- Michael Connelly
- May 17
- 3 min read
Aligning Hospice Payment and Benefit Design with Patient Need
Executive Summary
This proposal advances three integrated reforms: (1) replace the six-month prognostic eligibility requirement with diagnosis of terminal illness; (2) integrate hospice fully into the Medicare benefit; and (3) transition reimbursement to a guardrailed, reasonable cost-based model. These reforms are supported by extensive evidence that hospice reduces Medicare spending while improving care, but also recognizes that the current payment model creates negative structural incentives tied to time, classification, patient selection and benefit design.
Core Policy Rationale
Medicare payment systems shape clinical behavior. Fee-for-service systems incentivize volume and coding intensity. Hospice was designed to avoid these distortions, yet its per diem structure substitutes new proxy variables—length of stay, level-of-care classification, and patient trajectory. These proxies create predictable financial incentives that influence provider behavior, even in the absence of coding-based reimbursement.
The central policy insight is that eliminating coding does not eliminate incentives. Incentives shift to whatever variables define payment. In hospice, those variables are time, classification, selection and insurance benefit design.
As a result, even a simplified system can produce distortion if the underlying payment model is misaligned with patient need.
Evidence Base
MedPAC analyses consistently demonstrate that hospice reduces total Medicare spending in the final months of life, largely by reducing hospitalizations and ICU utilization. CMS data show that hospice patients experience fewer acute care transitions and improved care coordination. Peer-reviewed studies (e.g., Teno et al., JAMA) show lower aggregate spending and improved patient and family satisfaction in end-of-life care.
Structural Limitations of Current Model
Per diem payment rewards longer lengths of stay regardless of intensity
Level-of-care categories (e.g., continuous care) create classification-based revenue variation
Diagnosis and eligibility framing influence enrollment patterns
Negative financial incentives and coverage benefit flaws reduce the effective use of hospice.
Solutions to These Limitations
Replace Prognostic Certification by eliminating the six-month prognosis requirement and replace it with physician-documented diagnosis of terminal illness. Prognostication is inherently unreliable and delays appropriate care access.
Integrate Hospice into Medicare by eliminating hospice as a separate carve-out and integrate it into the core Medicare benefit to allow continuity between curative and palliative care.
Implement Reasonable Cost-Based Reimbursement by replacing per diem payments with reimbursement based on reasonable costs, with safeguards including cost benchmarks, audits, and defined allowable expenses. This eliminates incentives tied to time, classification, and patient selection.
Why Cost-Based Reimbursement is Appropriate for Hospice
Hospice differs fundamentally from hospital care. It is lower cost, less variable, and not driven by discretionary high-cost technologies. Care is labor-based and predictable, making it feasible to define reasonable cost benchmarks. Therefore, the risks of cost inflation associated with historical hospital cost-based reimbursement are materially reduced in hospice. This payment model would also dramatically reduce payment fraud in hospice and the invasion of private equity into this care space.
Expected Outcomes
Improved access to palliative care
Elimination of financial incentives for patient selection
Alignment of payment with actual care needs
Preservation of Medicare cost savings
Reduction in administrative burden and fraud in the hospice space
Implementation Pathway
Time is of the essence to start bending the Medicare cost curve. All these suggestions have been tested - most through the CMS CMMI demonstration program with demonstrated quality and cost benefits. Consequently, I would offer this option to Hospices and Health Systems immediately without further testing.
Conclusion
Hospice demonstrates that simpler payment systems and simple benefit revisions can improve care and reduce costs, but also shows that proxy-based payment models inevitably shape behavior. This proposal advances the next stage of reform: aligning reimbursement directly with patient need through a disciplined cost-based approach and simple benefit design changes.
