On July 31, 2015, the Centers for Medicare and Medicaid Services (CMS) issued a final rule (Final Rule) updating fiscal year (FY) 2016 Medicare payment policies and rates under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital (LTCH) Prospective Payment System. While many hospitals will see increased Medicare reimbursement rates based on the changes to the 2016 IPPS, they would be wise to focus these gains on increased quality initiative resources. It is clear that CMS’s emphasis on quality, safety, and patient satisfaction is what will continue to drive reimbursement.

Overall, CMS estimates that the applicable statutory percentage increase to the IPPS rates, combined with other payment changes in the Final Rule, will result in an estimated $378 million increase in FY 2016 operating payments (or a 0.4 percent increase from FY 2015) and an estimated $187 million increase in FY 2016 capital payments (or a 2.3 percent change from FY 2015). CMS also estimates that 2,666 hospitals will have their base operating diagnosis-related group (DRG) payments reduced by their proxy FY 2016 hospital-specific readmissions adjustment, a reduction of approximately $420 million in FY 2016.

The Final Rule demonstrates the continued shift of inpatient hospital payments from a volume- to value-based payment system. Indeed, facilities that are unsuccessful in the Hospital Inpatient Quality Reporting (Hospital IQR) Program and those that fail to submit the required quality data will be subject to a one-fourth reduction of the market basket update. Additionally, hospitals may face up to another one-half percent reduction of the FY 2016 market basket for failing to meet meaningful use requirements under the Medicare Electronic Health Records (EHR) Incentive Program. Other quality-focused payment adjustments detailed by the Final Rule include continued penalties for readmissions, penalties for underperforming hospitals under the Hospital-Acquired Condition (HAC) Reduction Program, and continued bonuses and penalties for hospital value-based purchasing.

EHR Incentive Programs and Quality Reporting

Certain hospitals and critical access hospitals (CAHs) are eligible to receive incentive payments under the Medicare EHR Incentive Program for the adoption of certified electronic health record technology (CEHRT) if they successfully demonstrate meaningful use of the CEHRT. Meaningful use is demonstrated by reporting on certain clinical quality measures (CQMs).

In its proposed rulemaking, CMS proposed electronic reporting by hospitals under the Medicare EHR Incentive Program on a minimum of 16 CQMs covering at least three National Quality Strategy (NQS) domains. In an effort to reduce the burden on hospitals and align the Medicare EHR Incentive Program with the Hospital IQR Program, however, CMS revised its proposal to require hospitals to report on a minimum of four CQMs, with no domain distribution requirement. This rule applies to hospitals that elect to submit CQMs electronically, while hospitals that report CQMs by attestation are still required to report on a minimum of 16 CQMs covering at least three NQS domains. CMS noted its intention to increase the number of reportable electronic CQMs to the 16-measure requirement.

The Final Rule also aligns the reporting period for calendar year (CY) 2016 for eligible hospitals and CAHs that report CQMs electronically for the Medicare EHR Incentive Program with that of the Hospital IQR Program. CMS now requires quarterly reports and submission periods for CQMs in the third and fourth CY quarters for both programs. Additionally, CMS modified its proposed requirement that hospitals reporting CQMs through electronic submission report two full quarters of data (Q3 and Q4 of 2016). Instead, the Final Rule requires only the submission of one full quarter of data (either Q3 or Q4 of CY 2016), with a submission deadline of February 28, 2017.

The Hospital Inpatient Quality Reporting Program

Under the Hospital IQR Program, hospitals are required to report data on certain measures in order to receive the full annual percentage increase in payments. For the FY 2018 Hospital IQR Program, CMS updated the measures used for performance evaluation under the program, adding a total of seven new measures – three new claims-based measures and one structural measure for the FY 2018 payment determination, and three new claims-based measures for the FY 2019 payment determination. CMS removed nine chart-abstracted measures for the FY 2018 payment determination and for subsequent years. The Final Rule keeps the electronic versions of five of the chart-abstracted measures finalized for removal.

As outlined above regarding the EHR Incentive Program, CMS finalized a similar reporting requirement for hospitals under the Hospital IQR Program. Instead of electronically reporting 16 of the 28 electronic CQMs for CY 2016, under the Final Rule hospitals are required to report only a minimum of four of the 28 electronic CQMs and report these measures for only one, instead of two, quarters.

The Hospital Readmissions Reduction Program

To encourage efforts to reduce readmissions, the Hospital Readmissions Reduction Program imposes penalties on hospitals with higher than expected readmission rates for certain conditions. For FY 2016, CMS will continue to assess a maximum penalty of 3 percent of base Medicare payments.

The Final Rule refines the pneumonia readmissions measure by expanding the measure cohort to include patients with a principal discharge diagnosis of pneumonia or aspiration pneumonia and patients with a principal discharge diagnosis of sepsis with a secondary diagnosis of pneumonia coded as present on admission, effective for the FY 2017 payment determination and subsequent years. Notably, this change will increase the number of discharges hospitals include in this measure.

The Hospital Value-Based Purchasing Program

The Hospital Valued-Based Purchasing (VBP) Program, in an effort to improve quality, especially in the inpatient hospital setting, gives hospitals value-based incentive payments based on their performance against several measures. For FY 2016, CMS will fund the Hospital VBP Program by reducing the base operating DRG payment for hospitals for each discharge by 1.75 percent.

For FY 2016, CMS adopted one additional measure, a 3-Item Care Transition Measure (CTM-3). CMS is adding the CTM-3 measure from the HCAHPS Survey to the Patient and Caregiver Centered Experience of Care/Care Coordination Domain of the FY 2018 program year.

The Final Rule also removes two current measures beginning with the FY 2018 program year: (1) the IMM-2: Influenza Immunization measure because it has “topped out” (meaning performance on certain measures are so high that using it does not give CMS any useful comparison data); and (2) the AMI-7a: Fibrinolytic Therapy Received Within 30 Minutes of Hospital Arrival measure because many hospitals have less than the minimum number of cases required for reporting.

The Hospital-Acquired Condition Reduction Program

Under the ACA, applicable hospitals are incentivized to reduce hospital-acquired conditions through Medicare payment adjustments. Currently, hospitals in the bottom 25 percent of the HAC Reduction Program receive a 1 percent payment reduction.

The Final Rule includes several updates to the HAC Reduction Program, including the following key changes:

  • CMS finalized the 24-month time period – July 1, 2013, through June 30, 2015 – to collect data used to calculate the total HAC score for the Domain 1 measure (AHRQ PSI-90 Composite measure).
  • A narrative rule was added for calculating the Domain 2 score in instances where hospitals may not have data on all Domain 2 measures for use beginning in FY 2017.
  • CMS reduced the weight of Domain 1 (claims-based Patient Safety Indicator measure) from 25 percent to 15 percent and increased the weight of Domain 2 (healthcare-associated infection measures) from 75 percent to 85 percent.
  • HAC coverage was expanded to central line-associated bloodstream infection (CLABSI) and catheter-associated urinary tract infection (CAUTI) measures to include patients in select non-intensive care unit sites within a hospital, beginning with the FY 2018 HAC Reduction Program.
  • A new “extraordinary circumstances exception policy” was created for hospitals whose ability to accurately collect quality measure data and/or to report those data in a timely manner has been negatively impacted by a natural disaster or other extraordinary circumstance.

The Final Rule also addresses other programs and changes, including LTCH payment and quality reporting, Disproportionate Share Hospital payments, the Bundled Payments for Care Improvement initiative, and the Two-Midnight rule. The provisions in the Final Rule, which is slated for publication in the August 17, 2015, Federal Register, apply to discharges on or after October 1, 2015.