CMS Issues Proposed Rules for FY 2017 Inpatient Prospective Payment System

On April 18, 2016, CMS released the Medicare Program's 2017 Acute Care Hospital Inpatient Prospective Payment Systems ("IPPS") proposed rule.  Published in the April 27, 2016 Federal Register, the proposed rule announces upcoming changes to 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, 2016.

I. Medicare Base PPS Payment Rates

Many hospitals will see a slight increase in the Medicare base rate reimbursement for FY 2017.  The net market basket increase is projected to be 0.9%.  The increase reflects a 2.8% market basket increase, along with the following adjustments:

  • Multi-factor productivity adjustment of -0.5%;
  • Statutory adjustment mandated by the ACA of -0.75%;

These adjustments will provide hospitals who submit quality data, and are meaningful users, with a market basket increase of 1.55%.  Hospitals who do not submit quality data and are not meaningful users will see a market basket decrease of 1.25%.  In addition to the multi-factor productivity and statutory adjustment mandated by the ACA, the Medicare base rates for FY 2017 will further be updated by:

  • Document and coding adjustment required by the American Taxpayer Relief Act of 2012;
  • MS-DRG recalibration Budget Neutrality Factor;
  • Wage Index Budget Neutrality Factor;
  • Reclassification Budget Neutrality Factor;
  • Operating Outlier Factor;
  • New Labor Market Delineation Wage Index 3-year Hold Harmless Transition Budget Neutrality Factor;
  • Removal of the adjustment to offset costs of the Two Midnight Rule

The net result for those hospitals who submit quality data and are meaningful users will be approximately an .85% increase in payments.

II. Outlier Threshold

CMS proposes the high cost outlier threshold effective October 1, 2016 to be $23,681, a slight increase over the FY 16 rate of $22,538.  Total hospital outlier payments for FY 2017 are projected to remain at 5.1% of total Medicare MS-DRG payments which has been the standard goal for CMS in preceding years.

III. Federal Capital Rate

The proposed Federal capital rate of $446.35 is slightly higher than the FY 2016 rate of $437.75 prior to the application of geographical adjustment factors and hospital case mix. 

IV. Uncompensated Care and Disproportionate Share

CMS is proposing to continue to apply the same payment methodology to DSH hospitals for uncompensated care as in previous years with 25% based on the original disproportionate share method and 75% on the empirically justified payment for uncompensated care in accordance with the ACA, with two proposed changes.  CMS will continue to distribute uncompensated care funds using the same methodology as previous years, a ratio based on 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.  In the past, this ratio was determined from the most recent Medicaid cost report data, however, CMS is proposing to use the three cost reporting periods, FY 2011, 2012 and 2013, instead of only one cost report to limit major fluctuations in uncompensated care payments from year-to-year.  The second change would allow CMS to apply a proxy to estimate SSI inpatient days for Puerto Rico, since those residents are not eligible for SSI benefits.  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 2017, the proposed pool available for distribution is $6.0 billion, a reduction of approximately $400 million from the FY 2016 pool. 

In FY 2018, CMS proposes to begin implementing a methodology of using uncompensated care data from Worksheet S-10 of the Medicare cost report for distributing these funds.  CMS plans to define uncompensated care costs as the costs of charity care and non-Medicare bad debt.

In the FY 2018 calculation, CMS is planning on incorporating the Worksheet S-10 data from FY 2014 cost reports along with the low-income days from the previous two cost reporting periods to distribute the uncompensated care payments.  The Factor 3 ratios determined by the FY 2012 and FY 2013 Medicaid days along with the FY 2014 and FY 2015 SSI ratios will be averaged with the Factor 3 ratio calculated using the FY 2014 Worksheet S-10 data to allocate the FY 2018 uncompensated care pool.  CMS believes this approach will aid in the transition to fully utilize Worksheet S-10.

SunStone Consulting recommends hospitals review their FY 2014 Worksheet S-10 data and work with their MACs to complete or revise this information as soon as possible.  SunStone further recommends that hospitals diligently capture all eligible Medicaid days for use in the traditional disproportionate share calculation, as well as the Factor 3 calculation for the current year and prior cost reporting years to ensure uncompensated care payments are distributed correctly.

