Health care providers should review the Proposed Rule on hospital payment policies posted by the Centers for Medicare and Medicaid Services (CMS) and consider submitting comments on the effects of the suggested provisions.

On Friday, May 21, 2010, the Centers for Medicare and Medicaid Services (CMS) posted a Proposed Rule that would implement various hospital-related provisions of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (referred to collectively as the Health Reform Law) that impact fiscal year (FY) 2011 proposed payment policies. This Proposed Rule supplements a notice published on May 4, 2010, that proposed a number of updates for Medicare hospital inpatient and long-term care hospital payments, but which did not address the various changes mandated by the Health Reform Law.

This On The Subject highlights certain of the key provisions addressed in the Proposed Rule.

Wage Index

The Proposed Rule makes several important changes to the wage index that could significantly impact hospitals in FY 2011. First, the Proposed Rule implements revisions to the average hourly wage comparison criteria required to qualify for wage index reclassification, which were mandated by the Health Reform Law. In 2008, CMS revised the criteria required to qualify for reclassification, thereby making it more difficult for nearly 250 hospitals to reclassify for purposes of the wage index. The Health Reform Law restored the more lenient standards in place in FY 2008: 84 percent for urban hospitals, 85 percent for group reclassifications, and 82 percent for rural hospitals. The Proposed Rule would now incorporate this change into regulations. Hospitals that could not qualify for reclassification under the heightened bar should re-examine their ability to qualify under the new lower criteria.

The Health Reform Law provides for a wage index floor of 1.00 for hospitals located in “Frontier States,” which were only loosely defined under the legislation as those where at least 50 percent of the state’s counties have a population density of less than 6 persons per square mile.

CMS analyzed population data and county definitions from the most recent Population Estimates published by the U.S. Census Bureau to determine each county’s population density. Based on this analysis, CMS identified five Frontier States for FY 2011: Montana, Wyoming, North Dakota, Nevada and South Dakota. CMS proposes to update the analysis to add or remove qualifying states “from time to time.”

Further, the Health Reform Law directs CMS to prepare a plan to reform the Medicare wage index applied under the Medicare Inpatient Prospective Payment System (IPPS). The plan must take into account the goals for reforming the wage index that were described in MedPAC’s June 2007 report, “Report to Congress: Promoting Greater Efficiency in Medicare.” CMS must submit the report to Congress by December 31, 2011. In the Proposed Rule, CMS solicits comments and suggestions from providers on how they may participate in developing the plan.

Low-Volume Hospital Adjustment

The Medicare Modernization Act of 2003 established a payment enhancement for hospitals located more than 25 road miles from another hospital and having fewer than 800 discharges. Eligible hospitals could receive as much as a 25 percent increase in payments based upon volumes. The Health Reform Law amended the criteria for qualifying as a low-volume hospital for FYs 2011 and 2012. Under new temporary criteria, a hospital can qualify if it is located more than 15 miles from another hospital and has less than 1600 Medicare discharges during the fiscal year.

CMS proposes to modify its regulations to reflect the revised criteria for FYs 2011 and 2012, and also proposes to add a new definition of “road miles” that tracks the current definition used for purposes of determining whether a hospital qualifies as a sole community hospital. The definition of “road miles” would continue in effect after FY 2012.

With respect to the discharge calculation, CMS proposes to include all discharges associated with individuals entitled to Medicare Part A benefits, including individuals who have exhausted their benefits or whose stay was not covered by Medicare. Beneficiaries enrolled in Medicare Advantage plans would also be included. In order to capture all discharges, CMS instructs that a hospital must submit a claim for all patients entitled to Medicare Part A, including a no-pay claim for patients enrolled in Medicare Advantage.

The Health Reform Law also revises the methodology for calculating the low-volume adjustment. Currently, CMS applies a 25 percent low-volume adjustment to all qualifying hospitals with fewer than 200 discharges. The Health Reform Law directs CMS to determine the applicable percentage increase in the low-volume adjustment using a continuous, linear sliding scale ranging from an additional 25 percent payment adjustment for hospitals with 200 or fewer discharges to 0 percent additional payment for hospitals with more than 1600 Medicare discharges. CMS proposes to apply the adjustment based on increments of 100 discharges, beginning with 200 or fewer discharges. Under the proposal, the applicable percentage increase would then decrease linearly in equal amounts by 1.6667 percent for every additional 100 Medicare discharges, up to 1599 discharges.

Extension of Medicare Dependent Hospitals

The Health Reform Law extended the Medicare Dependent Hospital (MDH) program through the end of FY 2012. The MDH program had been scheduled to expire at the end of FY 2011. The Proposed Rule reflects the extension of the MDH program.

Payments for Hospitals in Low Spending Areas

The Health Reform Law provides for additional payments in FY 2011 and 2012 for hospitals located in a county that ranks within the lowest quartile of counties based on its spending per enrollee for benefits under Medicare Parts A and B, adjusted for age, sex and race. The statute directs CMS to distribute the $400 million pool of funds set aside for this purpose to qualifying hospitals in proportion to the ratio of each such hospital’s FY 2009 IPPS operating hospital payments to the sum of total FY 2009 IPPS operating hospital payment made to all qualifying hospitals.

CMS proposes to determine age-, sex- and race-adjusted Medicare Part and B spending per enrollee by county using a methodology similar to the one used to calculate risk adjustment models for Medicare Advantage (MA) ratesetting. CMS further proposes to require a qualifying hospital to have existed as a subsection (d) hospital as of April 1, 2010, and to have received IPPS operating payments under their Medicare provider number in FY 2009. Applying its proposed methodology, CMS identified 415 IPPS hospitals eligible for additional payments.

CMS proposes to spread distribution of the $400 million across FY 2011 and 2012, paying out $150 million the first year and $250 million the second. Qualifying hospitals would receive one lump payment per year.

Extension of Long-Term Care Hospital Provisions

The Propose Rule reflects the Health Reform Law’s extension of various long-term care hospital (LTCH) provisions, most of which were self-implementing. Specifically, the Health Reform Law directed CMS to delay for an additional two years the application of (1) the very short stay outlier policy, (2) the one-time prospective adjustment to LTCH PPS rates under 42 C.F.R. § 412.523(d)(3), and (3) the 25 percent rules for free-standing, grandfathered and certain co-located LTCHs. However, the Health Reform Law also extends for an additional two years the moratorium on establishment of new LTCHs and LTCH satellite facilities and the addition of new beds to existing LTCHs or LTCH satellite facilities.