CMS Proposed Rules for Fiscal Year 2016 - Inpatient Prospective Payment System

On April 17, 2015, CMS released the proposed rules for the Medicare Program's 2016 Hospital Inpatient Prospective Payment Systems for Acute Care Hospitals.  These proposed rules, which were published in the Federal Register dated April 30th, revise the IPPS operating and capital rates as required by the statutory provisions of the Affordable Care Act as well as establishing new and revising existing quality reporting initiatives.

Medicare Base PPS Payment Rates

Many hospitals may see an increase in their Medicare base rate reimbursement for FY 2016.  Overall, CMS states the proposed rule will increase net IPPS payments by $120 million.  Those facilities that submit quality data and are meaningful users will experience a net 1.1% increase in the national operating rates.  This increase reflects a 2.7% market basket increase, minus the following adjustments:  a multi-factor productivity adjustment of 0.6%, a statutory adjustment mandated by the Affordable Care Act of 0.2% and a documentation and coding adjustment required by the American Taxpayer Relief Act of 2012 of 0.8%.  While CMS anticipates an increase for hospitals, other factors, such as a change in case mix index or wage index could result in lower payments.

Under these proposed rules, hospitals with a wage index greater than 1.0, who submit quality data and are meaningful users, will receive a base operating standardized amount before a wage index adjustment of $5,479.03.  The FY 2015 base rate is $5,437.85, a net increase of $41.18 or 0.75%.  Hospitals in the same area that do not submit quality data and are not meaningful users will experience a modest increase of 0.19% over FY 15 rates and will receive a base operating standardized amount of $5,370.15 before the wage index is applied.  Effectively, if the proposed rates are approved, the failure to submit quality data and not qualifying as a meaningful EHR user is a payment rate, prior to wage index and case mix adjustments, $108.88 per case lower than those hospitals meeting both requirements.  Some hospitals may have submitted the mandatory quality data but are not a meaningful user.  For them the base rate as proposed will be $5,442.74.   Hospitals who do not submit quality data but are meaningful users will receive a base rate of $5,406.44.  The chart below provides the proposed payment rates for hospitals with a wage index above and below 1.000 and the adjusted rates based on compliance with the quality data submission requirements and the implementation of EHR.

In other words:

  • Hospitals that have submitted quality data and are meaningful EHR users get the full base payment rate
  • Hospitals that are meaningful EHR users but did not submit quality data will be paid a rate .64 percent below the full base rate
  • Hospitals that have submitted quality data but are not meaningful EHR users will be paid a rate 1.32 percent lower than the full base rate
  • Hospitals that did not submit quality data and have not qualified as a meaningful EHR user will be paid a rate 1.99 percent below the full base rate

We recommend corrective action as reductions to the FY 2016 rates are certain and future reductions will likely increase further penalizing hospitals not in compliance with the quality data and EHR requirements.

The chart below contains the proposed Federal fiscal year 2016 payment rates.

Source - CMS website, CMS-1632P, Tables 1A & 1B

Source - CMS website, CMS-1632P, Tables 1A & 1B

Outlier Threshold

The proposed high cost outlier threshold of $24,485 is slightly lower than FY 2015 of $24,626.  Hospitals might interpret this as an opportunity to receive increased outlier payments.  This may not be the case as changes in hospital charges, ratios of cost-to-charges and case mix will influence if a claim is eligible for outlier payments.  Total hospital outlier payments for FY 2016 are projected to be 5.1% of the total Medicare MS-DRG payments.  This has been the standard goal for CMS in the preceding years.  Since the payment system is intended to be budget neutral, the thresholds set by CMS are intended to maintain limited increases in the outlier payments.  Some hospitals will receive increased outlier payments and others will not.  It will be important for hospitals to monitor outlier payments and make adjustment to their interim estimates of net revenues.

Federal Capital Rate

The proposed Federal capital rate of $468.51 is greater than the FY 2015 rate of $434.97 before geographical adjustment factors are applied.  This rate is subject to changes in case mix and the geographic adjustment factor.  We suggest that hospitals perform an analysis to determine if the improvement in the rate will translate into improved capital PPS payments for your hospital.

Disproportionate Share (DSH)

Fiscal year 2016 is the third year CMS is applying the payment methodology for disproportionate share where 25-percent is based on the original method and the remaining 75-percent on the empirically justified payment.  The empirically justified payment for uncompensated care is based on a percentage allocation using the sum of a hospitals Medicaid and SSI days in proportion to the sum of the total national Medicaid and SSI days.  This ratio is applied to a pool of funds preset by CMS for the fiscal year.  The pool of funds, known as Factor 3, looks at the amount of payments CMS made for disproportionate share using the previous method and adjusts it downward by a factor based on the percentage change in the number of uninsured individuals.  As a result, Medicare disproportionate share payments for uncompensated care decrease annually as part of the Affordable Care Act.  The FY 2014 pool was $9.0 billion.  FY 2015 is $7.7 billion.  In FY 2016, the pool will be reduced from the FY 2015 amount by $1.3 billion, allowing approximately $6.4 billion to be distributed to hospitals that qualify using Factor 3 data submitted from the most recently available FY 2011 or 2012 filed 12 month cost reports.  It can therefore be anticipated that uncompensated care payments will be less than the amounts received in FY 2015 and it could be significant.

