Fiscal Year 2016 Inpatient Prospective Payment System - CMS Final Rules

On July 31, 2015, CMS released the Medicare Program's 2016 Acute Care Hospital Inpatient Prospective Payment Systems ("IPPS") final rule.  Published in the August 17 2015 Federal Register, the final rule reveals the IPPS operating and capital rates as required by the statutory provisions of the Affordable Care Act ("ACA"); in addition to establishing new, as well as revising existing, quality reporting initiatives for discharges occurring on or after October 1, 2015.

I. Medicare Base PPS Payment Rates

Many hospitals will see a slight increase in their Medicare base rate reimbursement for FY 2016.  The net market basket increase in the final rule is 0.9%, a decline from the proposed rule of 1.1%.  The increase reflects a 2.4% market basket increase, minus the following adjustments: 

  • Multi-factor productivity adjustment of 0.5%;
  • Statutory adjustment mandated by the ACA of 0.2% and;
  • 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.  Hospitals who participate in submitting quality data and are meaningful use continue to receive the full market basket increase while those hospitals who do not participate in either will receive a penalty.  Total payments are further adjusted by the budget neutrality adjustment for disproportionate share of -1.0% and a positive adjustment for the operating outlier factor of 0.5% were also incorporated in the base rates for a final net increase of 0.4%. 

II. Outlier Threshold

Effective October 1, 2015, the high cost outlier threshold will be $22,544; lower than both the 2016 proposed rate of $24,485 and the FY 2015 threshold of $24,626.  Total hospital outlier payments for FY 2016 remain at 5.1% of total Medicare MS-DRG payments which 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 anticipated to result in limited increases in the outlier payments. 

SunStone Consulting recommends hospital continually monitor outlier payments and make adjustment to their interim estimates of net revenue.

III. Federal Capital Rate

The final Federal capital rate of $438.65 is slightly higher than the proposed rate of $438.40 and the FY 2015 rate of $434.97, prior to geographical adjustment factors being applied.  This rate is subject to changes in case mix and the geographic adjustment factor. 

SunStone Consulting recommends hospitals perform an analysis to determine if the increase in the rate will translate into improved capital PPS payments and account for those changes in the estimates.  

IV. Disproportionate Share ("DSH")

CMS will continue to apply the same payment methodology to DSH hospitals with 25% based on the original method and the remaining 75% on the empirically justified payment in accordance with the ACA.  The empirically justified payment for uncompensated care is based on a ratio calculated from the sum of a hospitals Medicaid and SSI days in proportion to the sum of the total national Medicaid and SSI days, applied to a pool of funds preset by CMS for the fiscal year.  The pool of funds, known as Factor 3, captures 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.  For FY 2016, this pool amounts to approximately $6.4 billion.  

As mentioned in our June Hot Stone article, 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 ensure all of the days are recordedbefore the cost report is settled.  At a minimum this will guarantee that the hospital is receiving the maximum allowable payment.  Since the denominator of the allocation ratio is the total national Medicaid and SSI days, improvements in capturing patient days by other hospitals in the pool could result in a decrease to a given hospital allocation percentage, even if an individual hospital submits improved information. 

SunStone Consulting recommends that any potential impact should not diminish a hospital's efforts to collect the most accurate data.

V. Wage Index

The FY 2016 final rules continues the transition for those hospitals located in an urban county, now designated as rural under the OMB delineations, with a 50/50 blended wage index.  Based on cost reporting periods beginning in FY 2012, and updated with the 2013 Occupational Mix survey results, the FY 2016 final rule occupational mix adjusted national hourly wage is $40.2555, slightly higher than the proposed rate of $40.0853  representing a 2.9% increase as compared to the 2015 hourly rate of $39.1177.  Since the final National Average hourly rate increased over the proposed rate, hospitals could see a reduction in their wage index when compared to the proposed rule.  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.

SunStone Consulting recommends hospitals continue to report accurate information since both surveys significantly impact future reimbursement.


As in previous years, the MS-DRG weights have been recalibrated to reflect not only the implementation of the ICD-10 system that goes into effect on October 1, 2015, but also 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 hospital's Worksheet C cost report data.   

To ensure proper cost to charge ratios, SunStone Consulting recommends that hospitals 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. 

VII. Post-Acute Transfers

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

VIII. Quality Initiatives

Quality initiatives continue to have an impact on hospitals payment rates.  CMS adopted the proposed rule which will require numerous changes to quality measures for both current and future years.  Included in the changes are updates to policies relating to the Hospital Value Based Purchasing (VBP) program, the Readmission Reduction program and the Hospital-Acquired Condition (HAC) programs as summarized below.

