CMS Releases FY 2014 Hospital IPPS Final Rule

by King & Spalding

On August 2, 2013, CMS released the annual Hospital Inpatient Prospective Payment System Final Rule for FY 2014 (the “Final Rule”), effective for discharges occurring on or after October 1, 2013.

The Final Rule increases Inpatient Prospective Payment System (IPPS) rates for FY 2014 by 0.7 percent after factoring in inflation and other adjustments mandated by law which accounts for the market basket adjustment of 1.7 percent minus a 0.8 percent documentation and coding “case mix” adjustment, and a 0.2 percent reduction in the standardized amount (and hospital-specific rates) to offset additional IPPS expenditures expected under the policy change announced in this Final Rule relating to inpatient admission criteria (the “2-midnight” rule, discussed below). 

CMS also refined the MS-DRG relative weight calculation for new cost centers related to Implantable Devices, MRIs, CT scans and cardiac catheterization that were created in the FY 2009 and FY 2011 final rules.  This will increase the total number of cost-to-charge ratios used to calculate the FY 2014 relative weights from 15 to 19.

CMS projects that in FY 2014, the Final Rule would increase overall hospital payments by $1.2 billion and long-term care hospitals (LTCHs) PPS payments by nearly $72 million or 1.3 percent.

Hospital Value-Based Purchasing (VBP) Program

The Final Rule updates value-based incentive payments available under the VBP Program and details the FY 2014 process required to fund this program including an increase in the applicable percent reduction to base operating Diagnosis Related Group (DRG) payment amounts by 1.25 percent.  CMS also finalizes the proposal to add new measures in FY 2016 including influenza immunization for hospital staff, catheter-associated urinary tract infection (CAUT), and surgical site infection (SSI).  The Final Rule also adopts performance standards, including achievement thresholds and benchmarks for the FY 2016 program including “floors” for all eight Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) dimensions.  The total estimated amount available for VBP incentive payments is $1.1 billion.

Hospital-Acquired Condition (HAC) Reduction Program

CMS sets forth the framework for the new HAC Reduction Program, starting in FY 2015.  Under section 3008 of the Affordable Care Act, as amended, CMS is required to create a program for IPPS hospitals to improve patient safety by implementing financial penalties on hospitals that perform poorly with respect to HACs.  HACs are conditions that patients develop during their hospital stays that they did not have prior to being admitted.  Pursuant to the HAC Reduction Program, hospitals that rank in the lowest-performing quartile of HACs will be reimbursed 99 percent of what they otherwise would have been paid under IPPS. 

The Final Rule identifies the quality measures and the scoring methodology to determine the lowest-performing quartile, in addition to the process hospitals will use to review and correct their data.  For the first year of the program in FY 2015, CMS will use measures that are part of the Inpatient Quality Reporting Program and is proposing to use a scoring methodology like the achievement scoring methodology currently used in the Hospital Value Based Purchasing Program scoring methodology.

Hospital Inpatient Quality Reporting (IQR) Program

Annual payment updates for hospitals that do not successfully participate in the Hospital IQR program are reduced by 2.0 percentage points, and starting with FY 2015, hospitals that do not participate in the Hospital IQR Program will lose one-quarter of the percentage increase in their payment updates.  The number of quality measures hospitals are required to report under the Reporting Hospital Quality Data for Annual Payment Update is reduced under the Final Rule from 59 to 57 measures for FY 2015 and FY 2016.

Measures reported under the Hospital IQR Progam are published on the Hospital Compare Website, and may later be adopted for use in the Hospital VBP Program.  For the FY 2016 payment determination and later years, the Final Rule eliminates seven hospital IQR measures and will suspend one measure.  The rule also implements changes to the Medicare Electronic Health Record (EHR) Incentive Program including an expansion of the submission period for reporting clinical quality measures electronically.  

Hospital Readmissions Reduction Program

For FY 2014, the maximum possible penalty under the Hospital Readmissions Reduction Program increases to 2 percent of a hospital’s base operating DRG payments.  In the Final Rule, CMS establishes additional exclusions for additional planned readmissions for each of the three existing readmissions measures—pneumonia; acute myocardial infarction; and heart failure.  CMS also adds two new readmissions measures for FY 2015—chronic obstructive pulmonary disease (NQF #1891); and total hip arthroplasty/total knee arthroplasty (NQF # 1551). 

