Earlier this month, the Centers for Medicare & Medicaid Services (CMS) issued a final rule (Final Rule) modifying the Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Prospective Payment System (PPS) for fiscal year (FY) 2017. CMS pays acute-care hospitals for services provided to Medicare beneficiaries under the IPPS and pays long-term care hospitals (e.g. hospices, nursing homes) under the LTCH PPS. For FY 2017, CMS projects that the Final Rule’s provisions will increase total Medicare spending for acute care hospital services by $746 million. In contrast, payments to long-term care hospital services are expected to decrease by $363 million, or 7.1 percent. According to CMS, the adjusted payments demonstrate an ongoing effort to move the Medicare program away from volume-based payments and toward a pay-for performance (value-based) reimbursement methodology as supported by a pay-for-reporting program.

The Final Rule, which goes into effect October 1, 2016, will affect an estimated 3,330 acute care hospitals and 430 LTCHs.

Quality over Quantity: Updates to Medicare Payments for Hospital Inpatient Stays

In short, CMS generally reimburses acute and long-term care hospitals for inpatient care with a single payment based on the Diagnosis-Related Group (DRG) assigned at dischargeThe DRG classification system divides diagnoses into groups that reflect the resources necessary for hospitals to treat the conditions. CMS is required to update the payment system annually to ensure that the rates account for any changes in the costs of goods or services to treat each DRG. The DRG-based IPPS payments are subject to quality improvement adjustments under the Hospital Value-Based and Hospital Readmissions Reduction Programs (Hospital VBP Program and HRR Program, respectively), the Hospital Acquried Conditions Reduction Program (HAC Reduction Program), and the Hospital Inpatient Quality Reporting Program (Hospital IQR Program). Such adjustments constitute a significant component of the Final Rule and are, in large part, the subject matter of this writing..

Key Provisions Affecting Acute Care Hospitals (IPPS)

Under the Final Rule, hospitals have financial incentives to improve quality of care. For example, CMS will increase DRG base payment rates by 0.95 percent for hospitals that participate in the Hospital IQR Program and are meaningful users of an electronic health record (EHR) system. Hospitals that fail to submit quality data to the Hospital IQR program and/or are not meaningful EHR users will suffer a 0.25 and 0.75 percent penalty, respectively.

Using quality data from the HAC Reduction Program, CMS will decrease payments by 1.0 percent to hospitals that rank in the worst performing quartile for hospital-acquired conditions (e.g. sepsis, surgical site infections). Similarly, the HRR Programwill increase penalties for hospitals with excessive readmissions for applicable conditions (e.g. acute myocardial infarction, congestive heart failure).

The final rule also implements the following changes:

• Extended eligibility for hospitals to qualify for low-volume hospital payment adjustments. A low-volume hospital must be located more than 15 road miles from another hospital and have fewer than 1,600 Medicare discharges.

• Medicare uncompensated care payments are expected to decrease by $400 million (totaling $6 billion for FY 2017). Hospitals qualify for uncompensated care payments based on their relative share of uncompensated care nationally.

• Section 631 of the American Taxpayer Relief Act of 2012 (ATRA) requires CMS to recover $11 billion in documentation and coding overpayments since 2008. The new rule implements a -1.5 percent adjustment to recoup the remaining $5.05 billion.

• Reversal of the controversial 0.2 percent cut associated with the two-midnight rule (hospital stays spanning two midnights are billed as inpatient admissions). The provision increases payment rates by 0.8 percent to account for the cut’s financial impact for FYs 2014, 2015, and 2016.

Provisions Affecting Long-Term Care Hospitals (LTCH PPS)

Beginning FY 2016, CMS established two separate payment categories for LTCH patients, standard and site-neutral. Under the Final Rule, cases qualify for higher “standard” payments if the patient meets specific clinical criteria following a direct admission from an IPPS (e.g. three-day Intensive Care Unit (ICU) or Coronary Care Unit (CCU) stay, ventilator services required upon discharge). All other discharges are paid “site-neutral” rates based on the estimated costs of care. While payments for “standard” cases will increase by 0.7 percent in FY 2017, site-neutral payments are projected to decrease by 23 percent. CMS estimates that the adjustments to the LTCH PPS will decrease spending by $363 million, down 7.1 percent from FY 2016.

For FY 2017, LTCHs that submit quality data to the LTCH Quality Reporting Program (LTCH QRP) are entitled to a 1.75 percent rate increase; non-participating LTCHs will face a 2.0 percent penalty. A provision also adds four new quality measures to LTCH QRP requirements: (1) discharge to community post acute care (PAC), (2) Medicare spending per beneficiary (MSPB), (3) potentially preventable 30 day post-discharge readmission measure for LTCHs, and (4) drug regimen review conducted with follow-up for identified issues.

How will the Final Rule Impact Low-Income Hospitals?

Under the Affordable Care Act (ACA), CMS established several programs to reward hospitals for delivering services of higher quality and higher value. Such programs include the quality-based program referenced above.  For example, the HAC Reduction Program was implemented in 2015 to encourage hospitals to reduce hospital-acquired conditions and prevent avoidable deaths by cutting payments to the bottom-performing quartile of hospitals. Likewise, the CMS-designed HRR Program was designed to reduce 30-day hospital readmissions through financial incentives. Since 2012, readmissions penalties have steadily increased, reaching a maximum of 3.0 percent for FY 2017.

Critics of these programs argue that performance-based financial penalties disproportionately affect hospitals that serve low-income and high-risk patient populations. Socioeconomic factors such as poverty, crime, and unstable housing contribute to higher rates of chronic conditions and increase the risk of hospital readmission. Low-income patient populations also tend to have poor health literacy and limited resources for disease management (e.g. medication adherence) and self-care (e.g. diet, lifestyle choices). Furthermore, experts suggest that financial incentives do not necessarily lead to improved outcomes—more than half of hospitals ranked in the bottom quartile for hospital-acquired conditions in 2015 remained on that list in 2016.

CMS projects 2,588 hospitals will face excessive readmissions penalties in FY 2017.

To view the full version of the final rule, click here.