FFY 2018 Proposed IPPS Changes

Thoughtware Article Published: Jun 01, 2017
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The Centers for Medicare & Medicaid Services (CMS) released their proposed inpatient prospective payment system (IPPS) regulations for federal fiscal year (FFY) 2018. If finalized, these regulations will include a variety of Medicare reimbursement changes. BKD issued separate alerts related to the proposed changes, “LTCH PPS Proposed Changes” and “Proposed Quality Data Reporting Changes.” This article outlines the significant changes from the remaining sections.

Rate Changes

CMS is proposing an increase of 0.4588 percent to the base DRG rate as it begins the restoration of documentation and coding adjustments. This restoration process is anticipated to continue through 2023 at a rate of 0.5 percent annually. For years, CMS implemented cuts that were anticipated to reach $11 billion after conversion to Medicare Severity-Diagnosis Related Groups, but those cuts have now expired, and payment restoration is proposed to begin in 2018.

The proposed rate changes are based on rebased market basket costs from fiscal year (FY) 2014 and a few revisions to the price indices applied to the market basket, resulting in a 2.9 percent increase in the market basket. The update factors also include adjustments for quality reporting, meaningful use, multifactor productivity and mandated Section 1886(b)(3)(B)(xii) to arrive at a maximum increase of 1.75 percent to a maximum decrease of -1.15 percent.

FFY 2018 Proposed IPPS Changes Table

In addition, the proposed labor component share decreased from the prior year’s 69.6 percent to 68.3 percent in FY 2018.

Lastly, the proposed 1.2 percent Capital Input Price Index resulted in a proposed capital standard federal payment rate of $451.37.

Wage Index

The proposed rules reflect the national average hourly wage of $41.96 with a rural floor budget neutrality adjustment factor (BNAF) of 0.993672. The BNAF is higher than prior years because CMS is proposing to end the imputed rural floor for all urban states (New Jersey, Delaware and Rhode Island). Hospitals that converted to critical access hospital (CAH) status on or after January 23, 2017, are currently removed from the wage index computations. In addition, CMS noted this is the third and final year of the 2013 occupational mix survey. The new survey due July 1, 2017, likely will be used for FFY 2019 through 2021.

The proposed rules are seeking comments on discontinuing the use of Worksheet S-3, Part II line 18, Other Benefits. Only 80 hospitals have data included on this line, and CMS notices a great deal of errors during their wage index reviews. The proposed rules include the reminder that data included on this line must be greater than 1 percent of adjusted total salaries, be an IRS-recognized benefit and taxed to the employee’s W-2.

Finally, the proposed rules include many reclassification discussions. Hospitals have the typical 45 days from publication of the IPPS rules to rescind their currently approved Medicare Geographic Classification Review Board (MGCRB) reclassification requests. Similar to the timing of prior years, FFY 2019 MGCRB reclassifications will be due September 1, 2017. The proposed rules also discuss the approval timing for sole community hospitals (SCH) and rural referral centers for MGCRB consideration. As opposed to an arbitrary February date, CMS is proposing that the approval letters must be to CMS by the first business day after January 1 to allow the MGCRB time to review the approval before the board meets in February.

Volume Decrease

Volume decrease adjustments have been the subject of adjudications by the Provider Reimbursement Review Board and CMS administrator through various cases listed in the proposed regulations. The volume decrease adjustment is intended to compensate hospitals for fixed cost only and variable cost excluded from the calculation. However, the calculation by the Medicare Administrative Contractor (MAC) currently applies the full prospective payment system (PPS) payment against fixed cost only. The proposed rule discusses changing the calculation to apply the ratio of the hospital’s fixed cost to total cost in the cost report period when the volume decrease occurred. This ratio will be applied to the DRG payments. The sum of the hospital’s PPS payments and volume decrease adjustment wouldn’t exceed the total Medicare inpatient operating cost.

Rural Referral Center

The qualifications for rural referral centers remain the same. The national, all-urban case mix index (CMI) value has been updated to 1.6635, and the median CMI value for urban hospitals by census region also has been updated.

Low-Volume Adjustment

Requests to the MAC are due by September 1, 2017. The low-volume adjustment qualifications are proposed to change, are no longer based on Patient Protection and Affordable Care Act (ACA) criteria and will revert back to the qualifications prior to the ACA. Hospitals must be more than 25 miles from the nearest similar hospital. Total discharges need to be less than 200 and are no longer payor-specific. Discharges will be based on the most recently filed cost report due to the change to total discharges rather than Medicare discharges that were confirmed from past Medicare Provider and Analysis Review (MedPar) data. The payment adjustment will be 25 percent for hospitals that qualify and will no longer be tiered to reflect the discharge number compared to the qualifying threshold. This is based on a statutory requirement for CMS to complete a payment adjustment model, which determined the relationship between cost and discharges for the low-volume hospitals unaffected until total discharges are less than 200. Therefore, hospitals with total discharges between 200 and 799 won’t receive a tiered rate payment adjustment.

