CMS has published its proposed rule to update the Medicare acute hospital inpatient prospective payment system (IPPS) and long-term care hospital (LTCH) prospective payment system (PPS) for fiscal year (FY) 2018. CMS also solicits public comments on a range of policy issues related to physician-owned hospitals, inpatient and outpatient payment differentials for similar services, and ways to reduce the regulatory burden for providers and promote high quality care, as discussed below.

Acute Hospital Rate Update. With regard to the IPPS, CMS projects that the cumulative rate and policy changes in the proposed rule would increase total IPPS payments by about $3.1 billion in FY 2018 compared to FY 2017 levels. Rate changes would result from a number of adjustments, including:  a 2.9% market basket update reduced by a -0.4% multifactor productivity adjustment and a 0.75% cut mandated by the Affordable Care Act (ACA); a -0.6% adjustment related to the two midnight policy; and a +0.4588% increase to adjust for documentation and coding under the 21st Century Cures Act. CMS also proposed changes in uncompensated care payments that are expected to increase IPPS operating payments by another 1.2%. 

Quality-Related Adjustments to Hospital Payment. Updates to acute hospitals are subject to several quality-related adjustments. The potential updates to standardized amounts for FY 2018 range from a high of 1.75% for a hospital that submits quality data under the Hospital Inpatient Quality Reporting (IQR) Program and is a meaningful Electronic Health Record (EHR) user, to a low of -1.15% for a hospital that does not submit quality data and is not a meaningful EHR user.  Specific hospital payments can be impacted by a variety of other factors, including penalties for excess readmissions under the Hospital Readmissions Reduction Program (HRRP), poor performance under the Hospital-Acquired Condition (HAC) Reduction Program (e.g., hospitals that perform in the lowest quartile for HACs will receive a 1% reduction in overall payments), and bonuses and penalties under the Hospital Value-Based Purchasing (VBP) Program. For instance, CMS estimates that 2,591 hospitals will have their base operating MS-DRG payments reduced under the HRRP in FY 2018, saving approximately $564 million.

Hospital Quality Programs. CMS proposes numerous changes to hospital quality programs, including updates to various quality measures and reporting periods.  CMS also proposes revisions to HRRP policies to account for a hospital’s proportion of patients who are dually eligible for Medicare and Medicaid.  In addition, CMS requests comments on additional measures for potential future adoption that would account for various social risk factors in the IQR Program, the HAC Reduction Program, and the Hospital VBP Program.

The proposed rule also addresses, among many other things: proposed changes to MS-DRG classifications, new technology add-on payment applications, rate-of-increase limits for certain hospitals excluded from the IPPS that are paid on a reasonable cost basis, and distribution of Medicare uncompensated care payments.  Other policy proposals address:  changes relating to transparency of accrediting organization survey reports and plans of correction of providers and suppliers; electronic signature and electronic submission of the Certification and Settlement Summary page of Medicare cost reports; clarification of provider disposal of assets; and proposed elimination of certain newspaper notices for the Medicare termination of various types of Medicare provider/suppliers.

LTCH Policy. With regard to LTCHs, CMS projects that FY 2018 LTCH PPS payments would decrease by 3.75% ($173 million) compared to FY 2017 levels. CMS attributes much of this reduction to continued phase-in of the Pathway for SGR Reform Act of 2013, which required CMS to establish an alternative site-neutral payment rate, generally based on IPPS rates, for Medicare inpatient discharges from an LTCH that fail to meet certain statutory-defined, patient-level clinical criteria.  CMS estimates that aggregate LTCH PPS payments for site-neutral payment rate cases would decrease by approximately 22% in FY 2018.   CMS expects about 58% of LTCH cases to meet the patient-level criteria for exclusion from the site-neutral payment rate in FY 2018, however; those cases would be paid based on the standard federal rate.  The proposed rule calls for a standard federal rate of $41,497 (compared to $42,476 in FY 2017), reflecting a 2.8% market basket increase partially offset by a -0.4% productivity adjustment and 0.75% reduction mandated by the ACA.  Note that the applicable annual update for any LTCH that does not submit required data under the LTCH Quality Reporting Program is reduced by 2 percentage points.

CMS also proposes other revisions to the LTCH PPS, including an increase in the fixed-loss amount for high cost outlier cases to $30,081 (compared to $22,728 in FY 2017); the fixed-loss amount under the site-neutral payment rate would be $26,713. In addition, CMS proposes changes to the short-stay outlier (SSO) payment policy, applicable to cases where the covered length of stay at the LTCH is less than or equal to five-sixths of the geometric average length of stay for the MS–LTC–DRG.  While current regulations pay SSO cases based on the lesser of four payment thresholds, CMS proposes to pay all SSO a single graduated per diem rate representing a blend of 120% of the MS LTC DRG specific per diem amount and a per diem rate based on the general acute care hospital IPPS.

In addition, CMS is proposing a one-year regulatory moratorium on full implementation of the 25% threshold policy, under which an LTCH is allowed to admit up to 25% of its patients from a single general acute care hospital; for patients admitted past the 25% threshold, an LTCH faces a significant Medicare reimbursement reduction (with certain exceptions). CMS notes that commenters have suggested that the new site-neutral payment rate would alleviate the policy concerns underlying the 25% threshold policy.  Accordingly, the regulatory moratorium would provide CMS with additional time to review the data to determine whether the site-neutral payment rate removes the need for the 25% threshold policy.  If the moratorium is not finalized, however, CMS proposes to apply the 25% rule to discharges occurring on or after October 1, 2017.

Furthermore, CMS is proposing to revise its hospital-within-hospital (HwH) regulations so that the separateness and control requirements would only apply to IPPS-excluded HwHs that are co-located with IPPS hospitals.  According to CMS, this proposed change “is premised on the belief that the policy concerns that underlie our existing HwH regulations (that is, inappropriate patient shifting and hospitals acting as illegal de facto units) are sufficiently moderated in situations where IPPS-excluded hospitals are co-located with each other but not IPPS hospitals” given the IPPS-excluded hospital payment policy changes CMS has made over the intervening years.

Request for Public Comment. In the proposed rule, CMS also solicits public comments on a variety of broader topics, including:

  1. The appropriate role of physician-owned hospitals in the delivery system, and how the current scope of and restrictions on physician-owned hospitals affects healthcare delivery.
  2. Transparent ways to identify and eliminate inappropriate payment differentials for similar services provided in the inpatient and outpatient settings.
  3. Policies CMS could adopt to reduce burdens, improve quality of care, and decrease health care costs. CMS specifically invites comments regarding: payment system redesign; streamlining of reporting, monitoring and documentation requirements; aligning Medicare requirements with those of other payers; operational flexibility and data sharing; support of the physician-patient relationship in care delivery; facilitation of individual preferences; when and how CMS issues regulations and policies; simplification of CMS rules and policies; and proposals involving “novel legal questions.

The rule was published on April 28, 2017. CMS will accept comments on the proposed rule until June 13, 2017.  Once finalized, the policies and rates generally will apply to discharges occurring on or after October 1, 2017.