Hot Off The Presses - IPPS Reimbursement and Policy Update

On August 2, 2018, CMS released the Medicare Program’s 2018 Acute Care Hospital Inpatient Prospective Payment System (“IPPS”) final rule. Published in the August 14, 2017 Federal Register, the final 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, 2018.

Overall, Medicare anticipates an operating payment increase to hospitals by a net update factor of 1.3%, or $2.4 billion in FY 2018. The increased payments include $800 million of additional funds to be added to the Uncompensated Care Pool.

I. Medicare Base PPS Payment Rates

Medicare finalized a 2.7% increase to market basket for FY 2018 due to inflationary measures; however, the following statutory adjustments will lower the net market basket increase to 1.35%:

  • Statutory adjustment mandated by the ACA of -0.75%;
  • Multifactor productivity adjustment as required by the ACA of -0.60%.

The Medicare base rate will continue to be impacted by the following regulatory adjustments:

  • FY 2018 MS-DRG recalibration factor
  • FY 2018 Wage Index Budget Neutrality factor
  • FY 2018 Operating Outlier factor
  • American Taxpayer Relief Act of 2012 document and coding adjustment
  • Removal of the adjustment to offset costs of the Two Midnight Rule
  • Frontier State Wage Index and outmigration adjustment, and
  • Expiration of the MDH Status.

After sorting through all the factors used in the calculation of the Federal rates, the net result will be a final increase in the payment rate of:

  • Submitted Quality Data and is a Meaningful EHR User                 1.35%
  • Submitted Quality Data and is NOT a Meaningful EHR User       -0.675%
  • NOT Submit Quality Data and is a Meaningful EHR User             0.675%
  • NOT Submit Quality Data and is NOT a Meaningful EHR User    -1.35%

We caveat that factors such as wage index changes, geographic reclassifications, case mix changes and increase in outlier thresholds will all influence the final payments made to an individual hospital. Also, noteworthy, CMS reduced the labor portion of the Federal rate from 69.6% to 68.3%.  So for hospitals in a wage index area greater than 1.0000, this will reduce the benefit of the wage index adjustment. No change has been made for those hospitals in a wage index area of .9999 or less.

II. Outlier Threshold

The final regulations increase the high cost outlier threshold effective October 1, 2018 to $26,601, from the FY 2017 threshold of $23,570, which will result in decreased outlier payments to hospitals. This adjustment ensures the FY 2018 outlier payments is calculated at 5.1% of the total Medicare DRG payments.

III. Federal Capital Rate

The FY 2018 Federal capital rate of $453.97 is slightly higher than the FY 2017 rate of $446.81, prior to the application of the geographical adjustment factors and hospital case mix.

IV. Uncompensated Care and Disproportionate Share

In the final rule, CMS will continue to apply the same methodology to DSH hospitals for uncompensated care payments as in previous years, with 25% based on the original disproportionate share method and 75% on the uncompensated care data, in accordance with the ACA. The empirically justified portion, 25% of the total pool or $3.888 billion, will continue to be distributed based on the Medical Assistance eligible days and current SSI information reported on the FY 2018 cost report. The remaining 75%, or $15.553 billion, of the funds are included in the uncompensated care pool and will be reduced by the Factor 2 adjustment. This reduction, calculated for FY 2018 at 58.01%, reflects the change in the number of uninsured individuals under the age of 65. The final FY 2018 Factor 3 uncompensated care pool available for distribution will be $6.8 billion, an increase of approximately $800 million over the FY 2017 pool amount of $5.982 billion

CMS finalized plans to incorporate the Worksheet S-10 data over a three-year period. Worksheet S-10 charity care and non-Medicare bad debt costs, along with the hospital’s low-income utilization days, will be averaged and used to distribute the uncompensated care funds beginning in FY 2018. The Worksheet S-10 data is being obtained from the Medicare cost report beginning in Federal fiscal year 2014. Hospitals have until September 30, 2017 to submit corrections to their worksheet S-10.

V. Quality Initiatives

CMS continues to adopt numerous changes for quality initiatives as Medicare payments shift focus from volume to value. In the FY 2018 final IPPS rules, CMS continues to refine quality measures, adding new measures and removing measures for FY 2019 and subsequent years. CMS is adopting the Hospital-Wide All-Cause Unplanned Readmission Hybrid Measure as a voluntary measure beginning in the FY 2018 reporting period, which could become required as early as CY 2021.

Hospital Acquired Condition Program (“HAC”) – In FY 2018, CMS finalized the following two policies: (1) to specify the dates for the time period used to calculate the FY 2020 hospital performance; and (2) update the HAC reduction program’s extraordinary circumstances exception policy. For the Domain 1 measure, Patient Safety and Adverse Events, CMS will use all Medicare fee-for-service discharged claims from the 24-month period, from July 1, 2016 through June 30, 2018 to calculate the results for the FY 2020 program. For Domain 2, (CLABSI, CAUTI, Colon and Abdominal Hysterectomy SSI, MRSA Bacteremia, and CDI, CMS has adopted the proposed rule as final, and plans to use data from the period January 1, 2017 through December 31, 2018 for the FY 2020 program.

Hospital Readmission Reduction Program (“HRRP”) – CMS is implementing changes to the payment adjustment factor in accordance to the 21st Century Cures Act. CMS will assess penalties based on the hospital’s performance relative to other hospitals with similar patient populations who are dually eligible for Medicare and Medicaid and has finalized the following;

  • Defining the proportion of full benefit dual-eligible beneficiaries as the proportion of dual-eligible patients among all Medicare-fee-for-service and Medicare Advantage stays during the three-year period that corresponds to the performance period;
  • Stratifying hospitals into five peer groups; and
  • Apply a change to the payment adjustment formula calculation methodology.

Hospital Value Based Purchasing Program (“VBP”) – In the FY 2018 final rule, CMS finalized its proposals to implement updates to the VBP program as follows;

  • Remove the current 8-indicator Patient Safety for Selected Indicators and replace it with the 10-indicator Patient Safety and Adverse Events composite measure beginning in FY 2019.
  • Adopt a payment measure associated with 30-day episodes of care for pneumonia patients beginning in FY 2022.
  • Update a new weighting methodology in FY 2021 for the Efficiency and Cost Reduction domain.

VI. EHR Incentive Program

For FY 2018, CMS finalized plans to reduce clinical quality measure reporting requirements for hospitals who have electronic health records. CMS adopted the proposal to modify the EHR reporting periods for hospitals, both new and returning, who are attesting to meaningful use in FY 2018 from the full-year to a minimum of any consecutive 90-day period during the calendar year. 

SunStone Consulting offers a full line of Reimbursement Solutions specifically geared to assist our clients manage the ever-changing regulatory environment. For more information about the FY 2018 Proposed IPPS Rule or any questions regarding our solutions, please contact Jim O’Connell, Principal, at