CMS Issues Medicare IPPS and LTCH Proposed Rule for FY 2021

King & Spalding

On April 27, 2021, CMS issued the fiscal year (FY) 2022 proposed rule for the hospital inpatient prospective payment system (IPPS) and long-term care hospital (LTCH) prospective payment system (the Proposed Rule). Among other proposals, the Proposed Rule proposes increases to IPPS and LTCH payment rates, repealing the market-based MS-DRG Relative Weight Policy, changing the new COVID-19 treatment add-on payment, changes related to Graduate Medical Education, changes to the Medicare wage index, revisions to the Medicare Geographic Classification Review Board rules, changes to organ procurement policies, proposals related to bad debt, Medicare DSH and uncompensated care payments, and proposed Medicare Shared Savings Program changes. This article provides an overview of the key proposals in the Proposed Rule. Comments to the proposed rule must be submitted by 5 pm EST on June 28, 2021.

Payment Rates Overview

CMS estimates that the proposed applicable percentage increase to the IPPS rates required by the statute, in conjunction with other proposed payment changes in this proposed rule, would result in an estimated $2.5 billion increase in FY 2022 payments. This increase is driven by a combined $2.2 billion increase in FY 2022 operating payments, including uncompensated care payments, and a combined increase of $0.3 billion resulting from estimated changes in new technology add-on payments, as well as the recently enacted statutory provision that provides for an imputed floor adjustment for all-urban states in a non-budget neutral manner beginning in FY 2022.

CMS also estimates that IPPS payment rates are expected to increase by approximately 2.7 percent for FY 2022 relative to FY 2021, which includes a proposed 2.5 percent market basket update, reduced by the proposed 0.2 percentage point multifactor productivity adjustment, and the 0.5 percentage point adjustment required under Section 414 of the Medicare Access and CHIP Reauthorization Act of 2015.

CMS projects that overall LTCH payments will increase by approximately $52 million relative to FY 2021 primarily due to the proposal annual update to the LTCH PPS standard federal rate. More specifically, CMS proposes to update the LTCH PPS standard Federal payment rate for FY 2022 by 2.2 percent and proposes to reduce the annual update to the LTCH PPS standard Federal rate by 2.0 percentage points for failure of a LTCH to submit the required quality data.

Proposed Repeal of Market-Based MS-DRG Relative Weight Policy

In the FY 2021 IPPS final rule, CMS had required hospitals to report certain market-based payment rate information on their Medicare cost report for cost reporting periods ending on or after January 1, 2021. More specifically, CMS required the reporting of the median of a hospital’s payer-specific negotiated charges for Medicare Advantage (MA) organizations; then, starting in FY 2024, CMS would use the data in a new “market-based” methodology to set MS-DRG relative weights.

In the Proposed Rule, CMS proposes to repeal both the market-based MS-DRG relative weight data collection and market-based methodology for calculating MS-DRG relative weights. CMS explains that it proposes this change after considering comments describing the burden of the data collection requirement and explaining the minimal likelihood that this data would be useful in setting reimbursement rates.

Changes to the New COVID-19 Treatments Add-on Payment (NCTAP)

In response to the pandemic, CMS established the NCTAP for eligible discharges during the public health emergency (PHE) in the FY 2021 IPPS final rule. CMS explained in the FY 2021 IPPS final rule that the Medicare program would provide an enhanced payment for eligible inpatient cases that involve the use of certain new products authorized or approved to treat COVID-19 (i.e., therapeutics). The enhanced payment would be equal to the lesser of: (1) 65 percent of the operating outlier threshold for the claim; or (2) 65 percent of the cost of a COVID-19 stay beyond the operating Medicare payment (including the 20 percent add-on payment under Section 3710 of the CARES Act) for eligible cases.

In the Proposed Rule, CMS says that it anticipates inpatient cases of COVID-19 beyond the end of the PHE. Accordingly, in the Proposed Rule, CMS proposes to extend the NCTAP payments for eligible COVID-19 products through the end of the fiscal year in which the PHE ends. CMS is also proposing to discontinue NCTAP for discharges on or after October 1, 2021 for a product that is approved for new-technology add-on payments (NTAP) beginning in FY 2022.

Graduate Medical Education Proposals

The Consolidated Appropriations Act of 2021 (CAA), which was enacted late last year, contains three provisions affecting GME payment rules. In the Proposed Rule, CMS is proposing rules to implement those provisions.

First, CMS is proposing to implement Section 126 of the CAA, which instructs CMS to distribute 1,000 new resident full-time equivalent (FTE) cap positions among hospitals meeting certain qualifying criteria between 2023 and 2027. CMS is proposing that applications for each round of distributions will be due by January 31 of the year preceding the distribution. For example, applications for 2023 distributions would be due by January 31, 2022.

In awarding new cap slots, the statute requires CMS to consider the demonstrated likelihood that hospitals will fill the slots within five years. CMS proposes permitting hospitals to satisfy that requirement by demonstrating that they are currently training over their cap and attesting that they will be able to fill the new slots with new or existing programs. Hospitals must also fall into one of four eligibility classes to qualify for distributions:

  1. is located in a rural area or reclassified as rural;
  2. is training in excess of its cap;
  3. is located in a state with a new medical school or a branch of an existing school; or
  4. serves areas designated by HRSA as health professional shortage areas (HPSA).

CMS is soliciting comments on two alternative proposals for prioritizing applications. Under the first alternative, CMS would prioritize the applications of hospitals serving HPSAs. Under the second alternative, CMS would prioritize applications based on the number of eligibility classes each hospital is in, with hospitals falling into all four categories receiving the highest priority. Finally, CMS is proposing to limit the increase in the number of residency positions available to each hospital to 1.0 FTE per year.

CMS is also proposing to implement Section 127 of the CAA concerning the rules for rural training track (RTT) programs. Under current CMS rules, CMS will adjust the FTE cap of a hospital participating in an RTT program if (and only if) the program is separately accredited. Section 127 removes the separate accreditation requirement. Accordingly, CMS proposes lifting the separate accreditation requirement for cost reporting periods beginning on or after October 1, 2022.

CMS also proposes to implement Section 131 of the CAA, which provides an opportunity for certain qualifying hospitals to establish new FTE caps and/or per-resident amounts (PRAs). Section 131 identifies two classes of hospitals that are eligible for new FTE caps and/or PRAs. The first class consists of hospitals that had an FTE cap or PRA that was based on the training of less than 1.0 FTE in a cost reporting period prior to October 1, 1997. CMS refers to hospitals in this class as “Category A” hospitals. The second class of hospitals are those that established an FTE cap or PRA based on the training of 3.0 or fewer FTEs in a cost reporting period beginning on or after October 1, 1997 and before enactment of the CAA on December 27, 2020. CMS refers to hospitals in this class as “Category B” hospitals.

CMS proposes allowing eligible hospitals to receive a new PRA if they begin training the requisite threshold of residents in a program (new or existing) in a cost reporting period beginning on or after December 27, 2020 and before December 26, 2025. CMS proposes allowing eligible hospitals to receive a new FTE cap if they begin training the requisite threshold of residents in a new program in a cost reporting period beginning within that same five-year window. CMS proposes that the requisite threshold for Category A hospitals would be at least 1.0 FTEs, and the requisite threshold for Category B hospitals would be more than 3.0 FTEs.

Medicare Wage Index

CMS is proposing several changes to the wage index in FY 2022. First, CMS is proposing to reestablish the imputed floor. The imputed floor is a policy CMS implemented in FY 2005 to establish a minimum wage index for hospitals located in “all-urban” states that do not have rural areas. CMS reasoned at the time that hospitals in all-urban states are disadvantaged because they cannot benefit from the statutory rural floor, which provides that no urban hospital can be assigned a wage index lower than that assigned to rural hospitals in the same state. CMS originally implemented the imputed floor in a budget-neutral manner, meaning that CMS reduced payments to hospitals nationwide to pay for the imputed floor. CMS discontinued the imputed floor in FY 2019 because it was concerned that the budget-neutrality adjustment was putting hospitals in states with rural areas at a disadvantage.

Section 9831 of the American Rescue Plan Act (ARPA) of 2021 (enacted on March 11, 2021) instructs CMS to revive the imputed floor policy with the modification that it will not be applied in a budget-neutral manner. Accordingly, CMS is proposing to reestablish its imputed floor policy beginning in FY 2022 without imposing a budget neutrality adjustment.

