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FY 2014 IPPS Final Rule Increases IPPS Operating Rates by 0.7 Percent

August 9, 2013—The Centers for Medicare and Medicaid Services (CMS) Aug. 2 released the Medicare inpatient prospective payment system (IPPS) final rule for fiscal year (FY) 2014. The rule is scheduled to be published in the Aug. 19 Federal Register and is effective for discharges on or after Oct. 1.

Under the final rule, IPPS operating rates will increase by 0.7 percent in FY 2014.  This increase reflects a market basket update of 2.5 percent, less a 0.5 percentage point multi-factor productivity adjustment, less a 0.3 percentage point adjustment required by the Affordable Care Act (ACA, P.L. 111-148 and P.L. 111-152).

The impact also takes into account a negative 0.8 percent recoupment cut to the standardized amount in FY 2014 to begin implementing the documentation and coding adjustment required by the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240) as well as other policies.  CMS also finalized an additional 0.2 percent reduction to offset projected spending increases associated with proposed new admission and medical review criteria for inpatient services.

Disproportionate Share Hospital (DSH) Payments

CMS finalized proposals to implement Section 3133 of the ACA that will reduce and repurpose DSH payments. In FY 2014, hospitals that are eligible for DSH payments will receive 25 percent of the amount they previously would have received under the current statutory formula for Medicare DSH payments. CMS also will pay hospitals that are currently eligible for DSH payments an additional amount (the new “uncompensated care payment”).

Noteworthy differences between the proposed and final rule with regard to the modified DSH payment methodology include:

  • As urged by the AAMC [see Washington Highlights, June 28], CMS increased its projection of the total DSH payment pool to take into account Medicaid expansion.  CMS also decreased the amount the total pool should be reduced to reflect changes in the percentage of people under 65 who are newly insured. 
    Accordingly, the total amount available to be redistributed as uncompensated care payments is $9.033 billion in the final rule, up from $8.217 billion in the proposed rule.

  • After AAMC and other hospital associations pointed out the potential for substantial underpayment to hospitals by MA plans, CMS decided not to finalize the proposed policy to make interim uncompensated care payments on a periodic basis rather than a per-discharge basis for FY 2014.
    Instead, CMS will include the uncompensated care amount in the payment for each IPPS hospital discharge, correcting the MA underpayment problem.

Graduate Medical Education (GME)

With respect to GME, beginning in FY 2014 labor and delivery days will be considered inpatient days for purposes of determining the Medicare share for direct graduate medical education (DGME) payments.  CMS also finalized the proposal that would no longer allow a hospital to count and be reimbursed for time residents train at critical access hospitals (CAHs). 

The final rule also announced Round 6 of the Sec. 5506 closed hospital slot redistribution program. Round 6 will distribute DGME and Medicare indirect medical education (IME) slots from Cooper Green Mercy Hospital in Birmingham, AL and Sacred Heart Hospital in Chicago. 

Hospitals wishing to apply for slots under Round 6 must submit applications directly to the CMS Central Office by Oct. 31 (must be received, not postmarked by that date).

Two Midnights Rule

CMS also finalized guidelines for when inpatient hospital admissions will be presumed to be appropriate for Part A payment.  The final rule creates a presumption that an inpatient admission is reasonable and necessary for encounters that cross “two midnights” in the hospital and for procedures on the inpatient only list. 

The final rule emphasizes the need for a formal order of inpatient admission to begin inpatient status, but permits the physician to consider all time a patient has already spent in the hospital as an outpatient receiving observation services, or in the emergency department, operating room, or other treatment area in guiding the two midnight expectation. 

The rule finalizes a proposal from a separate March 2013 proposed rule that allows hospitals to self-audit or respond to an inpatient claim denial by billing Medicare Part B for hospital inpatient services that were billed under Part A.  Hospitals will have one year from the date of service to bill Medicare Part B for admissions with dates of service on or after Oct 1.

Hospital Quality Programs

Regarding the new Hospital Acquired Condition (HAC) Reduction Program, CMS finalized much of the framework that was outlined in the proposed rule. Starting in FY 2015, the agency will penalize the 25 percent of hospitals with the worst HAC performance by reducing all inpatient payments 1 percent.

The application of the penalty to all payments differs from the other hospital performance programs, where the adjustment only applies to base operating diagnosis-related group (DRG) payments.

CMS notes that the HAC payment issue is due to the statutory language for this program, but that it would discuss the methodology for reducing payments in next year’s rule.

CMS will use two measure domains to determine a hospital’s total HAC score. Domain 1 will consist of the Agency for Healthcare Research & Quality (AHRQ) composite measure, which is a conglomerate of 11 individual patient safety indicators. Domain 2 will include the Centers for Disease Control and Prevention (CDC)’s Central Line-Associated Blood Stream Infection and Catheter-Associated Urinary Track Infection measures.

CMS changed the weights of the domains in the final rule, increasing Domain 2 measures from 50 to 65 percent, in part to alleviate the concerns that teaching hospitals would be disproportionately impacted by the payments. The AAMC supported increasing the weight of Domain 2 measures as these are clinically-validated and more reliable than the measures proposed for Domain 1.

For the Value-Based Purchasing (VBP) program, CMS finalized their proposal to remove three measures in FY 2016. CMS additionally removed two Surgical Care Improvement Project (SCIP) measures starting FY 2016. The full list of measures in the VBP and other are available in the FY 2014 IPPS final rule.

CMS also finalized the proposed domain weights for FY 2016, which places greater emphasis on outcome and efficiency measures compared to FY 2015.

Finally, for the Readmissions Reduction program, the agency finalized its proposal to incorporate a new planned readmissions algorithm and excluded unplanned readmissions following a planned readmission within 30 days of the initial admission starting in FY 2014, and adopted the Chronic Obstructive Pulmonary Disease (COPD) and elective Total Hip/Knee Arthroplasty measures starting FY 2015.


Scott Wetzel, M.P.P.
Lead, Quality Reporting
Telephone: 202-828-0495


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