On April 23, 2019, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System Proposed Rule for FY 2020 (the Proposed Rule), which will affect discharges on or after October 1, 2019. King & Spalding has reviewed CMS’s annual compendium of proposed changes and summarizes some of the key regulatory changes below.

Payment Rates Overview

• CMS projects that total Medicare spending on inpatient hospital services, including capital, will increase by about $4.7 billion in FY 2020. This compares to a proposed increase of $4.1 billion in Medicare inpatient spending in FY 2019. CMS projects that IPPS operating payments will increase by approximately 3.5 percent with an additional 0.2 percent increase resulting from proposed changes in uncompensated care payments, new technology add-on payments, low-volume hospital payments, and capital payments. Therefore, CMS estimates a total increase in IPPS payments of approximately 3.7 percent.

• For FY 2020, CMS expects LTCH PPS payments to increase by approximately 0.9 percent or $37 million as compared to FY 2019. LTCH PPS payments for FY 2020 for discharges paid using the standard LTCH payment rate are expected to increase by 2.3 percent. FY 2020 also marks the full implementation of the LTCH site neutral payment rate, rather than the transitional blended rate what had been transitioned between FY 2016 and FY 2019.

Medicare Wage Index

• Proposal to increase the wage index for hospitals below the 25th percentile by decreasing the wage index for hospitals above the 75th percentile.  CMS is proposing to make a positive adjustment to the wage indices for hospitals with a wage index value below the national 25th percentile. The positive adjustment for these hospitals would be 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 year. As of the date of the Proposed Rule, CMS estimates that the 25th percentile wage index value will be 0.8482 in FY 2020. To make these positive adjustments budget neutral, CMS is proposing to apply a negative adjustment to the wage indices of hospitals with a wage index value above the national 75th percentile. To calculate the budget neutrality adjustment, CMS would calculate the delta between the 75th percentile wage index value for all hospitals that year and the otherwise applicable final wage index value for each hospital in the 75th percentile. CMS would then calculate a budget neutrality factor needed to reduce that delta for each hospital so that the aggregate adjustment will offset the estimated increase in payments to hospitals in the bottom 25th percentile. For FY 2020, CMS estimates that the 75th percentile will be 1.0351, and the budget neutrality adjustment for hospitals for wage index values above that number will be 3.4 percent. CMS currently plans to maintain this policy for at least four years.

• Proposal to exclude the wage data of reclassified rural hospitals from the calculation of the rural floor.  Prior to FY 2020, the rural floor for each state was equal to the rural wage index for the state, which was calculated based on the combined wage data of all hospitals located in rural parts of the state and all hospitals in the state that have elected to reclassify as rural under section 1886(d)(8)(E) of the Social Security Act. CMS is proposing to calculate the rural floor for each state separately from the rural wage index, and to exclude the data of urban hospitals that have reclassified as rural from the calculation of the rural floor. CMS reasons that this policy is “necessary and appropriate” to address the “unanticipated effects of rural reclassifications on the rural floor and the resulting wage index disparities, including the effects of the manipulation of the rural floor by certain hospitals.”  In particular, CMS cited the fact that urban hospitals reclassifying as rural have in years past significantly increased the rural floors in certain states, including Massachusetts, Connecticut and Arizona.

• Proposal to cap wage index decreases in FY 2020.  To prevent any sharp decreases in reimbursement for hospitals that would be affected by the two proposals above, CMS is proposing to place a cap on any decrease to a hospital’s wage index in FY 2020. The cap would be equal to 5 percent of a given hospital’s final wage index from FY 2019, meaning that the hospital’s wage index value for FY 2020 will be at least 95 percent of its wage index value for FY 2019. It is not clear whether this cap would apply to all hospitals or only to hospitals affected by CMS’s proposed changes for FY 2020. To ensure that the 5 percent cap is budget neutral, CMS would apply a negative adjustment to the standardized amount in FY 2020. CMS currently estimates that the budget neutrality adjustment factor would be 0.998349. CMS does not anticipate extending any cap relief into FY 2021.

Uncompensated Care (UCC)

CMS distributes a prospectively determined amount of uncompensated care payments to Medicare DSH hospitals based on their relative share of uncompensated care nationally. CMS calculates the UCC payments using a 3-factor calculation, with the third factor being hospital specific. Since FY 2014, hospitals receive 25 percent (as estimated by CMS) of the DSH payment they would have received under the payment methodology that existed prior to FY 2014. The remaining 75 percent (Factor 1) is reduced by the change in national uninsured rates (Factor 2) and divided among eligible hospitals based on their proportionate share of uncompensated care (Factor 3). As explained in greater detail below, CMS’s major proposed change for FY 2020 UCC payments is to use a single year of data, currently proposed to be 2015, in calculating each hospital’s Factor 3.

Factors 1 and 2

• CMS did not propose any changes to the Factor 1 calculation methodology for FY 2020. As before, Factor 1 is a pool of funds estimated by CMS at 75 percent of what empirical DSH payments would have been, absent Affordable Care Act changes. To calculate this estimate, CMS used the most recently available projections of Medicare DSH payments for the fiscal year, as calculated by CMS’ Office of the Actuary (OACT) using the most recently filed Medicare hospital cost reports with Medicare DSH payment information and the most recent Medicare DSH patient percentages and Medicare DSH payment adjustments provided in the IPPS Impact File. CMS performed the calculation in December 2018 using FY 2016 cost report data. The OACT estimate for FY 2020 is $16.857 billion. Therefore, Factor 1 for FY 2020, after 25 percent reduction is $12.643 billion.

