Originally published by AHLA on August 18, 2016 and September 6, 2016

On August 2, 2016, the Centers for Medicare & Medicaid Services (CMS) issued its Fiscal Year (FY) 2017 Inpatient Prospective Payment System (IPPS) final rule, which becomes effective on October 1, 2016 and was published in the Federal Register on August 22, 2016. The comprehensive rule makes various changes that will affect about 3,330 acute care hospitals, according to the rule's associated CMS fact sheet. The rule also will affect about 430 long term care hospitals (LTCHs) through updates to the LTCH Prospective Payment System. This email alert will focus on some of the IPPS final rule's major provisions, including changes to several Medicare value-based programs and new guidance regarding notice to outpatients receiving observation services.

Under the final rule, CMS will increase FY 2017 operating payment rates by about 0.95% for general acute care hospitals paid under the IPPS that submit quality data through the Hospital Inpatient Quality Reporting Program and are meaningful electronic health record (EHR) users. This overall 0.95% increase results from the following: (1) a 2.7% hospital market basket update; (2) a 0.3% cut based on changes in economy-wide productivity (the multifactor productivity adjustment); (3) a 0.75% reduction that the Affordable Care Act requires; (4) a 1.5% cut due to Medicare Severity Diagnosis-Related Group (MS-DRG) documentation and coding issues; and (5) an increase of about 0.8% to remove the two-midnight rule adjustment and address its effects in prior years. The last two of these factors are discussed below. The 2.7% market basket update is subject to further reductions, by one-quarter for hospitals that fail to submit quality data and by three-quarters for hospitals that are not meaningful EHR users. CMS also estimates that payments for uncompensated care (including Medicare disproportionate share hospital payments) will reduce overall FY 2017 payments by about 0.4%. In total, CMS believes that cumulative Medicare payments, both operating and capital, to IPPS hospitals in FY 2017 will increase by about $746 million.

MS-DRG Documentation and Coding Adjustment

In the final rule, CMS has finalized a 1.5% cut in recoupment adjustments that Congress required as part of the American Taxpayer Relief Act of 2012 (ATRA). Enacted on January 2, 2013, the ATRA required CMS to adjust Medicare payments to acute care hospitals in FY 2014 through FY 2017 to recoup $11 billion of overpayments that were believed to have resulted after CMS implemented the MS-DRG system in FY 2008 to more fully account for the severity of illness in Medicare payment rates. CMS believed that the ATRA's and prior payment adjustments were necessary to counteract the increased payments that documentation and coding under the new system could have led to without an associated increase in patient illness severity. Although CMS' actuaries had estimated that a 9.3% cut would be needed to recover the ATRA's mandated $11 billion in one year, CMS spread the effect over several years by implementing a 0.8% cut in FYs 2014 through 2016. Despite pressure from the industry to renew the 0.8% reduction in FY 2017, CMS believes that this year's 1.5% reduction is necessary to recover the entire $11 billion, as required by the end of FY 2017.

Previously, CMS had anticipated offsetting the ATRA-required reductions through a single positive adjustment in FY 2018 once the $11 billion overpayment was recovered. However, the Medicare Access and CHIP Reauthorization Act (MACRA) of 2015 requires CMS to instead make a 0.5% positive adjustment each year from FY 2018 through FY 2023. Because this provision does not impact FY 2017's 1.5% reduction, CMS will address the MACRA required adjustments in a future rule.

Two-Midnight Rule Adjustment

When CMS adopted the two-midnight policy in the FY 2014 IPPS final rule, it implemented a 0.2% rate cut to offset the $220 million in FY 2014 IPPS expenditures that it expected to result from increased inpatient admissions. Hospitals challenged this payment reduction, including through litigation. Despite defending the assumptions underlying the reduction as "reasonable" when they were made, CMS has removed the reduction in the final rule and, for FY 2017 only, is increasing rates to address the reduction's effects in FYs 2014 through 2016. Together, these changes will increase FY 2017 rates by about 0.8%.

Value-Based Programs

CMS indicated that many of the rule's provisions reflect efforts to pay providers for providing quality care to beneficiaries. For example, as noted above, the FY 2017 operating payment rates of general acute care IPPS hospitals depend upon each hospital's participation in the Hospital Inpatient Quality Reporting Program and status as a meaningful EHR user. In addition, the final rule makes several changes to Medicare's value-based programs, including the following:

  • Hospital Readmissions Reduction Program: Under this program, CMS reduces a hospital's payments to account for excess readmissions for the following: acute myocardial infarction, heart failure, pneumonia, total hip arthroplasty/total knee arthroplasty, chronic obstructive pulmonary disease, and, effective FY 2017 through prior rulemaking, coronary artery bypass graft (CABG). In the final rule, CMS revised the methodology to include CABG in the calculation of the FY 2017 readmissions payment adjustment, which (at least in part) resulted in CMS' estimate that 2,588 hospitals will receive reduced payments, saving Medicare $528 million in FY 2017 ($108 million more than the prior year). CMS stated that public reporting of excess readmission ratios will be posted annually on its Hospital Compare website as soon as possible after the 30-day review period (as early as October but possibly later to streamline reporting and align with other quality reporting and performance programs).
  • Hospital-Acquired Condition Reduction Program: CMS' five changes to this program (which incentives hospitals to reduce hospital-acquired conditions) include a switch to a continuous scoring methodology (specifically, the Winsorized z-score method), which CMS believes is straightforward, adaptable, transparent, and familiar to many stakeholders.
  • Hospital Value-Based Purchasing Program: CMS made several changes to this program, which makes value-based incentive payments to hospitals based on various performance measures, including the following: (1) adding two new measures for FY 2021 (related to acute myocardial infarctions and heart failure) and one new measure beginning FY 2022 (monitoring 30-day mortality rates after coronary artery bypass graft surgery); (2) finalizing an update to the 30-day pneumonia mortality measure for FY 2021; and (3) requiring that hospitals be cited for deficiencies that pose immediate jeopardy to patients on at least three (instead of two) surveys during the performance period before being excluded.

Implementation of the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act)

The IPPS final rule also finalized regulations (42 C.F.R. § 489.20(y)) to implement the NOTICE Act (42 USC 1395cc(a)(1)(Y)), which requires hospitals and critical access hospitals (CAHs) to provide certain written and oral notification to Medicare beneficiaries receiving outpatient observation services for more than 24 hours no later than 36 hours after observation services are first furnished to the patient pursuant to a physician's order. CMS has separately developed a standardized Medicare Outpatient Observation Notice (MOON) to be used for providing the written notification, which will be finalized on or around October 1, following review of public comments that closed September 1. While the NOTICE Act was effective August 6, full implementation and enforcement of its requirements will not be expected by CMS until 90 days following finalization of the MOON.

The final rule included only one modification to the proposed regulation, which is to provide that hospitals and CAHs may deliver the MOON at any time prior to the patient receiving 24 hours of observation services but in any event must deliver the MOON no later than 36 hours after the observation services are first initiated. However, CMS encouraged hospitals and CAHs to avoid implementing routine and systematic delivery of the notification at the initiation of observation status when the patient may be preoccupied with their health condition and overwhelmed by hospital paperwork.