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FY 2015 IPPS Final Rule Includes No Substantive Changes to Two Midnights Policy and Cuts Uncompensated Care DSH Payment Pool by About $1 Billion

August 8, 2014—The Centers for Medicare and Medicaid Services (CMS) Aug. 4 issued the Inpatient Prospective Payment System (IPPS) final rule containing changes to the Medicare payment policies and rates under IPPS and the PPS payment update for federal fiscal year (FY) 2015. The AAMC submitted comments on the IPPS proposed rule in June [see Washington Highlights, July 11].

The final rule includes a payment update of 1.4 percent in FY 2015 for acute care hospitals.  CMS finalized an update to the IPPS market basket of 2.9 percent (up from 2.7 percent in the proposed rule) and also finalized a minus 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 minus 0.5 percentage points (compared to minus 0.4 percentage points in the proposed rule) and a ‑0.2 percentage point reduction required by the Affordable Care Act (ACA, P.L. 111-148 and P.L. 111-152).

With regard to Medicare payment for short inpatient hospital stays and the Two-Midnight Rule, CMS acknowledged that there was no consensus among commenters when responding to CMS’ proposed rule request for alternative payment approaches for short hospital stays. The final rule states that CMS will take all of the comments into account in any potential future rulemaking and plans to actively work with stakeholders to address the complex question of how to further improve payment policy for short inpatient hospital stays.

The AAMC was disappointed that despite strong comments from industry about the immediate need to rectify the inadequate reimbursement, the displacement of medical judgment, and the provider and beneficiary confusion caused by the Two-Midnight Rule, CMS did not include a policy that would revise or replace it in the FY 2015 IPPS final rule.

In an Aug. 4 statement, AAMC President and CEO Darrell G. Kirch, M.D., noted, “The AAMC looks forward to working with CMS on a short hospital stay payment policy solution that supports physicians’ relying on their medical judgment to determine when a patient needs to be admitted as a hospital inpatient.”

The final rule also continues to implement changes to Medicare Disproportionate Share Hospital (DSH) payments required by the ACA, but the total dollar amount available to be distributed through the uncompensated care (UC) DSH formula is reduced by nearly $1 billion compared to the proposed rule. 

The UC DSH pool is estimated based on 75 percent of the projected DSH payment in FY 2015 reduced proportionately to the projected decrease in the uninsured population. While the proposed rule projected $14.205 billion for DSH payments in FY 2015, the final rule revised the projection to $13.383 billion (approximately a 5.8 percent cut), which significantly reduced the amount available for distribution through UC DSH payments.

Additionally, based on more recent Congressional Budget Office (CBO) estimates of the insurance rate (13 percent in the final rule compared to 14 percent in the proposed rule), the final rule increases the DSH payment reduction due to expansion of insurance coverage. The distribution of the UC DSH pool will continue to be calculated based on a DSH-eligible hospital’s share of Medicaid and supplemental security income (SSI) days associated with their acute care units.

On the graduate medical education (GME) front, CMS finalized the alignment of the effective date of the full-time equivalent (FTE) cap, rolling average, and intern and resident-to-bed (IRB) ratio cap for new programs, but at AAMC’s recommendation, made changes to the proposed policy. 

Previously, a new teaching hospital’s FTE cap would go into effect after the five-year cap building window, but the three-year rolling average and the IRB ratio cap could go into effect on different dates based on the length of the new programs that started during the five-year window. Under the final rule, the FTE cap, the rolling average, and the IRB ratio cap all will go into effect at the beginning of the cost reporting period that coincides with or follows the sixth program year of the first new program that triggered the five-year cap-building window. 

This is a change from the proposed rule, which would have set an effective day “preceding” the sixth program year and, as the AAMC pointed out, would not have allowed new teaching hospitals to be reimbursed for all residents training during the 5-year cap-building window.

Additionally, CMS finalized the transition period for rural hospitals that are redesignated as urban when they are building new programs and for rural training track (RTT) programs. As a result, if a hospital was rural when it received a letter of accreditation and/or started training residents in a new program(s), but is redesignated by the Office of Management and Budget (OMB) as urban based on the updated labor market areas (also finalized in the rule), that hospital can continue to start and grow that program(s) and still receive a permanent cap adjustment for that new program. 

Similarly, if an urban and a rural teaching hospital are participating in a separately accredited RTT program and the rural hospital is redesignated as urban, the original urban hospital will continue to be paid for the rural track during a transition period that begins effective with the date the new OMB delineations are implemented by CMS and lasts through the end of the second residency training year following the implementation date of the new OMB delineations.

During this two-year transition period, either the rural hospital that has been redesignated as urban must be reclassified as rural, or the urban hospital must find a new rural hospital to participate in the RTT program to continue to be paid for the rural track.

The final rule also eliminates cap relief as one of the uses of Section 5506 awards of FTE slots from closed hospitals and makes other technical changes to the Section 5506 application process. In addition, CMS clarifies 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 clinics (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 GME payment for those residents.

Additionally, CMS finalized updates to the hospital quality pay-for-performance programs in the rule. For the Value-Based Purchasing (VBP) program, the agency removed six measures and added six measures in FY 2017. CMS continues to shift the focus of the VBP program away from process measures and towards outcome and safety measures.  To reflect this new balance of measures in each domain, CMS modified the weights for each starting FY 2017.

In the Hospital Readmissions Reduction Program (HRRP), CMS finalized one new measure, coronary artery bypass graft (CABG), starting FY 2017.

CMS did not add any measures to the Hospital-Acquired Condition (HAC) Reduction Program, which will start FY 2015. CMS did, however, finalize its proposal to decrease the weight of claims-based measures from 35 percent to 25 percent and 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. 


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


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