Underprioritized and Underfunded: Payment Policy Challenges Facing Hospitals Caring for Children

Over the past generation, US hospital payment policy and hospital-based care for children have undergone significant transformations. In 1983, Medicare introduced prospective payment systems (PPS), which are predetermined fixed payment amounts for hospitalizations within diagnosis-related groups (DRGs), regardless of the true costs of care.1 As hospitals were pressured to shorten inpatient stays, observation units and an observation status billing designation emerged.2–4 By the 1990s, PPS were being adapted for pediatrics.5,6 Payment reform grew in the 2000s with pay-for-performance programs tied to measures of hospital quality.7,8 In 2013, the Centers for Medicare & Medicaid Services (CMS) implemented the “Two-Midnight Rule,” limiting inpatient care and its higher level of reimbursement to stays expected to cross 2 midnights; commercial payers soon followed suit. Concurrently, the pediatric workforce has evolved. Pediatric emergency medicine was formally recognized as a subspecialty in 1992,9 and pediatric hospital medicine attained subspecialty status in 2020.10 These and other pediatric subspecialties are increasingly concentrated at academic centers and are in short supply relative to their demand.11Against the backdrop of these changes, in this issue of Pediatrics, Michelson et al describe a striking decrease in the proportion of acute care hospitals with more than minimal pediatric inpatient service capabilities over the past 20 years.12 The authors applied their previously validated method13 for classifying hospitals into 4 capability levels based on the presence of specific diagnosis and billing codes assigned to inpatient stays in the Kids’ Inpatient Database (KID), a data set available through the Agency for Healthcare Research and Quality’s Healthcare Cost and Utilization Project (HCUP). During the study timeframe, the proportion of Level 2 and 3 hospitals decreased by roughly 50%, and Level 4 hospitals, with minimal pediatric capabilities, increased by 137%. Although there was a clear increase in the proportion of Level 4 hospitals, more than 98% of pediatric inpatient hospitalizations still occurred within Level 1 to 3 hospitals. Michelson et al also describe that declining pediatric capabilities have led to a shift in the management of common conditions (eg, appendicitis, pneumonia, and asthma) toward pediatric referral centers.12At the same time, the United States has experienced a substantial decline in pediatric inpatient capacity. Recent studies estimate there were 30% fewer pediatric beds and more than 40% fewer pediatric inpatient units nationally in 2022 compared with 2008, with rural areas experiencing many closures.14 These closures have driven national hospital bed occupancy rates toward critical thresholds (exceeding 85% capacity), with projections indicating that critical capacity for pediatric beds will be reached by 2035.15 Contractions of pediatric inpatient capacity have accelerated the regionalization of pediatric inpatient care and resulted in more interfacility transfers, including common pediatric conditions (eg, asthma).16 Although hospitalization rates for some chronic conditions have declined, the clinical complexity and acuity of hospitalized children continue to rise.17Early concerns were raised about the ability of PPS, based on adult-derived DRGs, to properly account for the relatively higher costs of pediatric tertiary care5 and adjust for pediatric severity of illness.6 Current payment models threaten the solvency of hospitals with greater pediatric capacity, especially in rural settings. Today, Medicaid and the Children’s Health Insurance Program provide coverage for nearly half of all children nationally. Despite this widespread coverage, Medicaid reimbursement rates remain significantly lower than Medicare payments for equivalent services, regardless of hospital type or location.18 These reimbursement disparities place hospitals that operate with extremely narrow financial margins at the greatest risk.19 In addition, supplemental payments from CMS, including disproportionate share hospital payments, provide critical financial support to hospitals that serve low-income populations.20 However, the recently proposed federal budget cuts totaling $880 billion could substantially diminish Medicaid funding and supplemental payments, posing a serious threat to the stability of pediatric health care infrastructure.19,21 Any further reduction in coverage or reimbursement is a potential threat to the financial viability of hospitals, especially those in underserved areas.In addition, the widespread growth in observation status amplifies the need to realign payment models with actual care intensity to avoid underfunding hospitals managing complex pediatric cases under this billing designation.22,23 Despite similar resource use among children matched on diagnoses with similar lengths of stay, observation status is often reimbursed at lower rates than inpatient hospitalizations. Between 1999 and 2003, pediatric inpatient stays of 1 night or less in HCUP’s Nationwide Inpatient Sample rose from 25% to 30%.24 By 2009, 40% of stays in Children’s Hospitals contributing data to the Pediatric Health Information System had a 1-night length of stay, with observation surpassing inpatient status for short stays in 2007.25 Observation status now represents nearly half of pediatric hospital care,23 including several conditions in the categorization schema for pediatric capabilities13 used in the present study by Michelson et al,12 such as asthma, appendectomy, dehydration, and extremity fractures. Notable increases in observation stays for diabetes and surgical procedures reflect a broader shift toward observation status being applied to conditions requiring complex inpatient management.22 Importantly, observation status stays are excluded from HCUP inpatient databases, including KID. This has implications for the interpretation of hospital capabilities derived from inpatient data.Health systems should be available, resourced, and prepared to address the immediate needs of children, regardless of location. Looking forward, the 2025 changes to pediatric residency training requirements by the Accreditation Council for Graduate Medical Education, including reduced time spent caring for hospitalized children, threaten the capabilities of future pediatricians to provide definitive care and may worsen shortages of pediatric subspecialists. Children should be able to receive care for common conditions outside of referral centers. Presently, inequities in access and health care outcomes for nonurban populations continue to multiply. Many children are transferred from their community to a children’s hospital only to be discharged home from the emergency department (ED) or following a brief, uncomplicated hospitalization. Twenty years ago, such care would have likely occurred closer to home.26 To address these challenges, trials of tele-emergency consultations have shown success in reducing unnecessary interfacility transfers of children from rural and community EDs to pediatric referral centers.27 Hospital at Home and other virtual models have also gained traction as alternatives to inpatient care for children.28–30Potential next steps to address shortcomings in pediatric hospitalization capabilities could mirror those outlined by the Emergency Medical Services for Children Innovation and Improvement Center, which works to ensure high-quality pediatric emergency care, regardless of the location. Specifically, the National Pediatric Readiness Project (NPRP) provides a platform for all EDs to complete self-assessments and then implement initiatives to improve their pediatric readiness. As evidence of the success of NPRP, EDs that score more than 87 points of 100 on the NPRP assessment have an associated 76% lower mortality rate among ill children and 60% lower mortality rate among injured children.31 With declines in pediatric inpatient capabilities, similar programs and minimum standards for pediatric inpatient readiness should be established for community hospitals to ensure the US health care system’s capacity and capabilities to respond to future pediatric hospitalization needs, including pediatric hospitalization surges and disasters.