The Centers for Medicare & Medicaid Services (CMS) has released its final rule to update Medicare acute hospital inpatient prospective payment system (IPPS) and long-term care hospital (LTCH) prospective payment system (PPS) payments and policies for fiscal year (FY) 2017. With regard to the IPPS, CMS projects that the cumulative rate and policy changes in the final rule will increase total IPPS payments by about $746 million in FY 2017 compared to FY 2016. The rule provides a 0.95% operating payment rate update for hospitals that submit quality data and are meaningful users of Electronic Health Records (EHRs). This update reflects a 2.7% market basket update, adjusted by a -0.3 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 1.65% update. 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 “Two Midnight Policy” adjustment adopted in the final FY 2014 rule.

Updates to IPPS hospitals are subject to several quality-related adjustments. For instance, hospitals that do not successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program are subject to a one-quarter reduction in their market basket update. Furthermore, hospitals that are not meaningful EHR users are subject to a separate reduction equal to three-quarters of the market basket update under the EHR Incentive Program. Additionally, hospitals face a 1.0 percent reduction if they are in the lowest performing quartile under the Hospital Acquired Condition (HAC) Re25duction Program. CMS estimates that 2,588 hospitals will be subject to payment reduction in FY 2017 under the Hospital Readmissions Reduction Program (HRRP), and a total of about $1.8 billion in payments will be made under the Hospital Value-Based Purchasing (VBP) Program. The final rule makes numerous changes to these hospital quality programs, including updates to various quality measures, data submission requirements, and public reporting policies.

CMS also is finalizing regulations 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 individuals who receive observation services as an outpatient for more than 24 hours about their status and the implications of receiving such services as an outpatient. While CMS has developed a standard notice, the “Medicare Outpatient Observation Notice” (MOON) to fulfill the written notice requirement, the notice is still going through the Paperwork Reduction Act (PRA) approval process, which affords a 30 day public comment period. Once the comment period ends and the document is approved, hospitals and CAHs must begin using the MOON no later than 90 days from the date of approval.

The final rule addresses, among many other things: changes to IPPS MS-DRG classifications and recalibration of relative weights; new technology add-on payment applications (CMS did not adopt a proposal to discontinue in-person new technology town hall meetings); rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis; and distribution of almost $6 billion in Medicare disproportionate share hospital (DSH) allotments (with certain changes to the methodology for determining DSH payment amounts). In addition, CMS finalized its August 17, 2015 interim final rule provisions that extended the Medicare-dependent, small rural hospital program and changes to the low-volume payment adjustment for hospitals through FY 2017.

With regard to LTCHs, the final FY 2017 standard federal rate is $42,476.41, compared to the FY 2016 rate of $41,762.85. CMS is updating rates by an adjusted market basket increase of 1.75%. This update reflects a 2.8% market basket increase (using a rebased 2013-based LTCH PPS market basket), less a 0.3 percentage point MFP adjustment and an additional 0.75 percentage point reduction required by statute. Nevertheless, CMS projects that LTCH PPS payments will be reduced by 7.1% ($363 million) in FY 2017. While a portion of the 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. Application of the site-neutral payment rate is subject to a transition period that began with cost reporting periods beginning on or after October 1, 2015 through September 30, 2017. During the transition, Medicare cases not meeting the new criteria are paid a blended rate comprised of 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.

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. CMS estimates that total payments for LTCH PPS standard federal payment rate cases will increase by approximately 0.7% (about $24 million). On the other hand, CMS estimates that the rule will decrease estimated aggregate LTCH PPS payments for site neutral payment rate cases in FY 2017 by approximately 23% (about $388 million).Note that LTCHs also are subject to a 2.0 percentage point reduction to the annual update for failure to submit data under the LTCH QRP.

In addition, the final rule consolidates “25 percent threshold” policy regulations and bases an LTCH’s percentage of discharges referred from any hospital on a provider number basis only, applicable for discharges on or after October 1, 2016 that occur in its first cost reporting period that begins after the statutory moratoria on the full implementation of the current 25-percent threshold policy expire for the LTCH. Specifically, CMS is establishing that an LTCH’s percentage of Medicare discharges from a given hospital will be determined by dividing the LTCH’s number of Medicare discharges in the cost reporting period (based on the LTCH’s CMS Certification Number (CCN) that were admitted directly from a given referring hospital (based on the hospital’s CCN) that did not receive a high-cost outlier payment during the stay at that referring hospital by the LTCH’s total number of Medicare discharges in the cost reporting period (based on the LTCH’s CCN). CMS also finalized an interim final rule to implement a Consolidated Appropriations Act, 2016 provision that established a temporary exception from the site neutral payment rate for certain LTCH wound care discharges. Furthermore, CMS updated measures used in the LTCH QRP and the Inpatient Psychiatric Facility QRP.

The official version of the rule is scheduled to be published August 22, 2016.