On July 31, 2015, the Centers for Medicare & Medicaid Services (CMS) released a major final rule to update the Medicare acute hospital inpatient prospective payment system (IPPS) and the long-term care hospital prospective payment system (LTCH PPS) for fiscal year (FY) 2016. The official version of the rule will be published in the Federal Register on August 17, 2015, and generally applies to discharges occurring on or after October 1, 2015.

With regard to the IPPS, CMS projects that the rate and policy changes in the final rule will increase IPPS operating payments by approximately 0.4%, or about $378 million in FY 2016. The rule provide a 0.9% operating payment rate update for hospitals that submit quality data and are meaningful users of Electronic Health Records (EHR). This update reflects a 2.4% market basket update, adjusted by a -0.5 percentage point multi-factor productivity (MFP) cut and an additional -0.2 percentage point cut (as mandated by the Affordable Care Act, or ACA), with an additional -0.8 percentage point documentation and coding recoupment adjustment required by the American Taxpayer Relief Act of 2012.

Note that updates to IPPS hospitals are subject to several quality-related adjustments under the Hospital Value-Based Purchasing (VBP) Program, the Hospital Readmissions Reduction Program, the Hospital-Acquired Condition (HAC) Reduction Program, the Hospital Inpatient Quality Reporting (IQR) Program, and the EHR Incentive Program. For instance, hospitals that do not successfully participate in the Hospital IQR Program will be subject to a one-fourth reduction of the market basket update, which equals 0.6 percentage points under the final rule. Hospitals that are not meaningful EHR users are subject to a separate reduction equal to half of the market basket update, which is 1.2 percentage points under the final rule. The final rule makes numerous changes to hospital quality programs, including updates to various quality measures. The rule also increases the reduction to base diagnosis related group (DRG) payments under the Hospital VBP Program from 1.5% to 1.75%; CMS estimates in the final rule that the total amount available for VBP payments in FY 2016 will be approximately $1.5 billion.

In addition, the rule provides for distribution of Medicare disproportionate share hospital (DSH) allotments in accordance with the ACA. CMS expects to distribute approximately $6.4 billion in uncompensated care payments in FY 2016, down $1.2 billion from the estimated FY 2015 amount; CMS attributes this decline to declines in the number of uninsured individuals since the enactment of the ACA. Moreover, the rule addresses, among many other things: changes to MS-DRG classifications and recalibration of relative weights; new technology add-on payment applications; and rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis. The rule also implements, on an interim final rule basis, provisions of the Medicare Access and CHIP Reauthorization Act of 2015 that extended the Medicare-dependent, small rural hospital program and changes to the low-volume payment adjustment for hospitals through FY 2017. Comments on those provisions are due by September 29, 2015.

With regard to LTCHs, the final rule provides for a standard federal rate of $41,763, reflecting a market basket increase of 2.4% that is reduced by a 0.4 percentage point MFP adjustment and an additional 0.2% reduction mandated by the ACA. Nevertheless, CMS estimates that LTCH PPS payments will decrease by 4.6% (approximately $250 million) under the final rule. CMS attributes this cut largely to implementation of the Pathway for SGR Reform Act of 2013, which requires CMS to establish an alternative site-neutral payment rate, generally based on IPPS rates, for Medicare inpatient discharges from an LTCH that fail to meet certain statutory-defined, patient-level clinical criteria, beginning with LTCH discharges occurring in cost reporting periods beginning on or after October 1, 2015. Under the patient-level clinical criteria, LTCHs will be reimbursed under LTCH PPS only if, immediately preceding the LTCH admission, the patient was discharged from a general acute care hospital paid under IPPS and the patient’s stay included at least three days in an intensive care unit or coronary care unit, or if the patient is assigned to an MS LTC DRG for cases receiving at least 96 hours of ventilator services in the LTCH. Patient’s discharge from an LTCH with a principal diagnosis relating to psychiatric or rehabilitation services may not be reimbursed under LTCH PPS. LTCHs will be paid a lower “site neutral” payment rate for Medicare patients who do not meet the patient-level clinical criteria. This site-neutral payment rate equals the lower of (1) the IPPS comparable per diem payment rate (including any outlier payments), or (2) 100% of the estimated costs for services. The final rule establishes patient-level clinical criteria and addresses implementation issues, including the transitional blended payment rate methodology for FYs 2016 and 2017. The final rule also confirms that CMS will apply the existing 25 percent rule to all LTCH cases regardless of whether the site-neutral payment rate is applicable. CMS projects that payments for these site neutral payment rate cases will decrease by approximately 14.8% (or about $300 million). On the other hand, about 54% of LTCH cases are expected to meet the criteria for exclusion from the site neutral payment rate in FY 2016, and will be paid based on the LTCH PPS standard federal payment rate.