Readmission ratios for FY 2014 are based on MedPAR claims with discharge dates during the July 1, 2009 to June 30, 2012 period.  Of the 3,359 hospitals subject to the readmissions reduction program for FY 2014, 2,225 hospitals will receive some readmissions penalty.  171 of these hospitals will receive a readmissions penalty greater than 1 percent, and 18 will receive the maximum penalty of 2 percent.  The final readmissions adjustment factors for FY 2014 are available from the CMS website by clicking here.

Outlier Threshold

Under the Final Rule, the outlier threshold for FY 2014 will increase to $21,748 (reduced from $24,140 in the Proposed Rule).  The final outlier threshold for FY 2014 is slightly lower than the FY 2013 threshold of $21,821.  CMS estimates that outlier payments in FY 2014 will equal 5.1% of total Medicare DRG payments.

Changes to Disproportionate Share Hospital (DSH) Payments and Provision of Additional Payments for Uncompensated Care

Under section 3133 of the Affordable Care Act, as amended, Medicare DSH payments to qualifying hospitals for discharges in FY 2014 will be reduced to 25 percent (the “empirically justified” portion) of the amount that the hospitals otherwise would have received under the current statutory formula.  The remaining 75 percent of what otherwise would have been paid as Medicare DSH payments will be reduced to reflect the decline in the under-65 uninsured population since 2013, and the remainder will form a “pool” from which additional uncompensated care payments are made to eligible hospitals. 

CMS has finalized its proposal that only those hospitals that receive “empirically justified” DSH payments are eligible to receive an additional payment for uncompensated care.  Uncompensated care payments will be paid on a periodic basis rather than on a per-discharge basis.  CMS will determine eligibility for interim uncompensated care payments on the basis of each hospital’s estimated DSH status for the relevant fiscal year (using the most recently available SSI ratios and Medicaid fractions prior to the beginning of the payment year), and interim payments will be subject to cost report settlement.  The payment methodology for the empirically justified DSH payments will remain unchanged from the existing DSH payment process, with the 75 percent reduction applied on a per-claim basis.

Additional payments for uncompensated care are the product of three factors:

  1. The “Pool”—i.e., the leftover 75 percent of total DSH payments that otherwise would have been paid out under the current statutory formula;
  2. Adjustment factor reflecting the decline in the under-65 uninsured population since 2013; and
  3. Each DSH-eligible hospital’s share of total uncompensated care furnished by all DSH-eligible hospitals.

CMS has finalized its proposal to estimate the 75 percent of DSH payments that otherwise would have been paid under the current DSH formula (Factor 1) using the projections of total Medicare DSH payments prepared in July of each year by the Office of the Actuary.  CMS estimates this amount to be approximately $9.579 billion for FY 2014 (up from $9.2535 billion in the proposed rule).

CMS has also finalized its proposal to use the most recent CBO estimates available and to include unauthorized immigrants in its estimate of the uninsured under-65 population for purposes of determining the adjustment factor to account for the decline in the uninsured population under the Affordable Care Act (Factor 2).  In the Proposed Rule, CMS had proposed to calculate Factor 2 by comparing CBO’s March 20, 2010 estimate of the “Insured Share of the Nonelderly Population Including All Residents” for 2013 (18 percent uninsured) with its February 5, 2013 estimate for 2014 (16 percent uninsured).  This would have resulted in Factor 2 equaling 0.888 (88.8 percent) for FY 2014.  In the Final Rule, however, CMS has employed CBO’s May 2013 and July 2013 revised estimates to calculate the estimated uninsured population for 2014.  Since the CBO estimates are calendar year estimates, CMS has weighted the CBO estimates for CY 2013 (as estimated in May 2013) and CY 2014 (as estimated in May 2013 and updated in July 2013) to determine the estimated uninsured population in fiscal year 2014.  According to the methodology adopted in the Final Rule, Factor 2 equals 0.943 (94.3 percent) for FY 2014, resulting in an increase in the available pool for uncompensated care payments of more than $815 million over the proposed rule estimate.

In order to determine each DSH-eligible hospital’s share of total uncompensated care (Factor 3), CMS has finalized its proposal to employ insured low-income days as a proxy for uncompensated care costs during an interim period while CMS reviews the instructions for Worksheet S-10 and considers what revisions and clarifications might be necessary.  CMS has reiterated its intent to propose that Worksheet S-10 be used to determine Factor 3 “within a reasonable amount of time.”  Factor 3 will be calculated on the basis of each eligible hospital’s proportion of low-income insured days (Medicaid and Medicare SSI patient days) relative to the low-income insured days for all hospitals projected to receive DSH payments.  CMS will calculate Factor 3 for all subsection (d) hospitals, including those that are projected to be ineligible to receive DSH payments, so that in the event that such hospitals are later determined eligible, they can receive uncompensated care payments at the time of cost-report settlement.  CMS projects that there will be 2,437 DSH-eligible hospitals in FY 2014.

A number of commenters expressed concern that not including the uncompensated care payments in the Medicare PRICER would result in MA Plans not paying those amounts even though they had contracted to pay Medicare rates.  CMS has agreed to state the DSH uncompensated care payments on a per-discharge basis which will make it much simpler for MA Plans to determine what amounts they should pay.

Finally, in reaction to ongoing litigation, CMS has finalized its proposal to “readopt” its policy of counting Medicare Advantage patient days as patients who are “entitled to benefits” under Part A in the Medicare fraction of the disproportionate patient percentage (DPP) calculation.

Changes Affecting Direct and Indirect Graduate Medical Education (GME) Payments

CMS has finalized its proposal to include labor and delivery days as inpatient days in the Medicare utilization calculation for purposes of direct GME payments, effective for cost reporting periods beginning on or after October 1, 2013.  This will have the effect of reducing direct GME payments by an estimated $19 million for FY 2014 (up from $15 million estimated in the proposed rule). 

CMS announces the closure of four teaching hospitals.  Applications for available resident slots are due August 29, 2013 (Round 5) and October 31, 2013 (Round 6). 

CMS has finalized its proposed policy that an IPPS teaching hospital may not count resident time spent training at a CAH and may not be reimbursed for such time, even if the teaching hospital incurs the training costs.  Effective October 1, 2013, a CAH does not qualify as a “nonprovider site” for purposes of direct GME or IME payment. 

Finally, the “freeze” that has been in effect for per-resident amounts (PRAs) that exceeded the ceiling expires beginning in FY 2014.  For cost reporting periods beginning on or after October 1, 2013, the full CPI-U update will apply to all PRAs for direct GME purposes.

Part B Inpatient Billing

CMS finalized its proposal that a hospital may be paid for Part B services furnished during an inpatient admission for which payment is denied by a Medicare review contractor that determined that the inpatient admission was not reasonable and necessary.  Under a new policy announced in Ruling 1455-R (March 13, 2013), if Part A payment is denied on medical necessity grounds (and the patient in question is enrolled in Medicare Part B), the hospital may bill Part B services that would have been reasonable and necessary if the beneficiary had been treated on an outpatient basis. 

The Ruling applied to Part A denials that occurred while the Ruling was in effect (i.e., after issuance of the Ruling and prior to the effective date of this Final Rule), or that occurred prior to the effective date of the Ruling and for which the period for appeal had not yet expired or for which there was an appeal pending.  Under the Ruling, associated claims for Part B services were not subject to the timely filing restrictions as long as the underlying Part A claims had been submitted timely.  Under the policy adopted in the Final Rule, however, the timely filing restrictions, which require all claims for Part B services to be filed within 1 year from the date of service, will apply going forward, unless (1) the Part A claim denial was one to which the Ruling originally applied; or (2) the inpatient admission date is before October 1, 2013 and the Part A claim is denied after September 30, 2013 on the grounds that although the care furnished was reasonable and necessary, the inpatient admission was not.  This is a liberalization of CMS’s proposed timing restrictions.

