Industry Insights

CMS Proposes Prospective Payment System Updates

May 2015
Authors:  Sue Brammer

Sue Brammer

Partner

Consulting

Health Care

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

, Brad Brotherton

Brad Brotherton

Partner

Audit

Health Care

910 E. St. Louis Street, Suite 200
P.O. Box 1190
Springfield, MO 65801-1190 (65806)

Springfield
417.865.8701

 & Steve Parde

Steve Parde

Managing Director

Consulting

Health Care

1201 Walnut Street, Suite 1700
Kansas City, MO 64106-2246

Kansas City
816.221.6300

The Centers for Medicare & Medicaid Services (CMS) released a proposed rule to update the hospital inpatient prospective payment system (IPPS) and the long-term care hospital (LTCH) prospective payment system for federal fiscal year 2016. The proposed rule was published in the April 30, 2015, Federal Register. Here’s a look at some of the biggest potential changes for acute care hospitals paid under IPPS.

IPPS Payment Rate Updates

IPPS operating payment rates are proposed to increase 1.1 percent in FFY 2016 for hospitals that have reported quality data and are meaningful users of electronic health records. The increase stems from a projected hospital market basket update of 2.7 percent, offset by a 0.6 percent reduction for multifactor productivity, a 0.2 percent reduction required by the Patient Protection and Affordable Care Act (ACA) and a 0.8 percent reduction for the documentation and coding adjustment. In addition to the above payment changes, CMS also proposes other payment adjustments approximating -0.8 percent, reducing the anticipated increase for all hospitals to 0.3 percent.

The proposed documentation and coding reduction of 0.8 percent is the same as experienced in fiscal 2015. This adjustment was required as part of the 2012 “fiscal cliff” deal that required CMS to recover $11 billion from hospitals between 2014 and 2017 due to assumed overpayments from the government related solely to improved claim documentation and coding. CMS projects that approximately $6 billion will be recouped by the end of 2016, leaving an additional $5 billion to be recovered from hospitals in 2017.

Wage Index

The proposed rules would change computation of the three-year average contributions calculation for providers with a defined benefit pension plan. The current computation uses the year prior to, year of and year after the base cost-reporting period to compute the average. With the changes in the wage index timeline, CMS noted it may be difficult to have the subsequent year information support timely. Therefore, the agency proposes computing the three-year average as the base cost reporting period and the two prior years. If finalized, the FFY 2017 defined benefit pension allowable expense would be the same as FFY 2016. 

In the proposed rule, the outmigration adjustment for FFY 2016 would come from a combination of census data and results from the American Community Survey. If the current outmigration computation is based on FFY 2014 and continues through FFY 2016 and it is higher, the provider will get the old computation for FFY 2016. Starting with FFY 2017, all providers will follow the new rates if the proposed rules are finalized. There are 82 newly eligible hospitals, five hospitals that no longer would be eligible and others that would experience increases or decreases.

The three-year transition period for urban hospitals that became rural as a result of the new Core Based Statistical Area (CBSA), per the FFY 2015 rules, continues for those hospitals affected; FFY 2016 will be the second year of the transition. Hospitals given a one-year transition in FFY 2015—those where the new CBSA delineations resulted in a lower wage index—are fully integrated into the new CBSA rates for FFY 2016. CMS does not propose significant changes regarding the imputed rural floor, budget neutrality methodology, frontier states, labor percentage or the Lugar methodology. Separate proposed legislation bears watching, as it would determine the imputed floor calculations on a state-by-state basis. Consistent with prior years, reclassified hospitals have 45 days from publication of the proposed IPPS rules to withdraw these requests. It’s important to review the proposed CBSA changes and the related impact.

Lastly, the proposed rules change the timeline for submission of wage index changes. For FFY 2017, changes would be due in early September 2015, except for defined benefit pension plan data that would be due in mid-October 2015. A complete outline of the proposed timeline changes for FFY 2017 is included in the proposed rules.

Medicare Disproportionate Share Hospitals

Consistent with the FFY 2015 disproportionate share hospital (DSH) methodology, the FFY 2016 DSH payments will be calculated based upon the empirically justified DSH component (traditional DSH payment methodology) and uncompensated care DSH component. The empirically justified DSH component is 25 percent of the DSH payments that would have been paid based upon the historical DSH methodology. The uncompensated care DSH component is 75 percent of the estimated DSH payment that would have been paid based on the historical DSH methodology, adjusted for the change in the percent of individuals under age 62 who are insured and the hospital’s percentage of uncompensated care relative to the amount of uncompensated care for all DSH hospitals. CMS proposes distributing $6.4 billion in uncompensated care payments in FFY 2016—a $1.3 billion decrease from FFY 2015. The decrease in the uncompensated care payments primarily is due to the decline in the number of uninsured individuals. CMS estimates uninsured individuals will decrease to 11 percent in 2016 from 13 percent in 2015.

For FFY 2016, CMS will continue to use inpatient Medicaid days and Medicare Supplemental Security Income days to determine Factor 3 of the uncompensated care DSH component. CMS stated its intention to use Worksheet S-10 in the future to determine Factor 3; however, CMS doubts the reliability of the information reported on the current Worksheet S-10 form.

Simplified Cost Finding

CMS proposes eliminating the simplified cost finding methodology effective for cost reporting periods beginning on or after October 1, 2015. CMS is concerned the simplified cost finding method is less precise in computing the cost-to-charge ratios, which would result in inaccurate MS-DRG and APC weights. For critical access hospitals, this change could have a significant reimbursement impact if finalized. It’s important for PPS hospitals to consider the additional required information if simplified cost finding is eliminated.

For more information on how these changes could affect your organization, contact your BKD advisor.

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