Medicare-Dependent Hospital (MDH) Program

The small, rural and MDH program will expire September 30, 2017, unless a legislative bill is signed into law before September 30, 2017. Beginning with discharges on or after October 1, 2017, hospitals that previously qualified for MDH status will be paid based on the IPPS federal rate, unless the MDH hospital applies for SCH status. MDH hospitals must apply for SCH status by September 1, 2017, to receive SCH status effective for October 1, 2017. If an MDH hospital applies for SCH status after September 1, 2017, the hospital will be subject to the usual effective date—30 days after the date of the CMS written notification of approval.


There aren't changes to the readmissions payment adjustment factor for FY 2018. The adjustment factor ranges between 1.0 (no reduction) and .97 (or the largest reduction). CMS will use MedPar claim data file from July 1, 2013, through June 30, 2016. However, CMS proposes to implement the socioeconomic adjustment approach (social risk factors) mandated by the 21st Century Cures Act for FY 2019. CMS also proposes to implement changes to the payment adjustment factor to assess penalties based on a hospital’s performance relative to other hospitals with a similar proportion of patients who are dually eligible for Medicare and full-benefit Medicaid.

Value-Based Purchasing

For FY 2018, the value-based purchasing percentage is 2 percent, and CMS estimated the total amount available for incentive payments is approximately $1.9 million. CMS is proposing to remove one measure and adopt two measures. First, CMS is proposing to remove the current eight-indicator Patient Safety for Selected Indicators (PSI 90) from the safety domain beginning with FY 2019. This is being driven by the lack of data available from the International Classification of Disease, Tenth Edition. In FY 2022, CMS is proposing to adopt the hospital-level, risk standardized payment associated with a 30-day episode of care for pneumonia measure for the efficiency and cost reduction domain. Finally in FY 2023, CMS is proposing to adopt the 10-indicator modified Patient Safety and Adverse Events Composite PSI 90 measure.

Hospital-Acquired Conditions (HAC)

Hospitals that rank in the top quartile for HAC will be subject to a 1 percent payment reduction. The FY 2018 total HAC scores will be released in late summer, and hospitals will have 30 days to review and submit corrections. CMS is seeking comments related to adopting additional measures related to falls with injury, adverse drug events, glycemic events and ventilator events as CMS aims for better health care for patients, better health for the community and lower health care costs. CMS also requests comments on accounting for disability and medical complexity in the Centers for Disease Control and Prevention National Healthcare Safety Network measures.

As with readmissions and value-based purchasing, CMS is requesting comments in accounting for social risk factors within hospital acquired conditions. Social risk factors may include income, education, race/ethnic background, employment, disability, community resources and social support. CMS is considering stratifying hospitals into peer groups based on one or a combination of social risk factors. CMS would like comments on which of these factors to include and current data sources where this information would be available.

Rural Demonstration Project

The 21st Century Cures Act required a five-year extension of the Rural Community Hospital Demonstration. Previously participating hospitals can continue in the demonstration program unless they elect to discontinue participation. CMS expects the request for applications to be released by the end of this month and plans to announce the participating hospitals (old and new) by June 2017, with a maximum of 30 participating hospitals. Any rural community hospital in any state can submit an application. However, priority will be granted to hospitals in the 20 states with the lowest population densities: Alaska, Arizona, Arkansas, Colorado, Idaho, Kansas, Maine, Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Utah, Vermont and Wyoming. CMS is proposing that participating hospitals begin the demonstration project with the first cost report beginning on or after October 1, 2017. The budget neutrality methodology will be similar to previous years, and the FY 2018 budget neutrality factor will be calculated after the selection of hospitals.

Payments for Services in Inpatient & Outpatient Settings

For the Two-Midnight Rule, CMS is proposing to include a FY 2018 factor to remove the temporary one-time factor of 1.006 from FY 2017.

CMS is seeking comments to identify and eliminate inappropriate Medicare payment differentials for similar services in the inpatient and outpatient setting.

Provider-Based Status of Indian Health Services & Tribal Facilities/Organizations

CMS is proposing to remove the provider-based date limitation that restricted the grandfathering provision to Indian Health Services and tribal facilities/organizations.

Request for Information Regarding Physician-Owned Hospitals

CMS is seeking comments on how the current scope of and restrictions on physician-owned hospitals affect health care delivery and the effect on Medicare beneficiaries.

Proposed Changes to Hospitals Excluded from IPPS

As in the past, this includes children’s hospitals, 11 cancer hospitals and hospitals in the Virgin Islands, