CMS has published its proposed rule to update the Medicare acute hospital inpatient prospective payment system (IPPS) and long-term care hospital (LTCH) prospective payment system (PPS) for fiscal year (FY) 2017.

With regard to the IPPS, CMS projects that the cumulative rate and policy changes in the proposed rule would increase total IPPS payments by about $539 million in FY 2017 compared to FY 2016. The proposed rule would provide for a 0.9% operating payment rate update for hospitals that submit quality data and are meaningful users of Electronic Health Records (EHRs). This update reflects a 2.8% market basket update, adjusted by a -0.5 percentage point multi-factor productivity (MFP) adjustment and an additional -0.75 percentage point adjustment (as mandated by the Affordable Care Act, or ACA), resulting in a 1.55% update to standardized amounts. This update is subject to an additional -1.5 percentage point documentation and coding recoupment adjustment required by the American Taxpayer Relief Act of 2012, and a one-time increase of approximately 0.8 percentage points to permanently negate the cumulative impact of a controversial “Two Midnight Policy” adjustment adopted in the final FY 2014 rule.

Updates to IPPS hospitals are subject to several quality-related adjustments under the Hospital Value-Based Purchasing (VBP) Program, the Hospital Readmissions Reduction Program (HRRP), 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. Furthermore, hospitals that are not meaningful EHR users are subject to a separate reduction equal to half of the market basket update. Specific hospital payments can be impacted by a variety of other factors, including penalties for excess readmissions and poor performance under the HAC Reduction Program, and bonuses and penalties under the Hospital VBP Program.

The proposed rule would make numerous changes to hospital quality programs, including updates to various quality measures, performance periods, data submission requirements, and public reporting policies. CMS also proposes to implement the Notice of Observation Treatment and Implications for Care Eligibility Act (NOTICE Act) by specifying the process for hospitals and critical access hospitals to notify an individual, orally and in writing, regarding the individual’s receipt of observation services as an outpatient for more than 24 hours and the implications of receiving such services on cost sharing and post-hospitalization eligibility for Medicare coverage of skilled nursing facility services. CMS has developed a standard notice, the “Medicare Outpatient Observation Notice” (MOON) that would include all of the informational elements necessary to fulfill the NOTICE Act’s written notice requirement. In addition, CMS addresses, among many other things: proposed changes to MS-DRG classifications and recalibration of relative weights, new technology add-on payment applications, rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis, and distribution of Medicare disproportionate share hospital (DSH) allotments.

With regard to LTCHs, the proposed rule would provide for a standard federal rate of $42,314.31. CMS is updating rates by an adjusted market basket increase of 1.45% (reflecting a 2.7% market basket increase, less a proposed 0.5 percentage point MFP adjustment and an additional 0.75 percentage point reduction required by statute). Nevertheless, CMS estimates that overall LTCH PPS payments would decrease by 6.9% (approximately $355 million) under the proposed rule.

Although a portion of the estimated decrease is a result from reduced high-cost outlier payments, CMS attributes the bulk of this cut to continued phase-in 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. Application of the site-neutral payment rate is subject to a transition period that commenced with cost reporting periods beginning on or after October 1, 2015 through September 30, 2017. During the transition, a blended rate will be paid for Medicare patients not meeting the new criteria. The blended rate will comprise half the site-neutral payment rate and half the LTCH-PPS payment rate. The full site-neutral payment rate applies for all Medicare patients not meeting the new criteria in cost reporting periods beginning on or after October 1, 2017.

Under the patient-level clinical criteria, LTCHs will be reimbursed under LTCH PPS only if, immediately preceding the patient’s 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 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. For any Medicare patient who does not meet the patient-level clinical criteria, the LTCH will be paid a lower “site neutral” payment rate, which will be the lower of (1) the IPPS comparable per diem payment rate including any outlier payments, or (2) 100% of the estimated costs for services. CMS expects approximately 55% of LTCH cases to meet the patient-level criteria for exclusion from the site neutral payment rate in FY 2017; those cases will be paid based on the LTCH PPS standard federal payment rate (note that LTCHs are subject to a 2.0 percentage point reduction to the annual update for failure to submit data under the LTCH Quality Reporting Program). CMS estimates that the payments per discharge for LTCH PPS standard federal payment rate cases will increase 0.3% on average. On the other hand, CMS estimates that the proposed rule would decrease estimated aggregate LTCH PPS payments to site neutral payment rate cases in FY 2017 by approximately $367 million (or approximately 21%). CMS proposes other revisions to LTCH policies, including consolidation of its “25 percent threshold” policy regulations.

CMS proposed changing the 25% rule that applies to LTCH. Currently, the 25% rule payment adjustments are found in two Medicare regulations, one that applies to Medicare patients admitted from a co-located referring hospital and one that applies to Medicare patients admitted from a referring hospital not co-located with the LTCH. CMS is now proposing a single 25% rule that would apply to LTCH discharges on or after October 1, 2016. Under this proposal, CMS would calculate the percentage of LTCH discharges referred from any hospital on a provider number basis only.

CMS is also proposing to rebase the LTCH-specific market basket for FY 2017. Under the proposal the 2009-based LTCH-specific market basket that is currently used to calculate the standard federal payment rate for LTCHs would be replaced with a 2013-based LTCH-specific market basket that is based on Medicare cost report data from cost reporting periods beginning on or after October 1, 2012 and before October 1, 2013.

The rule was published on April 27, 2016. CMS will accept comments on the proposed rule until June 17, 2016. Once finalized, the policies and rates generally will apply to discharges occurring on or after October 1, 2016.