On April 14, 2008, a display copy of the proposed rule updating the inpatient hospital payment system (IPPS) for FY 2009 (Proposed Rule) was posted by the Centers for Medicare and Medicaid Services (CMS) to its website on the Internet. The full text of the Proposed Rule, which is slated for publication in the Federal Register on April 30, 2008, may be accessed online. The Proposed Rule, which is replete with changes affecting hospital reimbursement, will apply to discharges beginning October 1, 2008. Comments must be received by June 13, 2008. A final rulemaking from CMS is expected in early August.

There are a number of major policy changes in the Proposed Rule for which hospitals must be prepared. The shifting focus of the Medicare program on quality (rather than cost) continues be the driving force behind many changes in the Proposed Rule. The groundwork for the CMS-envisioned "Value-Based Purchasing Program" is being laid to ease the next fundamental transition in payment for hospitals. In the meantime, the Proposed Rule implements and refines the severity-adjusted, or MS-DRG, system of payment that was begun last year. Highlights from the Proposed Rule's 1200-plus pages are set forth below:


CMS proposes the following basic payment changes for FY 2009: (1) a market basket update of 3 percent, with hospitals successfully reporting quality measures in FY 2008 receiving the full update, and hospitals not successfully reporting quality measures receiving an update of only 1 percent; (2) a 0.9 percent reduction in payment rates; and (3) an outlier threshold of $21,025 (down from $22,185 in FY 2008). The 0.9 percent reduction in payment rates is designed to account for changes in coding practices that would otherwise result in increased payments under the MS-DRG system, purportedly without a change in a hospital's actual patient case mix.

With respect to the FY 2009 wage index, CMS proposes a national average hourly wage of $32.2252, which reflects a 4.2 percent increase over FY 2008; and a state-wide (rather than national) budget neutrality adjustment for rural and imputed rural wage index floors. CMS also proposes to change to its geographic reclassification policies in the form of revisions to the average hourly wage comparison criteria for individual and county group reclassifications. With respect to individual reclassifications, CMS proposes to require urban hospitals to have an average hourly wage that is at least 88 percent of the average hourly wage in the area to which it seeks reclassification (as opposed to the current 84 percent threshold). County group reclassifications will also be set at 88 percent. The percentage for rural hospitals will be 86 percent, up from the current 82 percent threshold. Additionally, CMS reminds providers that all Section 508 reclassifications expire on September 30, 2008.

In FY 2009, relative weights for MS-DRGs will be based 100 percent on costs, thus completing the three-year transition from charged-based to cost-based weights. 

Also, CMS proposes to add a cost center to allow costs and charges for inexpensive medical supplies to be reported separately from more expensive devices. The revised cost reporting form will be available for use during FY 2009. With respect to post-acute transfers, CMS proposes to increase the time frame under which the post-acute transfer policy is applied to discharges to home under a written plan for home health services. The new policy would apply the post-acute transfer policy to services beginning within seven days from the day of discharge, rather than the current three-day timeframe. CMS also proposes an annual July 1 deadline for new technology applicants to receive FDA approval or clearance in order to allow CMS to review applications for new technology add-on payments. Finally, CMS is seeking six additional hospitals to participate in a 15-provider rural community hospital demonstration program. 


The Proposed Rule reflects the growing focus on quality, which will continue to be an issue for providers with respect to not only payment, but also compliance and enforcement.

Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU)

Under section 5001(a)(2) of the Deficit Reduction Act, hospitals that do not participate in the RHQDAPU program or do not comply with the program's reporting requirements will have their annual payment update reduced by 2.0 percentage points for that fiscal year. CMS is proposing to expand the set of quality measures under the RHQDAPU program by 43 (1 measure for "SCIP Cardiovascular 2"; 4 nursing sensitive measures; 3 readmission (pneumonia, heart attack and heart failure) measures; 6 measures related to venous thromboembolism; 5 stroke measures; 9 AHRQ measures and 15 measures for cardiac surgery). This would be the most substantial single increase to the set of quality measures since they were originally introduced in the RHQDAPU program. If adopted, 72 quality measures will be used for the FY 2010 IPPS annual payment determination. CMS is also soliciting public comment on a number of RHQDAPU program issues including (1) identifying measures that may be suitable for retirement; (2) updating existing measures through a subregulatory process; and (3) waiving the submission of patient level data for hospitals with five or fewer reportable discharges in a reporting period. The current reconsideration and appeal procedures for the RHQDAPU program, finalized in the FY 2008 IPPS rulemaking, would remain in effect under the Proposed Rule. The deadline for submitting a request for reconsideration in connection with the FY 2009 payment determination is November 1, 2008.