Observation services, outpatient diabetes self-management training services, and hospital outpatient visits are excluded from Part B inpatient payment.  Part B inpatient services will be paid under the OPPS or the respective Part B fee schedules for OPPS-excluded services.  The hospital is also permitted to bill any Part B outpatient services furnished during the 3-day payment window preceding the denied inpatient admission.

Admission and Medical Review Criteria for Inpatient Hospital Services

CMS has finalized its proposal to require a physician order for hospital inpatient admission as a condition of payment for inpatient services under Medicare Part A.  The formal admission order must be documented in the patient’s medical record (at or before the time of inpatient admission) and must be supported by the physician admission and progress notes.  The order must be signed by a qualified, licensed practitioner with admitting privileges who is responsible for the patient’s care.  CMS states that a verbal admission order is not a substitute for a properly documented and authenticated order for inpatient admission.  A verbal order must be properly countersigned by the practitioner who gave the order.  CMS has stated that it will further develop its requirements regarding verbal orders for inpatient admission in subregulatory guidance. 

CMS has also clarified that the statutory certification requirement, which requires a physician to certify that services must be furnished on an inpatient basis, applies to all inpatient admissions (not just extended stays).  In addition to the inpatient admission order, the reason(s) for continued hospitalization must be documented in the medical record in order for inpatient services to be paid under Medicare Part A.  Certification statements must be signed and documented in the medical record prior to discharge (except for recertifications of extended stays, which are required earlier).

CMS has finalized its proposed “2-midnight” benchmark for the medical necessity of an inpatient stay.  Under the modified inpatient admission guidelines adopted in the Final Rule, Part A payment is “generally inappropriate” unless the patient is admitted based on the physician’s expectation that the patient will require a hospital stay that crosses at least 2 midnights (or the planned procedure is on the inpatient-only list).  The physician’s expectation of time and determination of need for inpatient care must be supported by “complex medical factors such as history and comorbidities, the severity of signs and symptoms, current medical needs, and the risk of an adverse event.”  If the physician cannot reliably predict that the beneficiary will require a stay that transcends 2 midnights, CMS states that the physician should continue to treat the beneficiary as an outpatient until such time as a 2-midnight stay is anticipated.  Under the Final Rule, the starting point for the 2-midnight estimate begins with the patient’s initial outpatient service.  If the patient has already passed 1 midnight as an outpatient, admission would be considered appropriate if the physician expects the patient to require at least 1 additional midnight in the hospital.  (This is a change from the Proposed Rule, which would have started the “2-midnight” clock beginning with the time the beneficiary is moved from an outpatient area to an inpatient bed.)

Situations in which the admitting physician properly includes prior outpatient time in the 2-midnight assessment may nevertheless be scrutinized by Medicare review contractors.  CMS has finalized a “2-midnight presumption” for purposes of medical review of inpatient admissions.  Inpatient hospital stays are presumed to be generally appropriate for Part A payment if they cross 2 midnights after the formal admission order.  Review efforts by Medicare review contractors will focus on inpatient stays that cross only 1 midnight or less after the formal admission order is written.  In these situations, review contractors will evaluate (a) the physician admission order and physician certification; (b) documentation supporting the physician’s expectation that care would span at least 2 midnights; and (c) documentation supporting the decision that it was reasonable and necessary to keep the patient at the hospital to receive such care.  In evaluating claims, Medicare review contractors will “apply the 2-midnight benchmark to all time spent within the hospital receiving medically necessary services.”

CMS estimated that 360,000 cases would move from inpatient to outpatient status as a result of the “two midnight” presumption, but that 400,000 cases would move from outpatient to inpatient status, with a net cost to the Medicare program.  This is why CMS reduced the IPPS update by 0.2 percent.  Commenters had pointed out that CMS’s estimate of cases moving from inpatient to outpatient status does not match the data it reported in the Proposed Rule regarding the number of one-day stays.  CMS continued, however, with its proposal to reduce the IPPS rate to reflect what it continued to claim would be a net cost to the Medicare program.

The Final Rule is available from the Office of the Federal Register website by clicking here.  The Final Rule is scheduled to be published in the August 19, 2013 Federal Register.

Reporters, Susan Banks, Washington, D.C., +1 202 626 2953,, and Juliet McBride, Houston, +1 713 276 7448,

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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