VBP program

  • 3-Item Care Transition Measure (CTM-3) to be implemented in FY 2018;
  • 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

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

Hospital Acquired Condition program

  • 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. 
  • 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 natural disaster.

Together the new quality initiatives should not produce a significant financial impact to Medicare payments for FY 2016.

IX. Bundled Payments for Care Improvement Initiative

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

X. Simplified Cost Allocation Method

After consideration of the comments received, CMS did not finalize the proposal to eliminate the simplified cost allocation method for cost reporting periods beginning on or after October 1, 2015.  Rather, they are retaining the simplified cost allocation method with some minor modifications.  Hospitals who use this methodology may approach the Medicare Administrative Contractor ("MAC") for approval to use the dollar value as an alternate statistic for capital related movable equipment.  CMS believes these measures, while providing more accurate information, will not impact beneficiary access to care as affected hospitals.

XI. Two-Midnight Rule

In the final rule, CMS mentioned that the proposed changes for the two-midnight rule, short inpatient stays and observation services will be further addressed in the Hospital Outpatient Payment Systems ("OPPS") rule scheduled to be released on or about November 1, 2015.  SunStone Consulting will provide a summary of the rule when issued.

XII. LTACHs, SNFs & Inpatient Behavioral Health and Rehab

CMS also finalized the FY 2016 rules for Long Term Acute Care Hospitals ("LTACH"), Skilled Nursing Facilities ("SNF"), inpatient Psychiatric facilities and Rehabilitation facilities. 


Reimbursement is expected to decrease by $250 million or 4.6%. CMS proposed a 2.4% market basket increase, minus the following adjustments:

  • Productivity adjustment of0.5%;
  • ACA required market basket adjustment of 0.2%;
  • Other adjustments of 0.3%;
  • Site Neutral Payment adjustment of 6.1% (higher than the 5.8% adjustment in the proposed rule);
  • Plus the net outlier adjustment of 0.1%. 

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 $300 million, requires CMS to establish an alternative site-neutral payment rate, generally based on IPPS rates, for Medicare inpatient discharges from an LTACH that fail to meet certain statutory-defined, patient-level clinical criteria.   Quality initiatives also apply to LTACHs with a 2% reduction to the market basket update for those facilities that did not submit quality data under the LTACHQR program. 


Payments are expected to increase by $430 million in FY 2016.  The final net increase of 1.2%, as compared to the proposed increase of 1.4%, will be achieved with a market basket increase of 2.3%, minus a productivity adjustment of 0.5% 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 in FY 2018, with the adoption of the following three measures;

  1. Skin integrity;
  2. Incidence of falls;
  3. 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 adopted the 30-day, all-cause, all-condition hospital readmission quality measure that will be implemented by October 1, 2015.  The proposed rule also addresses the ACA 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 Psychiatric Facilities

These facilities will see increased payments by $75 million representing a net increase of 1.5% from FY 2015 to FY 2016.  The additional reimbursement is based on a market basket increase of 2.4%, reduced by the ACA adjustments for the market basket of 0.2%, productivity of 0.5%, and high cost outlier adjustment of 0.2%. 

The federal based per diem for FY 2016 is $743.73, slightly lower than the proposed per diem of $745.19, but up from the FY 2015 rate of $728.31.  The high cost outlier threshold will be $9,580, lower than the proposed threshold of $9,825, and down from the FY 2015 amount of $10,245.  This reduction will set outlier payments at 2.2% of total inpatient Psychiatric payments. 

CMS also revised the market basket rate calculation for FY 2016 to be specifically based on both free-standing and hospital-based Psychiatric facilities to reflect more accurate information.  This new methodology contains a slightly lower inflationary percentage than utilized in previous years   Currently inpatient Psychiatric Facilities have to meet fourteen quality initiatives and in the coming years, these measures will increase by a net of two, with five measures added and three removed. 

Inpatient Rehabilitation Facilities

While the proposed net increase for Inpatient Rehabilitation Facilities ("IRF's") of 1.8% represents a reduction from the 1.9% contained in the proposed rule, it still results in additional funds of $135 million for IRF's.   The net increase is comprised of a 2.4% market basket increase minus the required ACA reductions of 0.2% for the market basket adjustment and 0.5% for productivity plus an additional 0.1% for high cost outliers. 

IRFs that fail to submit quality data will receive a 2% reduction of the market basket rates.  The finalized 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.

SunStone Consulting offers a full line of Reimbursement and Regulatory Solutions specifically geared to assist our clients manage the every changing regulatory environment.  For more information about the FY16 IPPS Final Rule or any questions regarding our solutions, please contact Jim O'Connell, Principal, at jimoconnell@sunstoneconsulting.comor Linda Randall, Senior Consultant, at