Since the allocation of the pool is based on the sum of a hospital's Medicaid and SSI days it will be imperative for hospitals to properly report the patient days on the cost report and make sure that all of the days are recorded before the cost report is settled.  At a minimum this will guarantee that the hospitals are receiving the maximum allowable payment.  Since the denominator of the allocation ratio is the total national Medicaid and SSI days, improvements in the capturing of patient days by other hospitals in the pool could result in a given hospital allocation percentage todecrease even if an individual hospital submits improved information.  This should not diminish a hospital's efforts to collect the most accurate data.

Hospitals will continue to receive 25% of what they would have previously received under the statutory formula for DSH payments.

Wage Index

The FY 2016 wage index continues the transition for those hospitals located in an urban county now designated as rural under the OMB delineations.  Based on cost reporting periods beginning in FY 2012 and updated with the 2013 Occupational Mix survey results, the FY 2016 occupational mix adjusted national hourly wage is $40.0853 compared to the 2015 hourly rate of $39.1177, approximately a 2.5% increase.  These changes, along with the effects of the OMB transition result in a budget neutral position in payments.  The wage index schedules and Occupational mix surveys continue to play an important role.  Hospitals should continue to report accurate information as both surveys significantly impact future reimbursement.


As in previous years, the MS DRGs have been recalibrated to reflect the implementation of the ICD-10 system that goes into effect on October 1, 2016, the 2014 MedPAR claim data and updated cost report information.  CMS adjusted the MedPAR claim charges to cost by the applying 19 national average Cost to Charge Ratios.  These ratios were developed by combining cost report lines with like services from the hospital's Worksheet C cost report data.  To ensure proper cost to charge ratios, hospitals should review their cost center mappings so like departments are aligned directly beneath a standard cost report line.  For example, hospitals that have additional Cardiology departments that are sufficiently different from the preprinted Line 06900 Electrocardiology, should use one of the six subscripted nonstandard lines.  These services include Cardiopulmonary, Stress Test, Electromyography and Holter Monitors.  CMS intends to aggregate like services to arrive at a ratio of cost to charge for Cardiology services to calculate future MS-DRG weights and fee schedules. CMS also is encouraging hospitals to use the dollar value statistical basis for major movable equipment to support a more precise cost allocation method.  By reviewing the statistics used and cost center alignment, hospitals will enable CMS to develop accurate cost to charge ratios to assist in future reimbursement for both IPPS relative weights and outpatient fee schedules.  In addition to the recalibrations, CMS proposes to add two new MS-DRGs, 273 and 274 for certain Percutaneous Cardiovascular Procedures.  The proposed relative weights of these MS-DRGs are 3.5461 and 2.4171 respectively.

Post-Acute Transfers

CMS identified two additional MS-DRGs to be subject to the postacute care transfer policy.  Discharges assigned to the newly proposed MS-DRG 273, Percutaneous Intracardiac Procedures with MCC and MS-DRG 274, Percutaneous Intracardiac Procedures without MCC will be subject to the transfer policy.   

Quality Initiatives

Quality initiatives continue to have an impact on hospitals payment rates.  The proposed rule makes numerous changes and updates to its quality measures for both current and future years.  Included are updates to policies relating to the Hospital Value Based Purchasing (VBP) program, the Readmission Reduction program and the Hospital-Acquired Condition (HAC) programs.  

For the VBP program, CMS proposes to adopt the following measures:

  • 3-Item Care Transition Measure (CTM-3) to be implemented in FY 2018
  • The Hospital 30-Day, All-Cause, Risk-Standardized Mortality Rate (RSMR) Following Chronic Obstructive Pulmonary Disease (COPD) Hospitalization Measure (NQF #1893) (MORT-30-COPD) to be adopted in FY 2021.

Both of these measures are required for the Hospital IQR program and will not cause additional burdens to hospitals.   

Readmission Reduction Program

Under the Readmission Reduction program, CMS proposes to

  • Refine the Pneumonia readmission measure, CMS 30-Day Pneumonia Readmission Measure (NQF #0506)),
  • And establish an extraordinary circumstance exception policy for those facilities that may experience a disaster. 

Hospital Acquired Condition Program

For the Hospital Acquired Condition program, CMS proposes to make three changes:

  • Expand the relevant population covered by the central line-associated bloodstream infection (CLABSI) and catheter-associated urinary tract infection (CAUTI) measures to include patients other than those in the ICU. 
  • To adjust the relative contribution of each domain to the total HAC score used to determine if hospitals will receive a payment adjustment
  • Establish an extraordinary circumstance policy for those facilities who may experience a disaster

Together these initiatives should not have a net financial impact to payments for FY 2016.

