CMS Proposed Rules for Fiscal Year 2018 Inpatient Prospective Payment System

On April 14, 2017, CMS released the Medicare Program’s 2018 Acute Care Hospital Inpatient Prospective Payment Systems (“IPPS”) proposed rule.  Published in the April 28, 2017 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, 2017.

Medicare anticipates an overall operating payment increase to hospitals by a net update factor of 1.6%, or $3.1 billion in FY 2018.  The increased payments include a proposed $1.0 billion of additional funds to be added to the Uncompensated Care Pool.

I. Medicare Base PPS Payment Rates

Medicare proposed a 2.9% increase to market basket due to inflationary measures, however, the following statutory adjustments will lower the net market basket increase to 1.75%:

  • Statutory adjustment mandated by the ACA of -0.75%;
  • Multifactor productivity adjustment as required by the ACA of -0.40%.

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

Hospitals who submit quality data and are meaningful users, will receive the full net market basket increase of 1.75% to the base rate prior to the regulatory adjustments; while hospitals who do not submit quality data and are not meaningful users, will experience a decrease in the Medicare base rate of 1.15% before adjustments.

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

  • Submitted Quality Data and is a Meaningful EHR User - 1.45%               
  • Submitted Quality Data and is NOT a Meaningful EHR User - 1.30%       
  • NOT Submit Quality Data and is a Meaningful EHR User - 1.40%           
  • NOT Submit Quality Data and is NOT a Meaningful EHR User - 1.25%

We caveat that factors such as wage index changes, geographic reclassifications, case mix changes, and an increase in outlier thresholds will all influence the final payments made to an individual hospital.  Also noteworthy is CMS reduced the labor portion of the Federal rate from 69.6% to 68.3%.  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 proposed regulations increase the high cost outlier threshold effective October 1, 2017 to $26,713, from FY 2017 rate 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 proposed Federal capital rate of $451.37 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 proposed 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 proposed total disproportionate share pool to be allocated is $16.002 billion.  The empirically justified portion, 25% of the total pool or $4.001 billion, will continue to be distributed based on the Medicaid eligible days and current SSI information reported on the FY 2018 cost report.  The remaining 75% of available disproportionate share funds, $12.002 billion, 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 proposed FY 2018 Factor 3 uncompensated care pool available for distribution will be $6.962 billion, an increase of approximately $1.0 billion over the FY 2017 pool amount of $5.982 billion

In the proposed rules, CMS 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.

V. Quality Initiatives

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

Hospital Acquired Condition Program (“HAC”) –CMS is proposing the following policies: (1) to specify the dates for the time period used to calculate the FY 2020 hospital performance; (2) request comments on future adoptions of measures; (3) request comments on social risk factors; (4) request comments on accounting for disability and medical complexity in the CDC NHSN measures in Domain 2; and (5) update the HAC reduction program’s extraordinary circumstances exception policy.     

Hospital Readmission Reduction Program (“HRRP”) – The program reduction is based on a hospital’s risk-adjusted readmission rate for a three-year period to a hospital’s base operating rate up to 3%.  In FY 2018, CMS estimates this program will save approximately $564 million.  CMS plans to implement a socioeconomic adjustment approach mandated by the 21st Century Cures Act.  Under this proposal, 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.  CMS is proposing the following –

·      A methodology for calculating the proportion of dual-eligible patients;

·      A methodology to assign hospitals to peer groups; and

·      A payment adjustment formula calculation methodology.

Hospital Value Based Purchasing Program (“VBP”) – In the FY 2018 proposed rule, CMS will redistribute $1.9 billion in operating payments through the VBP program.  All hospitals will be subject to a 2% reduction in base operating payments.  CMS proposes to remove one measure in FY 2019 and adopt one measure in FY 2022 and FY 2023.  Also proposed are two modifications to the domain scoring policies beginning in FY 2019, and further proposing a new weighting methodology in FY 2021 for the Efficiency and Cost Reduction domain.  CMS is inviting public comments on accounting for the social risk factors in the Value Based Purchasing program. 

VI. EHR Incentive Program

In the FY 2018 proposed rule, CMS plans to reduce clinical quality measure reporting requirements for hospitals who have electronic health records.  CMS is proposing to modify the EHR reporting periods, for hospitals who are attesting to meaningful use for the first time in FY 2018, from the full-year to a minimum of any consecutive 90-day period during the calendar year. 

Mandated by the 21st Century Cures Act, CMS proposes to add exceptions from the Medicare payment adjustment for eligible professionals, hospitals and critical access hospitals that demonstrate, through an application process, that it is not possible to comply with being a meaningful user because their certified EHR technology has been decertified.  CMS plans to implement a policy that no payment adjustments will be made for eligible professionals who furnish substantially all their services in an ambulatory surgical center, also mandated by the 21st Century Cures Act.  CMS proposes to exempt ASC-based eligible professionals from 2017 and 2018 payment adjustments if they provide substantially all their covered services in an ASC.

VII. Long Term Acute Care

CMS is proposing payment and policy changes for FY 2018 to include a 1% increase to the LTCH PPS standard payment rate for those facilities who meet the criteria under the Pathway for SGR Reform Act of 2013.  Quality reporting initiatives have also been proposed.  One new measure for pressure ulcers and two new measures relating to ventilator weaning have been proposed for quality reporting.  CMS is also defining standardized patient assessment data for LTCHs to report on.

CMS will accept comments on the proposed rule no later than 5 pm on June 13, 2017.

SunStone Consulting offers 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 reimbursement solutions, please contact Jim O’Connell, Principal, at or Linda Randall, Senior Consultant, at