CMS is also proposing to change when a hospital can request to cancel its election to reclassify as rural. The Medicare statute and regulations permit hospitals to elect to reclassify as rural for the purposes of the prospective payment systems. When a hospital makes this election, its wage and hour data is included in the rural area wage index for the following federal fiscal year unless the hospital cancels its reclassification 120 days prior to the beginning of that year. CMS has observed that hospitals in certain states are reclassifying as rural and cancelling their reclassifications soon after approval so that their wage data does not negatively affect the rural wage index in the following year. To address this, CMS is proposing to impose a minimum one-year time period between the time a hospital reclassifies as rural and the time it may cancel that election.

CMS is also proposing to continue several policies it has adopted in recent years. First, CMS proposes to continue its low wage index hospital policy that it first adopted in FY 2020. Under this policy, CMS makes upward adjustments to the wage indices of hospitals with a wage index value below the 25th percentile. The adjustment for each eligible hospital is equal to half of the difference between the otherwise applicable final wage index value for the hospital and the 25th percentile wage index value for all hospitals that same year. For FY 2022, CMS is proposing that the 25th percentile wage index will be 0.8418. As in past years, CMS is proposing to fund these adjustments by making a budget neutrality adjustment to the standardized amount. The proposed budget neutrality adjustment is 0.998108.

CMS is also soliciting comments on whether it would be appropriate to apply a hold harmless transition policy in FY 2022. In FY 2021, CMS implemented OMB Bulletin 18-04, which drastically changed the geographic delineations for many hospitals. To mitigate the initial impact of that change, CMS adopted a policy in FY 2021 whereby no hospital’s wage index for that year could drop below 95 percent of its wage index from FY 2020. CMS is asking stakeholders whether it should adopt a similar policy in FY 2022—but only for those hospitals negatively affected by OMB Bulletin 18-04.

Revisions to MGCRB Rules

On the same day that the Proposed Rule was issued, CMS also issued an interim final rule that makes changes to the rules for applying for geographic reclassification with the Medicare Geographic Classification Review Board (the MGCRB). The interim final rule is effective May 10, 2021. Comments to the interim final rule are due June 28, 2021.

The Medicare statute permits hospitals to apply to the MGCRB to be paid according to the wage index of a neighboring area. Relatedly, urban hospitals can apply to CMS to be treated as if they were located in the rural part of their state for all purposes of the prospective payment system. An urban hospital that has reclassified as rural can apply to the MGCRB to be paid according to the wage index of its home area (instead of the rural wage index).

Under the existing MGCRB rules, an applicant hospital is required to demonstrate that its average hourly wages (AHW) are a certain percentage greater than the wages of the other hospitals in its home area. Additionally, a hospital is prohibited from applying to the MGCRB to reclassify to an area that has a pre-reclassified AHW that is lower than the pre-reclassified AHW of its home area. For the purposes of both of these rules, CMS considers a hospital’s home area to be the area in which it is physically located, even if the hospital has elected to be treated as if it were located in the rural part of its state (i.e., rural reclassification).

Hospitals recently successfully challenged this policy in Bates County Memorial Hospital v. Azar, 464 F. Supp. 3d 43 (D.D.C. 2020). In that case, six urban hospitals that have elected to reclassify as rural were denied geographic reclassification because their AHWs were compared to their geographic home areas. The hospitals contended that because they were reclassified rural hospitals, their AHWs should have been compared to the AHW of the hospitals in the rural areas of their respective states. The D.C. District Court ruled for the plaintiff hospitals. The government did not appeal.

The interim final rule acquiesces to the Bates County decision. Specifically, if an urban hospital reclassifies as rural, its eligibility for geographic reclassification will be determined based on a comparison of its AHW to the AHWs of the hospitals located in the rural area of the state. In addition, in determining whether the area to which the hospital seeks to reclassify has a lower reclassified AHW than the hospital’s home, CMS will compare the pre-reclassified AHW of the target area to the pre-reclassified AHW of the rural area of the state.