Bundled Payments for Care Improvement Initiative

In this proposed rule, CMS is seeking comments regarding the Bundled Payments for Care Improvement Initiative.  Since 2011, CMS has been developing and testing bundled payments models to see if these payments resulted in higher quality and more coordinated care for Medicare recipients.  In 2016, CMS is requesting comments on policy and operational issues surrounding potential expansion of this initiative in the future.

Simplified Cost Allocation Method

CMS is proposing to eliminate the simplified cost allocation method for cost reporting periods beginning on or after October 1, 2015.  Since CMS uses the cost report information to assist in establishing MS-DRG weights and outpatient fee schedules, they feel that less precise ratio of costs to charges occur when hospitals use the simplified allocation method.  They believe hospitals have better and more accurate systems in place to warrant elimination if the simplified allocation method. 

Two-Midnight Rule

No changes were proposed for the two-midnight rule and will be further addressed in the Hospital Outpatient payment rule scheduled to be released this summer. 

LTACHs, SNFs & Inpatient Behavioral Health and Rehab

CMS also issued proposed rules for FY 2016 for Long Term Acute Care Hospitals, Skilled Nursing Facilities, inpatient Psych facilities and Rehab facilities. 

Long Term Acute Care Hospitals (LTCH) should see a net decrease of $251 million or 4.6% in their reimbursement rates according to the proposed rule.  CMS proposed a 2.7% market basket increase, minus the following adjustments:  a net outlier adjustment of 0.4%, other adjustments of 0.3% and the Site Neutral Payment adjustment of 5.8%.  The Site Neutral payment rate adjustment, effective October 1, 2015, is required by the Pathway for SGR Reform Act of 2013.  This Act, which will reduce payments in FY 2016 by $293 million, requires CMS to establish an alternative site-neutral payment rate, generally based on IPPS rates, for Medicare inpatient discharges from an LTCH that fail to meet certain statutory-defined, patient-level clinical criteria.   Quality initiatives also apply to LTCHs.  For LTCHs that do not submit quality data under the LTCHQR program, a 2.0% reduction will be applied to the market basket update. 

Proposed Skilled Nursing Facilities (SNFs) payments are expected to increase by $500 million in FY 2016.  A net increase of 1.4% in the rates will be achieved with a market basket increase of 2.6%, minus a productivity adjustment of 0.6% and a market basket forecast error of 0.6%.  The wage index used for FY 2016 will fully implement the new OMB delineations.  Quality reporting initiatives will be established beginning in FY 2018, adopting three measures - Skin integrity; Incidence of falls; and Functional status and cognitive functions.  SNF's who fail to submit required quality data will see a 2% reduction in the annual update factor.  Additional measures will be proposed in future regulations.  CMS also proposes a 30-day, all-cause, all-condition hospital readmission quality measure to be implemented by October 1, 2015.  The proposed rule also addresses the Affordable Care Act requirement for implementation of a new SNF Value Based Purchasing program to provide financial incentives to SNFs who promote safe, high-quality care for Medicare beneficiaries.

Inpatient Psych Facilities proposed rates will increase payments by $80 million, a net increase of 1.9% from FY 2015 to FY 2016.  The additional reimbursement is based on a market basket increase of 2.7%, reduced by the ACA adjustments for the market basket reduction of 0.2% and a productivity of 0.6%.  The federal based per diem for FY 2016 is $745.19, up from the FY 2015 rate of $728.31, and the high cost outlier threshold will be $9,825, down from the FY 2015 amount of $10,245.  This reduction will allow outlier payments to be 2.3% of total inpatient Psych payments.  CMS revised the market basket rate calculation to be used in FY 2016 to be specifically based on both free-standing and hospital-based Psych facilities to reflect more accurate information.  This new methodology reflects a slightly lower inflationary percentage than would have been calculated in previous years   Currently IPFs have to meet 14 quality initiatives.  In the coming years, these measures will increase by a net of two - five measures will be added and three will be removed. 

The proposed net increase for Inpatient Rehab facilities (IRF) is 1.9%, comprised of a 2.7% market basket increase minus the required ACA reductions of 0.2% for the market basket adjustment and 0.6% for productivity.  This results in additional funds of $130 million to be paid.  IRFs that fail to submit quality data will receive a 2% reduction of the market basket rates.  The proposed standard base rate will increase in FY 2016 to $15,529 up from the previous rate of $15,198.  CMS has updated the CMG weights and average length of stay using FY 2014 data, and the effects of these changes remain budget neutral.  Additional quality measures are being proposed for adoption in FY 2018.

Comments on the proposed rule will be accepted by CMS until Jun 16, 2015.  The final rule is expected to be issued by August 1, 2015.

For more information or if you have any questions please contact either Jim O'Connell, Principal, at or Linda Randall, Senior Consultant, at