On April 30, 2015, the Centers for Medicare & Medicaid Services (CMS) is publishing 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) 2016.  CMS will accept comments on the proposed rule until June 16, 2015. The final rule will be published by August 1, 2015, and generally will apply to discharges occurring on or after October 1, 2015.

With regard to the IPPS, CMS projects that the rate and policy changes in the proposed rule would increase IPPS operating payments by approximately 0.3%, or about $120 million in FY 2016. The proposed rule would provide for a 1.1% operating payment rate update for hospitals that submit quality data and are meaningful users of Electronic Health Records (EHR). This update reflects a 2.7% market basket update, adjusted by a -0.6 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.

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. 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 CMS estimates would equal 0.675 percentage points. Hospital that are not meaningful EHR users would be subject to a separate reduction equal to half of the market basket update in FY 2015 (currently estimated to be a 1.35 percentage point reduction).

The proposed rule also would make numerous changes to hospital quality programs, including updates to quality measures. CMS also would increase the reduction to base diagnosis related group (DRG) payments under the Hospital VBP Program from 1.5% to 1.75%. 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, distribution of Medicare disproportionate share hospital (DSH) allotments in accordance with the ACA, and a potential future expansion of the Bundled Payments for Care Initiative.

With regard to LTCHs, the proposed rule would provide for a standard federal rate of $41,884, reflecting an adjusted market basket increase of 1.9%. Nevertheless, CMS estimates that LTCH PPS payments would decrease by 4.6% (approximately $250 million) under the proposed 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 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.

The proposed rule would establish the patient-level clinical criteria by adopting a new rule at 42 C.F.R. § 412.522 and address implementation issues, including the transitional blended payment rate methodology for FYs 2016 and 2017. CMS projects that payments for these site neutral payment rate cases will decrease by approximately 14.3% (or about $293 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 be paid based on the LTCH PPS standard federal payment rate. CMS projects that payment for those cases that qualify for the standard LTCH PPS payment rate will increase by 1.9%, reflecting a 2.7% market basket update reduced by a 0.6 percentage point multi-factor productivity adjustment and an additional adjustment of -0.2 percentage point under the ACA.