CMS Issues Medicare IPPS and LTCH Final Rule for FY 2021

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On September 2, 2020, CMS issued the fiscal year (FY) 2021 final rule for the hospital inpatient prospective payment system (IPPS) and long-term care hospital (LTCH) prospective payment system (the Final Rule). This article provides an overview of the key changes in the Final Rule. The Final Rule goes into effect on October 1, 2020. However, as discussed below, some of the changes in the Final Rule apply retroactively to cost reporting periods beginning before October 1, 2020.

Payment Rates Overview

IPPS payment rates are expected to increase by approximately 2.9 percent in FY 2021 relative to FY 2020 for acute care hospitals that participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users. This increase is the result of a 2.4 percent market basket update and a 0.5 percent point adjustment required by legislation. CMS projects that IPPS operating payments per discharge will increase by approximately 2.5 percent for urban hospitals and 2.2 percent for rural hospitals in FY 2021 compared to FY 2020. Overall payments to acute care hospitals are expected to increase by $3.5 billion in FY 2021.

CMS projects that overall LTCH payments will decrease by 1.1 percent ($40 million) in FY 2021. For hospitals that continue to be paid under the LTCH PPS, payments are expected to increase by 2.2 percent per discharge due to an increase in rates of 2.3 percent. LTCH PPS payments are expected to decrease by 24 percent for hospitals that complete the statutory transition to the site neutral rate.

CMS Set to Change Methodology in Setting MS-DRG Relative Weights

Through the Final Rule, CMS instructs hospitals to include on their cost reports a calculation of their median payer-specific negotiated inpatient services charges for Medicare Advantage (MA) organizations. Hospitals will calculate and report these medians on the basis of the negotiated prices for items and services that they are required to disclose under the agency’s November 2019 price transparency rule. CMS will begin collecting this data for the cost reporting periods ending on or after January 1, 2021. CMS will use these reimbursement rates that hospitals negotiate with MA organizations as the basis for calculating MS-DRG relative weights, beginning in Fiscal Year 2024. Currently, CMS utilizes a cost-based methodology when estimating the appropriate weight for each MS-DRG. The current cost-based methodology relies upon hospital charges from MedPAR claims data and cost report data from the Healthcare Cost Report Information System to establish the MS-DRG relative weights. In the Final Rule, CMS indicates its intent to utilize a more “market-based approach” in calculating MS-DRG relative weights by using payer-specific negotiated charges between hospitals and MA organizations, as the agency believes that these charges are generally well-correlated with Medicare IPPS payment rates. The adjustment of relative weights will continue to be performed in a budget-neutral fashion, as it is under current law.

Medicare Wage Index

In the Final Rule, CMS adopted the revised labor market area delineations based on the latest core-based statistical areas reflected in OMB Bulletin No. 18-04 issued September 14, 2018. As a result of these changes, 34 urban counties will become rural, 47 rural counties will become urban, and 19 counties are moving from one CBSA to another.

To ease the transition to the revised labor market area delineations, CMS has placed a 5 percent cap on any decrease in a hospital’s wage index in FY 2021 relative to its FY 2020 wage index. This means that a hospital’s wage index for FY 2021 cannot go below 95% of its wage index from FY 2020. To offset the cost of this policy, CMS will make a downward adjustment to the standardized amount.

CMS also continued 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 nationally. 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 2021, the 25th percentile wage index value will be 0.8457. To fund these adjustments, CMS has applied a budget neutrality adjustment to the standardized amount.

Uncompensated Care

In the Final Rule, CMS finalized the three factors that will be used to determine uncompensated care payments in FY 2021.

Factor 1 is equal to 75 percent of CMS’s estimate of the amount of disproportionate share hospital (DSH) payments that hospitals would receive during the year under the DSH payment methodology that existed prior to FY 2014. As in years past, CMS calculated Factor 1 for FY 2021 based on the most recent Medicare hospital cost reports with Medicare DSH payment information. Based on data from FY 2017, CMS estimated that total DSH payments to hospitals under the pre-FY 2014 methodology would have been $14.004 billion. CMS updated that number by a factor of 1.0437 for a result of $15.171 billion. Factor 1 for FY 2021 is equal to 75% of that number, or $11.378 billion.