• Factor 2 is calculated as 1 minus the percent change in the percent of individuals who are uninsured, as determined by comparing the percent of individuals who were uninsured in 2013 (as estimated by CMS) and the percent of individuals who were uninsured in the most recent period for which data are available. Unlike FY 2018 and FY 2019, FY 2020 does not require a 0.2 percentage point reduction to this estimate. The OACT estimates that the uninsured rate for the historical, baseline year of 2013 was 14 percent and that the uninsured rate for both CYs 2019 and 2020 was 9.4 percent. Using this data, Factor 2 is calculated at 67.14 percent.

• The results of Factors 1 and 2 are $8.489 billion.

Factor 3

• Factor 3 is equal to the percent, for each subsection (d) hospital, that represents the quotient of: (1) the amount of uncompensated care for such hospital for a period selected by the Secretary; and (2) the aggregate amount of uncompensated care for all subsection (d) hospitals that receive a payment under section 1886(r) of the Act for such period (as so estimated, based on such data). In previous years, CMS used 3 years of data in the calculation of Factor 3 to smooth over anomalies between cost reporting periods and to mitigate undue fluctuations in the amount of uncompensated care payments from year to year. For FY 2020, however, CMS proposes using a single year of data of uncompensated care costs from Worksheet S-10 of the Medicare cost report for FY 2015 to distribute these funds. In addition, CMS is seeking public comments on whether it should, due to changes in the reporting instructions that became effective for FY 2017, use a single year of Worksheet S‑10 data from the FY 2017 cost reports, instead of the FY 2015 Worksheet S-10 data, to distribute the amount available for uncompensated care payments for FY 2020.

Indirect and Direct Graduate Medicare Education Costs

• Proposal to allow hospitals to include residents training at a Critical Access Hospital (CAH) in its FTE count as long as it meets the non-provider setting requirements.  CMS is proposing, starting with cost reporting periods beginning October 1, 2019, to allow hospitals to treat CAHs as non-provider settings for purposes of the FTE count. Currently, CAHs are not considered non-provider sites for purposes of direct GME and IME payments. CMS expressed concern about its current policy as “creating barriers” to training residents in rural areas, contrary to CMS’s various efforts to increase the number of physicians practicing in rural areas. For those reasons, CMS believes that changing its current policy to allow CAHs to count as non-provider settings will increase the rural residency training opportunities. In general, the higher a hospital’s FTE count, the greater the amount of direct GME and IME payments the hospital will receive. This proposal, if finalized, would allow hospitals to count residents training at CAHs under certain conditions and, consequently, increase its FTE count.

• Notice of closure of a teaching hospital and opportunity to apply for that hospital’s available FTE resident cap slots.  The Affordable Care Act provided CMS the authority to redistribute resident slots from a hospital that closed, and which maintained an approved medical residency program. CMS is providing notice that Good Samaritan Hospital closed, along with the closure of its medical residency program, and that its IME FTE and direct GME FTE resident slots are available for redistribution. Prior to redistributing those resident slots, CMS undertakes an application process that requires, among other things, mailing a hard copy application to the CMS Central Office. That application is due 90 days from April 23, 2019 and contains multiple ranking criteria preferencing hospitals that had some involvement in the closed program before moving to criteria based on the type of program the hospital intends to expand. The current CMS application form is available here.

Quality Reporting Program

• Proposals to update the Hospital Inpatient Quality Reporting (IQR) Program.  CMS addresses the removal of one measure and invites public comment on three new electronic clinical quality measures (eCQMs) as part of the IQR. Specifically, CMS proposes to remove the Claims-Based Hospital-Wide All-Cause Readmission measure and replace it with the Hybrid Hospital-Wide All-Cause Readmission Measure with Claims and Electronic Health Record Data measure (the first of three new eCQMs proposed), beginning in the fiscal year 2026 payment determination. The other two eCQMs proposed pertain to opioid-related measures: (1) Safe Use of Opioids – Concurrent Prescribing eCQM and (2) Hospital Harm – Opioid-Related Adverse Events eCQM. Additionally, in alignment with the Promoting Interoperability Program (formerly known as the Medicare and Medicaid EHR Incentive Programs), CMS proposes to change the eCQM reporting period so that hospitals report one, self-selected calendar quarter of discharge data for four self-selected eCQMs in the IQR for calendar years 2020 and 2021.

Provider Reimbursement Review Board

• CMS solicits comments to reduce the number of PRRB appeals related to the DSH Medicaid fraction.  CMS is asking for feedback on ways to reduce the number of appeals that providers file with the PRRB to get additional Medicaid eligible days included in their cost reports. In the proposed rule, CMS floats the idea of requiring MACs to reopen cost reports within the three-year reopening window to include additional Medicaid eligible days in the Medicaid fraction. CMS is also considering giving hospitals a one-time option to resubmit a cost report with updated Medicaid eligibility information.

The display copy of the Proposed Rule is available here. The Proposed Rule is expected to be published in the Federal Register on May 3, 2019 here. Comments to the Proposed Rule are due no later than 5:00 p.m. EDT on June 24, 2019. CMS provides summary-level information on the Proposed Rule in its Fact Sheet, available here.