On August 18, 2008, the Centers for Medicare & Medicaid Services (CMS) published its final Medicare hospital inpatient prospective payment system (IPPS) rule for fiscal year (FY) 2009, which begins October 1, 2008. CMS estimates that the rate updates and other policies in the rule will increase Medicare payments to acute care hospitals by almost $4.75 billion in FY 2009, although the impact on particular procedures varies.  The following are highlights of the sweeping regulation.

  • Rate Update – The final rule includes a 3.6% market basket increase, although hospitals that do not report the quality measures will receive an update of market basket minus 2 percentage points, for a 1.6% update. This update will be partially offset by a 0.9% reduction designed to compensate for changes in documentation and coding practices that do not reflect real changes in case mix.  In FY 2009, CMS will complete the transition to cost-based relative weights, with relative weights based 100% on costs.
  • Value-Based Purchasing Program – CMS is expanding the Hospital-Acquired Conditions policy, under which Medicare will not make higher payments to hospitals for care associated with certain reasonably-preventable conditions unless the condition were reported as present on admission.  CMS has added three new conditions for FY 2009: certain manifestations of poor glycemic control; surgical site infections following certain orthopedic surgeries and bariatric surgery for obesity; and deep vein thrombosis or pulmonary embolism following total knee replacement and hip replacement procedures. In addition, CMS is adding 13 new quality measures for which hospitals will have to report data in FY 2009 in order to receive the full Medicare IPPS market basket update in FY 2010 (down from 43 new measures in the proposed rule) and retiring one previous measure (pneumonia/oxygenation assessment).  Both initiatives are designed to further CMS’s Value-Driven Health Care agenda.
  • Charge Compression/Cost Centers – CMS is establishing separate cost centers for (1) medical supplies and (2) implantable devices. CMS is adopting this change to help address “charge compression,” or the practice of hospitals applying a higher percentage charge markup over costs to lower-cost items and services and a lower-percentage charge markup over costs to higher cost items and services.
  • New Technology Payments – Under the final rule, CMS will only consider for new technology add-on payments for a particular fiscal year, an application for which the new medical service or technology has received Food and Drug Administration (FDA) approval or clearance by July 1 prior to the particular fiscal year.
  • Hospital Ownership/Physician Self-Referrals – The final rule includes significant revisions to hospital ownership and the physician self-referral provisions (also referred to as the “Stark Law”).  Among other things, the final rule prohibits the use of “per-click” leases for office space or equipment when the lease is entered into between a referring physician or physician organization and an entity that furnishes designated health services (DHS). The rule also prohibits the use of a percentage-based compensation formula for determining the rental charges for the lease of office space or equipment (but does not apply to management agreements, billing services arrangements, and gainsharing arrangements). The final rule also revises the definition of an “entity” to include both the entity that bills Medicare for DHS as well as the entity that fully performs the DHS. These provisions are effective October 1, 2009.  Moreover, the rule modifies the “stand in the shoes” provisions in the Stark Act definition of indirect compensation arrangement. Specifically, a physician owner of (or investor in) a physician organization stands in the shoes of the physician organization for the Stark purposes if the physician has the ability or right to receive financial benefits of the ownership or investment.  However, a merely titular owner is not required to (but may select to) stand in the shoes of his or her physician organization.  CMS also is finalizing its proposed revisions to the definitions of “physician” and “physician organization,” and clarifying the period of time for which a physician would be prohibited from referring Medicare patients to an entity for DHS and for which the DHS entity would be prohibited from billing for such DHS where a financial relationship failed to satisfy a Stark Act exception.  The final rule also requires a physician-owned hospital to furnish to patients, on request, a list of physicians or immediate family members who own or invest in the hospital. Moreover, a physician-owned hospital must require all physician owners or investors who are also active members of the hospital’s medical staff to disclose in writing their ownership or investment interests in the hospital to all patients they refer to the hospital.  CMS can terminate the Medicare provider agreement of a physician-owned hospital if it fails to comply with these disclosure provisions or with the requirement that a hospital disclose in writing to all patients whether there is a physician on-site at the hospital 24 hours per day, 7 days per week. Reed Smith is preparing a client memo analyzing these provisions; it will be available on our web site, reedsmith.com.
  • Emergency Medical Treatment and Labor Act (EMTALA) – Under the final rule, if an individual with an unstable emergency medical condition presents to a participating hospital and is admitted, the admitting hospital has satisfied its EMTALA obligation.  If the patient is subsequently transferred to a hospital with capabilities for specialized care, that hospital does not have an EMTALA obligation to accept the individual. CMS invites ongoing public comment on whether this policy results in unintended consequences, such refusals by hospitals with specialized capabilities to accept the transfer inpatients whose emergency medical condition remains unstabilized.
  • Other Policies – Among many other things, the rule: makes limited revisions to the classifications of cases to Medicare severity diagnosis-related groups (MS-DRGs) and Medicare severity long-term care diagnosis-related groups (MS-LTC-DRGs); updates the rate-of-increase limits for certain hospitals and hospital units excluded from the IPPS that are paid based on reasonable cost; implements wage index and geographic reclassification changes; reduces by 50% capital Indirect Graduate Medical Education payments; and implements provisions in the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) rebasing sole community hospital payment rates and extending certain geographic reclassifications and special exceptions. The rule also requires Medicare Advantage plans to provide encounter-level data to CMS to be used for risk adjustment, disproportionate share hospital calculations, and Medicare coverage tracking purposes. CMS did not adopt its proposal to expand the postacute care transfer policy to transfers to home for the furnishing of home health services within 7 days (rather than 3 days) of hospital discharge.