Factor 2 is equal to 1 minus the percent change in the percent of uninsured individuals between 2013 and the most recent year for which data is available. In the Final Rule, CMS estimated that the number of uninsured individuals was approximately 10.2 percent accordingly the latest data. Accordingly, the Factor 2 for FY 2021 is 72.86 percent. The product of Factors 1 and 2 is a payment pool of $8.290 billion. The payment pool was $8.350 billion in FY 2020.

Factor 3 is equal to the ratio of each hospital’s own amount of uncompensated care costs relative to the uncompensated care costs of all other hospitals nationally. In the Final Rule, CMS finalized its proposal to use Worksheet S-10 data from FY 2017 to calculate Factor 3. CMS also indicated that it intends to use the most recently audited Worksheet S-10 data to calculate Factor 3 in subsequent FYs.

Graduate Medical Education

The Medicare statute limits the number of resident trainees that hospitals can claim for reimbursement from Medicare under the Graduate Medical Education (GME) rules. One exception to the limit applies to hospitals that train “displaced residents” who were previously training at a hospital or program that closed before they could complete their training programs.

Under current GME rules, a “displaced resident” is defined as a resident training at a hospital or in a program the day before the hospital or the program closes. This rule has proven problematic for displaced residents seeking to transition to other hospitals or programs. To address this problem, in the Final Rule, CMS changed the definition of “displaced resident” to (1) residents who were training at the hospital or in the program on the day that the closure was publicly announced, or (2) residents who had been accepted to train at the hospital or program but had not yet begun training by the day that the closure was publicly announced.

Bad Debt Policies

In the proposed rule for FY 2021, CMS proposed to amend its existing bad debt regulations to incorporate the agency’s bad debt policies reflected in Chapter 3 of the Provider Reimbursement Manual (PRM). CMS also proposed that most of these changes would apply retroactively to prior cost reporting periods. King & Spalding submitted comments in opposition to several of CMS’s more controversial proposals. A copy of the comment letter is available here. As a result of these comments, CMS modified many of its proposals in a manner favorable to providers.

Bad Debt of Non-Indigent Beneficiaries

In the Final Rule, CMS amended its bad debt regulation to specify the timeframe by which a hospital must issue a bill in order for the collection effort to qualify as reasonable. For cost reporting periods beginning prior to October 1, 2020, hospitals are required to issue a bill “shortly after” discharge or death of the beneficiary. For cost reporting periods beginning after October 1, 2020, hospitals must issue a bill within 120 days after the later of (1) the date of the Medicare remittance advice, (2) the date of the remittance advice from the beneficiary’s secondary payer, or (3) the date of notification that the beneficiary’s secondary payer does not cover the services furnished to the beneficiary.

CMS also established a timeframe by which a hospital can write off a debt as uncollectible. For cost reporting periods beginning before, on or after October 1, 2020, hospitals may not write off a bad debt until at least 120 days have passed since the issuance of the bill. The 120-day period will reset each time the hospital receives a partial payment.

CMS also amended its regulation to require hospitals to employ similar collection efforts between Medicare and non-Medicare beneficiaries. Providers will also be required to maintain and furnish upon request (1) their bad debt collection policies, (2) the patient account history, and (3) the beneficiary’s file with copies of bills and follow up notices. Both of these changes will apply to cost reporting periods beginning before, on or after October 1, 2020.

Bad Debt of Beneficiaries Determined Indigent under Provider’s Financial Assistance Policy

Under current CMS policy, if a provider determines that a patient is eligible for assistance under its Financial Assistance Policy (FAP), i.e., the patient is indigent, the provider need not attempt reasonable collection efforts before claiming the debt for reimbursement from Medicare. In the proposed rule for FY 2021, CMS proposed requiring hospitals to consider a patient’s “total resources” such as income, assets, expenses and liabilities in determining indigency. CMS also proposed adopting this policy retroactively and prospectively to cost reporting periods beginning before, on or after October 1, 2020. This proposal posed a significant threat to hospitals who have for years determined indigence without considering all four of the factors identified in the proposed rule.

King & Spalding strongly opposed this proposal in its comment letter. King & Spalding argued that the Medicare statute prohibits CMS from adopting these specific proposals retroactively. In addition, King & Spalding pointed out that it does not make sense to require hospitals to consider expenses and liabilities because this would simply increase the number of beneficiaries eligible for financial assistance, thereby increasing the amount of bad debt hospitals would claim from Medicare.

