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FY 2013 IPPS Final Rule Includes 2.3 Percent Hospital Payment Update

August 3, 2012—The Centers for Medicare and Medicaid Services (CMS) Aug. 1 released the Medicare inpatient prospective payment system (IPPS) final rule for fiscal year (FY) 2013.  The rule is scheduled to be published in the Federal Register on Aug. 31 and will take effect for discharges on or after Oct. 1, 2012. 

Under the IPPS final rule, inpatient payments, in the aggregate, will increase by 2.3 percent in FY 2013—up from a 0.9 percent projected increase in the proposed rule.  This 2.3 percent increase reflects a market basket update of 2.6 percent, less a multi-factor productivity adjustment of 0.7 percent, less a 0.1 percent adjustment required by the Affordable Care Act (ACA).  The impact also reflects several documentation and coding adjustments (a FY 2008 and FY 2009 adjustment of minus1.9 percent and restoration of the FY 2012 cut of 2.9 percent) as well as other policies.  However, the final rule does not reflect any effects of sequestration scheduled to take effect in Jan. 2013.  The 2 percent across-the-board sequestration cuts for Medicare would take effect independently of the changes made in the FY 2013 final rule.

The two factors that account for the largest changes between the proposed and final rule increases are: (1) CMS withdrew its proposal to implement a minus 0.8 percent documentation and coding adjustment for FY 2010; and (2) CMS recalculated the outlier budget neutrality adjustment (to account for errors in the proposed rule).

CMS finalized the payment methodology for the readmission reduction program and did not make any adjustments to account for socio-economic factors, dual-eligible status, or planned/unrelated readmissions.  The final rule also outlines the process for collecting the DRG-payment reduction and distribution of incentive payments in the value-based purchasing program by applying them simultaneously starting in January 2013 for FY 2012 discharges.  The efficiency measure, Medicare Spending per Beneficiary, is finalized for inclusion in VBP beginning in FY 2015.  Under the Inpatient Quality Reporting Program (IQR), CMS finalized proposals to remove 17 current measures and include additional measures in the areas of care coordination, perinatal care, and readmissions. 

The final rule also contains several provisions of particular interest to teaching hospitals.  First, CMS finalized its proposal to include labor and delivery (L&D) beds in the available bed count for the indirect medical education (IME) and disproportionate share hospital (DSH) adjustment.  CMS intends to amend the cost reporting instructions to reflect this final change in policy [see Washington Highlights, April 27]. Because this increase in available beds will lead to a decrease in many teaching hospitals’ intern and resident-to-bed (IRB) ratios, CMS estimates this change would decrease IME payments by $40 million in FY 2013 (down from an estimated $170 million in the proposed rule). 

Second, with respect to new teaching hospitals, CMS finalized its proposal to increase the amount of time a new teaching hospital has to establish its DGME and IME FTE caps from 3 years to 5 years.  This policy will be in effect only for hospitals that first begin to train residents in their first new program on or after Oct. 1, 2012.  CMS also finalized its proposal to adopt an apportionment plan for instances when residents in new programs train in more than one hospital during the cap-building period.

Third, with respect to the timing for filing of claims for MA patients, CMS finalized its proposal that the timely filing rules for claims submission will also apply to no-pay (“shadow”) claims that hospitals submit to receive IME, DGME, and nursing/allied health education payments.  CMS also will apply the timely filing requirements to no-pay bills submitted for purposes of calculating the DSH adjustment.

Fourth, with respect to ACA Section 5503 redistributed residency slots, CMS did not finalize its proposal that a hospital that was awarded slots under this program must use half of its awarded slots within the first three cost reporting periods of the 5-year evaluation period and all of its awarded slots within the fifth cost reporting period, or risk losing its entire slot award.  Instead, CMS adopted separate policies for expanded versus new programs.  For expansions of existing programs, hospitals will be required to fill all slots by the fourth cost reporting period.  Any expansion-related slots that are not filled by the fourth cost reporting period will be removed at the end of the fifth cost reporting period.  For new programs, hospitals will only lose those Section 5503 slots they do not use by the end of the fifth cost reporting period. 

CMS clarifies that in meeting the 75 percent test, 25 percent of the slots may be “used” for cap relief and reminds hospitals that they may lose all of their Section 5503 slots if they do not meet the 75 percent test or the 3-year primary care average requirement.  To support the new policy, CMS will amend the hospital cost report to require Section 5503 slot awardees to report the number of resident FTEs they have added because of Section 5503 slots.

Finally, with respect to future slot redistributions from closed hospitals under Sec. 5506 of the ACA, CMS shortened the application time-frame from the current 4 months to 90 days (rather than the 60 days in the proposed rule).  CMS also adopted changes to the ranking criteria for future applications, the determination of slot effective dates, and the application form for slots under this program. 

Additionally, CMS used the IPPS rule to announce the closure of three teaching hospitals (Hawaii Medical Center East, Oak Forest Hospital in Illinois, and Huron Hospital in Ohio) and the opening of the 90-day application period to apply for slots from these hospitals.  The deadline to apply for slots from these hospitals is Oct. 29, 2012.

The proposed rule also contains provisions that affect long-term care hospitals, critical access hospitals, new technology payments, outlier payments, the labor related share, and the wage index.


Jennifer Faerberg, MHSA
Director, Clinical Transformation Unit
Telephone: 202-862-6221


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