On May 1, 2009, a display copy of the proposed IPPS rule for FY 2010 (Proposed Rule) was posted on the Centers for Medicare and Medicaid Services (CMS) website. The full text of the Proposed Rule is slated for publication in the Federal Register on May 22, 2009.

The revised policies and payment rates contained in the Proposed Rule could result in a $979 million decrease in payments to participating hospitals in FY 2010 and will apply to discharges beginning October 1, 2009. Comments must be received by June 30, 2009. A final rulemaking from CMS is anticipated in early August. Highlights from the Proposed Rule’s 1200-plus pages are summarized below.


CMS proposes the following payment changes for FY 2010: (1) a market basket update of 2.1 percent, with hospitals that successfully report quality measures receiving the full update, and those that do not report such measures receiving a 0.1 percent update as required by the Deficit Reduction Act of 2005 (DRA); (2) a 1.9 percent reduction in payment rates to account for the effect of the classification or coding changes discussed below; and (3) an increase in the outlier threshold to $24,240 to keep outlier payments equal to 5.1 percent of total payments under IPPS.

The Proposed Rule contains three additional cost categories that previously had not been separated in the FY 2002-based IPPS market basket, including blood and blood products, administrative and business support services and financial services. Another separate cost category, photo supplies, will be merged into the chemical cost category. Revisions of multiple price proxies also are included in the Proposed Rule.

Pursuant to the Medicare Prescription Drug Improvement, and Modernization Act of 2003 (MMA), the market basket for FY 2010 will be rebased using FY 2006 data. Under the rebased cost category weights, CMS calculates a labor-related share of 67.062 percent, almost three percentage points lower than the current labor-related share of 69.731.

An Indirect Medical Education (IME) multiplier of 1.35 will be used to calculate the IME payment adjustment for discharges beginning in FY 2010, resulting in a 5.5 percent payment increase for every approximately ten percent increase in a hospital’s resident-to-bed ratio.

Congressional efforts in the American Recovery and Reinvestment Act of 2009 (ARRA) to spare teaching hospitals from the loss of the IME capital adjustment may prove to be short-lived. While the ARRA prohibited CMS from reducing the IME capital adjustment by 50 percent in FY 2009, it did not prevent the agency from eliminating 100 percent of the adjustment for FY 2010 and beyond. In the Proposed Rule, CMS reiterates its intention to eliminate the adjustment, making future congressional action necessary for reviving the payment adjustment.  

Wage Index

In the FY 2009 final rule, CMS adopted a policy, to be phased in over a three-year period, that applies a budget neutrality adjustment to the rural and imputed floors within a state, rather than on a national basis. Consequently, in FY 2009, hospitals received a 20 percent state level and an 80 percent national blended wage index adjustment. In FY 2010, the wage index will reflect a 50/50 state/national blend. In FY 2011, the adjustment will be transitioned fully to 100 percent of the state level adjustment.

The Proposed Rule also continues the two-year phase-in of the FY 2009 geographic reclassification policy adjustments involving the average hourly wage comparison criteria for individual and county group reclassifications. The average hourly wage standards in FY 2010 will change to 86 percent for urban and group classifications and 84 percent for rural hospitals.


Although CMS applied a negative 0.6 percent documentation and coding adjustment to the Medicare Severity Diagnosis Related Groups (MS-DRG) payment rates in FY 2008, the agency now says that in FY 2008, provider behavioral changes actually increased payments by 2.5 percent with heart failure, chronic obstructive pulmonary disease, simple pneumonia and pleurisy being the “top contributors.”

Under the Transitional Medical Assistance, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), CMS must adjust payment rates in FY 2010, 2011 and 2012 if a retrospective review of FY 2008-2009 claims data shows a difference between hospitals’ documentation and coding practices and the amount of the adjustment made by the TMA. Accordingly, the agency is proposing a 1.9 percent reduction in payment rates to account for the effect of classification or coding changes that otherwise would result in increased payments under the MS-DRG system, purportedly without an actual change in a hospital’s patient case mix. While CMS has the authority to implement a rate reduction to recoup payments resulting from prior year provider behavioral changes above and beyond the 0.6 percent cut previously applied, the agency says it will address this issue in a future rulemaking and is seeking public comment on the appropriate methodology and analysis.

Other proposed changes include: (1) applying the documentation and coding adjustments to sole community hospitals (SCHs), Medicare-dependent hospitals (MDHs) and Puerto Rico hospitals; (2) reassigning complex cases involving patients who have received hip or knee joint replacements, but have contracted an infection that requires the removal of the prosthesis and inpatient hospitalization to higher paying MS-DRGs; (3) creating a new edit to identify cases in which wrong surgeries occurred for purposes of implementing wrong-site surgery coverage determinations; and (4) making limited revisions to the Complications or Comorbidity Exclusion List to take into account the changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2009.

Although CMS is not proposing any policy changes to MS-DRG relative weights in the Proposed Rule, the agency is requesting comments on options for improving the standardization process to remove more precisely cost differences across hospitals.

Disproportionate Share Hospitals (DSH)

CMS proposes to change its policies for counting inpatient days, labor and delivery days and observation days to calculate DSH payments.

Under the Proposed Rule, if a patient occupied an inpatient bed at any time during her hospital admission, ancillary labor and delivery days will be included in the DSH calculation. According to current policy, ancillary labor and delivery days are counted only if the patient occupied a routine bed prior to occupying an ancillary labor and delivery bed before the census-taking hour. Moreover, the current policy applies even to rooms where labor, delivery and postpartum care all occur in the same bed, requiring hospitals to allocate a certain portion of the patient’s stay to labor and delivery days.

The agency proposes to reverse this policy and count patient days associated with beds for labor and delivery days even when the patient did not occupy a routine bed prior to occupying an ancillary bed, and regardless of whether the patient occupies a “maternity suite” in which labor, delivery, recovery and postpartum care all take place in the same room. This change is consistent with the IPPS treatment of such services (i.e., they are paid as inpatient services) and with the language of the DSH statute. A number of hospitals routinely have been appealing the exclusion of their labor and delivery days to the Provider Reimbursement Review Board (PRRB), challenging CMS’s current policy. The Proposed Rule change, which would be applied prospectively only, represents a quiet acceptance of the arguments hospitals have been advancing in their appeals.

The Proposed Rule also allows hospitals to report Medicaid inpatient days (the numerator of the Medicaid fraction for the DSH calculation) based on either the date of admission, the date of discharge or dates of service. Under current policy, CMS requires hospitals to report such days based on the date of patient discharge. A hospital that chooses to change its methodology for counting days will be required to notify CMS in advance.

Effective for cost reporting periods beginning on or after October 1, 2009, CMS proposes to exclude observation beds and patient days from the DSH calculation under the rationale that observation services are services furnished to outpatients of the hospital, and such days, even for a patient who subsequently is admitted as an inpatient, should not be considered inpatient days for DSH payment purposes. This proposed change would apply to the available bed count used for both DSH and IME payment purposes.