CAA. The law didn’t waive the American Rescue Plan’s SPAYGO effects. It simply pushed those numbers to 2025. Luckily for Medicare providers, the amount of cuts that SPAYGO could apply are statutorily capped at 4 percent. So, despite the astronomical deficit number that will appear on the 2025 PAYGO scorecard, there will not be more than a 4 percent cut related to that amount.

Add that to the expiration (again) of the supplemental payment increases in 2025 and the continued mandatory Budget Control Act sequester and in 2025 healthcare providers could, once again be looking at close to 10 percent cuts in Medicare payments. Only this time, until at least January 3, 2025 when the 119th Congress is sworn in, there will be a divided Congress, one that may be unwilling or unable to agree on legislation to ease those cuts.

Reed Smith will continue to follow legislative and regulatory developments affecting Medicare payment rates. If you have any questions about how this law or Medicare payment rules affect you, please reach out to the health care lawyers at Reed Smith, LLP.