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FY 2015 IPPS Proposed Rule Opens Door for New 2 Midnights Guidance; Disproportionately Hurts Major Teaching Hospitals

May 2, 2014—The Centers for Medicare and Medicaid Services (CMS) April 30 issued the Inpatient Prospective Payment System proposed rule containing changes to the Medicare payment policies and rates under the Inpatient Prospective Payment System (IPPS) and the PPS payment update for federal fiscal year (FY) 2015.

The proposed rule includes a projected payment update of 1.3 percent in FY 2015 for acute care hospitals.  CMS proposes to update the IPPS market basket by 2.7 percent, but also proposes a 0.8 percent recoupment cut to the standardized amount in FY 2015 to continue implementing the documentation and coding adjustment required by the American Taxpayer Relief Act of 2012 (ATRA, P.L. 112-240).

The payment update also reflects a multi-factor productivity adjustment of 0.4 percentage points and a 0.2 percentage point reduction required by the Affordable Care Act (ACA, P.L. 111-148 and P.L. 111-152).

CMS projects that the proposed rate increase along with other proposed payment changes in the rule will decrease IPPS operating payments for all hospitals by about $864 million (a ‑0.8 percent change).  CMS’ projected impact of teaching hospitals that train 100 or more residents is that IPPS operating payments will decrease by 1.3 percent.

Based on CMS’ impact analysis in the proposed rule, the difference between all hospitals and large teaching hospitals is accounted for by proposals in the rule related to the ACA disproportionate share hospital (DSH) payment cuts and the Hospital Acquired Conditions (HAC) Reduction Program.

In the proposed rule, CMS requests comments on alternative payment approaches under the Medicare program for short hospital stays.  CMS is soliciting comments on how the short stay payment methodology would be designed, how short stays would be defined, and what the appropriate payment would be for these short stays.

This presents an opportunity to suggest a new way for CMS to reimburse hospitals for stays of less than two midnights instead of simply requiring that these services be billed under Part B.

CMS continues to implement changes to Medicare DSH payments required by the ACA.  Beginning in FY 2014, hospitals started receiving 25 percent of what they would have received under the former statutory formula for Medicare DSH.

The remaining 75 percent of what would have been paid as Medicare DSH was adjusted for decreases in the rate of uninsured individuals under the ACA, and redistributed to hospitals as Uncompensated Care DSH (UC DSH) payments based on each hospital’s relative share of uncompensated care costs calculated using a proxy of low income days.

Under the proposed rule, CMS will continue to use this methodology to redistribute what would have been paid as Medicare DSH payments.  CMS’ Office of the Actuary estimates that 75 percent of what would have been paid in Medicare DSH payments for FY 2015 is $10.654 billion, which is then adjusted by the change in the percentage of individuals who are uninsured as estimated by the Congressional Budget Office (CBO) and a statutory factor to determine the amount available for UC DSH payments.

After this cut to the UC DSH pool, the amount available to be redistributed to hospitals based on their relative share of uncompensated care is $8.56 billion (about $500 million less than FY 2014).

In the graduate medical education (GME) context, CMS proposes to eliminate cap relief as one of the uses of ACA Section 5506 awards of full-time equivalent (FTE) slots from closed hospitals.

CMS also proposes to remove the requirement under the Section 5506 application process that hospitals “seamlessly” replace displaced FTE residents with new FTE residents after the displaced residents graduate, to be eligible for slots under Ranking Criterion One and Three.

The proposed rule also changes the effective date of the FTE cap, rolling average, and intern and resident-to-bed (IRB) ratio cap for new teaching hospitals that are just starting to train residents.  Currently, a new teaching hospital’s FTE cap goes into effect after the 5-year cap building window, but the 3-year rolling average and the IRB ratio cap take effect on different dates based on the length of each new program started during the 5-year window.

Under the proposed rule, the FTE cap, the rolling average, and the IRB ratio cap all would go into effect at the beginning of the cost reporting period that precedes the sixth program year of the first new program that triggered the 5-year cap-building window.

CMS also proposes that the same requirements applicable to teaching hospitals for direct GME payments with respect to training residents in nonprovider settings also apply to Federally Qualified Health Centers (FQHCs) and Rural Health Centers (RHCs).  Under this clarification, if an RHC or an FQHC incurs the salaries and fringe benefits (including travel and lodging where applicable) of residents training at the RHC or FQHC, the RHC or FQHC may receive direct graduate medical education payments for those residents.

The proposed rule also includes changes to use the new recent labor market area delineations issued by the Office of Management and Budget (OMB) using 2010 Census data.  CMS proposes transition periods to mitigate negative wage index payment impacts from the updated labor market areas.

For GME purposes, CMS proposes that if a hospital was classified as rural when it started training residents in a new program, but is redesignated by OMB as urban during the 5-year cap-building period for that program, that hospital can continue growing that program for the rest of the cap-building period and still receive a permanent cap adjustment for that new program.

Additionally, if an urban and a rural teaching hospital are participating in a separately accredited rural training track program and the rural hospital is redesignated as urban, the original urban hospital will continue to be paid for the rural track during a 2-year transition period.

The rule also includes proposals to implement the ACA provision requiring that each hospital establish and make public a list of its standard charges for items and services. CMS includes guidelines in the proposed rule that would require hospitals either to make public a list of standard charges or to explain how they permit the public to view those charges if they ask for them.

Additionally, CMS proposes updates to the hospital quality pay-for-performance programs in the rule. For the Value Based Purchasing (VBP) Program, the agency proposed a total of six measures, and recommends that six “topped out” measures be removed. CMS is also considering adding a care transition survey as part of the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) and episode measures in the future.

To reflect the new balance of measures in each domain, CMS proposes to modify the weights for VBP starting in FY 2017. In the Hospital Readmissions Reduction Program, CMS proposes to add coronary artery bypass graft (CABG) as a measure starting in FY 2017.

CMS does not propose to include the hospital-wide readmission measure that was posted on Hospital Compare in December 2013.

Also, CMS does not propose any new measures for the HAC Reduction Program. However, there was a proposal to decrease the weight of claims-based measures from 35 percent to 25 percent and to increase the weight of measures from the Centers for Disease Control’s National Health Safety Network to 75 percent starting in FY 2016.

CMS estimates that over half of large teaching hospitals will be hit by the HAC penalty in FY 2015.  Additionally, more than five percent of a hospital’s Medicare payment is at risk under these programs.

Comments on the proposed rule are due by 5:00 p.m. EDT on June 30, 2014, and CMS expects to issue the final rule by Aug. 1, 2014.


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


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