Organ Acquisition Payment Policies

In the Proposed Rule, CMS proposes to revise and codify the Medicare usable organ counting policy to count only organs transplanted into Medicare beneficiaries. Specifically, CMS is proposing to facilitate more accurate payment of Medicare’s share of organ acquisition costs by collecting data from transplant hospitals and organ procurement organizations (OPOs) to calculate this share, and to ensure Medicare payment at reasonable costs by requiring donor community (not transplant) hospitals to bill OPOs customary charges that are reduced to costs, in line with Medicare reasonable cost principles.

Bad Debt Proposals

CMS is proposing to modify the Medicaid regulations to make it easier for certain hospitals to claim reimbursement from Medicare for the bad debt of dual-eligible individuals.

Under current CMS policy, providers are permitted to claim reimbursement from Medicare for the bad debt of Medicare beneficiaries. For patients who are dually-eligible for Medicare and Medicaid, hospitals must first attempt to collect any unpaid balance from Medicaid before claiming reimbursement for the balance from Medicare. This is commonly referred to as the “must-bill” policy.

Many states do not permit certain classes of hospitals to enroll in Medicaid. As a result, these hospitals have not been able to comply with the must-bill policy because they cannot attempt collection from Medicaid before claiming the balance from Medicare. To address this problem, CMS is proposing to require state Medicaid programs to accept enrollment of all Medicare-enrolled providers and suppliers for the limited purpose of determining Medicare cost-sharing obligations.

Medicare Shared Savings Program

In the December 2018 final rule, CMS established the BASIC track, which includes an option for eligible ACOs to begin participation under a one-sided model and incrementally phase-in risk and potential reward over the course of a single agreement period, referred to as the glide path. The proposed rule proposes to make changes to policies to allow ACOs participating in the BASIC track’s glide path option to elect to forgo automatic advancement along the glide path’s increasing levels of risk and potential reward for performance year (PY) 2022. Under these proposed changes, prior to the automatic advancement for PY 2022, an eligible ACO may elect to remain in the same level of the BASIC track’s glide path in which it participated during PY 2021. For PY 2023, an ACO that elects this advancement deferral option would be automatically advanced to the level of the BASIC track’s glide path in which it would have participated during PY 2023 if it had advanced automatically to the required level for PY 2022 (unless the ACO elects to advance more quickly before the start of PY 2023).

Uncompensated Care Payment

CMS proposes to update its estimates of the three factors used to determine uncompensated care payments for FY 2022. As a result, CMS is proposing to distribute roughly $7.6 billion in uncompensated care payments for FY 2022, a decrease of approximately $660 million from FY 2021. This total uncompensated care payment amount reflects the CMS Office of the Actuary’s projections that incorporate the estimated impact of the COVID-19 pandemic.

Consistent with the policy adopted in the FY 2021 IPPS final rule, for FY 2022 and subsequent fiscal years, CMS will use a single year of data on uncompensated care costs from Worksheet S-10 of hospitals’ FY 2018 cost reports to distribute these funds. CMS is also proposing to continue to use data regarding low-income insured days (Medicaid days for FY 2013 and FY 2018 SSI days) to determine the amount of uncompensated care payments for Puerto Rico hospitals, Indian Health Services, and Tribal hospitals for FY 2022, similar to the FY 2021 methodology.

Medicare DSH

CMS proposes to modify the formula for the Medicaid fraction of the Medicare DSH payment. Under current CMS policy, the Medicaid fraction is the ratio of patient days attributable to patients who are eligible for Medicaid but not entitled to Medicare Part A benefits to total patient days. CMS considers a patient to be eligible for Medicaid if the patient is eligible for inpatient hospital services under an approved State plan or under a waiver approved under Section 1115.

In recent years, CMS has litigated with providers over what it means for a patient to be eligible for benefits under a Section 1115 waiver. CMS has taken the position that hospitals cannot include the patient days of individuals for whom a hospital receives reimbursement from an uncompensated care pool established under a Section 1115 waiver. However, two federal courts have rejected CMS’s position, finding that both the statute and regulation requires CMS to include those days in the Medicaid fraction.

In response to those cases, CMS proposes to invoke its purported authority to limit the universe of Section 1115 days that can be included in the Medicaid fraction. Specifically, CMS is proposing that Section 1115 days may only be counted in the Medicaid fraction if the patient directly received inpatient hospital insurance coverage on such days.

The Proposed Rule is available here, and a CMS fact sheet is available here. A copy of the interim final rule that modified the MGCRB rules is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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