V. Wage Index

For FY 2017, CMS will continue the third and final implementation of the 3-year transition for those hospitals located in an urban county, now designated as rural under the OMB delineations.  CMS continues to use the FY 2013 Occupational Mix Survey information to develop the FY 2017 wage index.  Based on data submitted by hospitals on their FY 2013 Medicare cost reports and updated with the 2013 Occupational Mix Survey results, the proposed national average hourly wage for FY 2017 is $41.0651, slightly higher than the FY 2016 national average wage of $40.0853.  Although the national average hourly wage is anticipated to increase by $0.9798 over the prior year, this may have a positive or negative impact to each individual CBSA depending on fluctuations and accuracy of hospital's wage index data.


The MS-DRG weights have been recalibrated for the FY 2017 proposed rule based on the FY 2015 MedPAR claim data grouped to Version 34 MS-DRGs and the HCRIS cost report data.  CMS adjusted the charges from claims to costs by applying the 19 national average cost-to-charge ratios developed from cost reports. 

VII. Quality Initiatives

CMS continues to adopt numerous changes to the IPPS rates for quality initiatives as Medicare payments shift focus from volume to value.  Medicare has been mandated to move toward paying providers based on the quality of service provided rather than the quantity of care they provide to patients.

Hospital Acquired Condition Program (HAC)

  • CMS is not proposing any major changes for the FY 2017 program.  CMS also proposed updates to previous measures for clarification purposes.  
  • CMS anticipates providing hospitals with their confidential hospital-specific reports and discharge level information used in the calculation of their FY 2017 HAC score in late summer 2016.

Hospital Readmission Reduction Program (HRRP)

  • The FY 2017 reduction continues to be based on the hospital's risk-adjusted readmission rate during a 3-year period for Acute AMI's, heart failure, pneumonia, COPD, and total hip/total knee arthroplasty.
  • Effective for FY 2017, coronary artery bypass graft (CABG) is a proposed addition.

Hospital Value-Based Purchasing Program (VBP)

  • CMS proposes to:
    • Expand the number of hospital units for two National Healthcare Safety Network measures beginning FY 2019;
    • Expand the cohort used to calculate the 30-day pneumonia mortality measure beginning in FY 2021;
    • Add two condition-specific payment measures (one for acute myocardial infarction and one for heart failure) beginning in FY 2021;
    • Add a 30-day mortality measure following CABG in FY 2022.

VIII. Notice of Outpatient Observation Services

The Notice of Observation Treatment and Implication for Care Eligibility Act, enacted on August 6, 2015, requires hospitals and Critical Access Hospitals to provide notification to individuals receiving observation services as outpatients for more than 24 hours.  Notification must be provided to patients no later than 36 hours after observation services are initiated, or upon release from the hospital if sooner.  This notification, effective 12 months from the date of enactment, provides the reason the patient is in an outpatient observation bed and the implications of observation services on cost sharing and post-hospitalization eligibility for Medicare coverage of skilled nursing services.  An oral explanation must also be provided, ideally at time of the delivery of the notice, and a signature from the beneficiary or individual acting on their behalf must also be obtained to acknowledge receipt and understanding of the notice.

IX. Long-Term Care Hospital PPS Changes

CMS continues to implement changes required by the Pathway for SGR Reform Act of 2013 that established two different types of LTACH PPS payment rates based on the individual patient's clinical criteria.  As a result, CMS anticipates LTCH PPS payments to decline in 2017 by approximately $355 million, or 6.9%.

The LTCH Quality Reporting Program continues to require LTACHS to report quality measures as well as resource use measures.  For those facilities who fail to submit quality reporting data, CMS proposes to further reduce the PPS Federal payment rate by 2.0%. 

CMS is also proposing to streamline the regulations established in the FY 2005 IPPS final rule relative to the payment adjustment made when the number of cases admitted from one single hospital to an LTACH exceeds a specified threshold, generally 25%.  

SunStone Consulting offers a full line of Reimbursement Solutions specifically geared to assist our clients manage the every changing regulatory environment. For more information about the FY 2017 Proposed IPPS Rule or any questions regarding our solutions, please contact Jim O'Connell, Principal, at or Linda Randall, Senior Consultant, at