Hospital-Acquired Conditions (HACs), U Coding and Readmissions

Beginning October 1, 2008, CMS will no longer pay hospitals a higher weighted MS-DRG for eight HACs, identified in the FY 2008 IPPS rule, acquired during an inpatient stay. The agency proposes to add 9 categories of conditions to the HAC list including several conditions identified by the National Quality Forum (NQF) as "never events." These include: surgical site infections following total knee replacement, laparoscopic gastric bypass and gastroenterostomy, and ligation and stripping of varicose veins; Legionnaires' disease; glycemic control; iatrogenic pneumothorax; delirium; ventilator-associated pneumonia; deep vein thrombosis/pulmonary embolism; staphylococcus aureus septicemia; and Clostridium difficile associated disease. Additionally, in an effort "to foster better medical record documentation," CMS is proposing to not pay for HACs coded with the "U" indicator. The "U" option indicates that the medical record documentation was insufficient to determine if the condition was present at admission. While acknowledging that any payment adjustments for readmissions would likely require new statutory authority, the agency is also soliciting comments regarding the use of reporting incentives and payment adjustments to reduce avoidable hospital readmissions.

Stark Law and Fraud and Abuse

Physician Hospital Ownership Disclosure

In the Proposed Rule, CMS is making several changes to close what it perceives are loopholes in the current physician-owned hospital disclosure rules. The definition of physician-owned hospital is changing to be consistent with Stark Law by including not only ownership by physicians but also immediate family members of physicians. CMS also proposes that physicians, as a condition of continued medical staff membership and exercise of admitting privileges, disclose, at the time of referral to a physician-owned hospital, any ownership or investment interest they or an immediate family member have. Finally, CMS proposes termination of a provider agreement as a remedy if the physician-ownership disclosures are not made timely, or if a hospital fails to provide the currently required notification that a physician is not on premises at all times.

Stark Period of Disallowance

In the Proposed Rule, CMS addresses how long a Stark Law violation lasts. For non-financial violations, such as a missing signature, the Stark taint will end when the violation is corrected. Where noncompliance is due to excess or insufficient compensation, the disallowance period will end when the arrangement is brought into compliance and excess compensation is returned or additional required compensation is paid, as applicable. Corrections of Stark Law violations will not, however, convert prohibited referrals made during the period of disallowance into permissible referrals.

If a prohibited arrangement (1) is not corrected; (2) is terminated prior to the correction; or (3) relates to a compensation violation other than an under or overpayment, CMS refuses to prescribe a period of disallowance, instead citing a case-by-case determination of the duration of disallowance.

Physician Stand in the Shoes

The Stark Phase III final rule treats referring physicians as "standing in the shoes" of their physician organizations for the purpose of applying the compensation rules. In essence, physician organizations were disregarded and physicians were treated as having a direct relationship with designated health services (DHS) entities.

Many academic medical centers and integrated healthcare systems (IHS) were concerned that this rule would prohibit support payments, such as mission support payments (e.g., fund transfers from an academic medical center to a faculty practice plan). In response, CMS delayed the implementation of the rule for some entities until December 8, 2008.

CMS offers two alternative approaches to address the concerns. Under the first approach, CMS would not treat a physician as standing in the shoes of a physician organization if the compensation arrangement between the physician organization and the physician satisfies the Stark (1) bona fide employment relationship exception; (2) personal services exception; or (3) fair market value compensation exception (Direct Compensation Exception). Thus, if a physician's compensation doesn't satisfy a Direct Compensation Exception, the physician will continue to be treated as standing in the shoes of the physician organization. Moreover, all physician owners and investors would continue to stand in the shoes of the physician organization, although CMS is seeking comments to address situations where a physician has a nominal ownership interest (e.g., captive P.C. in a corporate practice of medicine state).

Under the second proposal, for which no proposed language was provided, CMS is seeking comments on whether the agency should develop a separate Stark exception for support payments.

Entity Stand in the Shoes

CMS previously proposed a corollary "stand in the shoes" rule that applied to DHS entities. CMS felt this rule was necessary to preclude parties from avoiding the Stark Law by inserting an entity between a DHS entity and a referring physician. Many commenters, however, felt that the rule was overly broad. As a result, in the Proposed Rule, CMS proposes to treat an organization as standing in the shoes of a DHS entity only if the DHS entity is the sole owner of the organization. The Proposed Rule also provides several conventions to coordinate the application of the physician and entity stand in the shoes rules.


In the Proposed Rule, CMS is also seeking comments on the establishment of a gainsharing exception and whether it should more specifically regulate physician investments in implant and other medical device manufacturing, distribution and purchasing companies


In response to recommendations submitted by the Emergency Medical Treatment And Labor Act (EMTALA) Technical Advisory Group, established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), CMS is proposing to clarify EMTALA's "specialized care" requirements as they apply to hospital inpatients. The new provision would require a hospital with specialized capabilities to accept the appropriate transfer of an individual who was admitted as an inpatient at another hospital and remained unstable with an emergency medical condition, provided the hospital has the capacity to treat that individual. CMS is also requesting comment on applying EMTALA obligations to participating hospitals with specialized capabilities when a patient who currently has an unstabilized emergency medical condition had a period of stability prior to transfer. In addition, CMS is proposing to revise the EMTALA regulations to allow hospitals to comply with the on-call list requirement by participating in a formal community call plan, provided the plan contains certain requisite elements.