In response to these comments, CMS modified its proposal in two important respects. First, CMS decided that hospitals will not be required to consider expenses and liabilities in determining a patient’s eligibility for financial assistance. Instead, hospitals will only be required to consider income and assets. Second, CMS decided against adopting this policy retroactively. Instead, hospitals will only be required to consider income and assets for cost reporting periods beginning on or after October 1, 2020. These two modifications to CMS’s proposals represent a significant victory for the provider community.

Bad Debt of Dual-Eligible Beneficiaries

Providers are also excused from attempting to collect debt from beneficiaries who are eligible for both Medicare and Medicaid. Bad debts attributable to dual-eligible beneficiaries is known as crossover bad debt. In the Final Rule, CMS amended the bad debt regulations to require providers to attempt to bill the applicable state Medicaid program and submit remittance advice to the MAC before claiming reimbursement from Medicare for crossover bad debts. In cases where a State does not process a Medicare crossover claim and issue a Medicaid remittance advice to providers, CMS will allow providers to submit alternative documentation that includes: (1) State Medicaid notification evidencing that the State has no obligation to pay the beneficiary’s Medicare cost sharing; (2) documentation setting forth the State’s liability or lack thereof for the beneficiary’s Medicare cost sharing; and (3) documentation verifying the beneficiary’s eligibility for Medicaid on the date of service. These policies are effective for cost reporting periods beginning on, before or after October 1, 2020.

Contractual Allowance Accounts

In the proposed rule, CMS proposed prohibiting providers from claiming bad debt that is written off to a contractual allowance account in their financial accounting statements. Effective October 1, 2020, providers would only be permitted to claim bad debt written off to a bad debt expense account.

King & Spalding commented that requiring hospitals to write off bad debts to an expense account does not make sense because CMS has proposed to define bad debts as reductions to revenue that must be recorded in revenue accounts instead of expense accounts. CMS acknowledged this error in the Final Rule and will not require providers to write off bad debt to a revenue account instead of an expense account.

However, whether by accident or design, CMS pulled a switcheroo in the Final Rule. CMS decided that for cost reporting periods beginning before October 1, 2020, hospitals would be required to report bad debts to a bad debt expense account. This new rule contradicts the public announcement CMS made in an MLN matters article issued on April 4, 2019, in which CMS said it would not require hospitals to report bad debt to a bad debt expense account for cost reporting periods beginning prior to October 1, 2019.

CMS Created a New MS-DRG For CAR T-Cell Therapies

During the Fiscal Year 2021 IPPS/LTCH PPS proposed rule, CMS discussed the various requests received for a new Medicare Severity Diagnostic Related Group (MS-DRG) for procedures involving Chimeric Antigen Receptor (CAR) T-cell therapies in the inpatient setting. Requestors commented there would likely be a reduction in the overall payments for cases involving these therapeutics, as cases involving CAR T-cell therapies were no longer eligible for new technology add-on payments in Fiscal Year 2021. Other requestors opined that without the creation of a new MS-DRG for procedures that utilized CAR T-cell therapies, outlier payments would increase significantly. After consideration of public comments received, CMS elected to create a new MS-DRG for cases involving CAR T-cell therapies to provide for more predictable payments to be made to hospitals paid under the IPPS.

CMS Expanded the NTAP Pathway for Antimicrobial Products

Due to concerns and impacts resulting from antimicrobial resistance, CMS has expanded the alternative NTAP pathway for antimicrobial products approved in accordance with the FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs (LAPD pathway). To enable new technology add-on payments for antimicrobial products to occur more quickly, CMS is additionally adopting a policy providing conditional approval for antimicrobial products that otherwise meet the NTAP alternative pathway criteria but have not received FDA approval in time for consideration in the final rule.

Twenty-Four Technologies Are Eligible to Receive New Technology Add-On Payments

CMS additionally approved a total of 24 New Technology Add-on Payments (NTAPs) for Fiscal Year 2021. The NTAP program provides for additional payment to hospitals for cases involving eligible new and relatively high cost technologies utilized during inpatient hospital stays. CMS plans to additionally continue NTAPS for 10 out of 18 technologies currently receiving the add-on payments. Overall, CMS predicts that Fiscal Year 2021 Medicare spending on NTAPs will be approximately $874 million, approximately an 120% increase over the Fiscal Year 2020 spending.

The Final Rule is available here, and a CMS fact sheet 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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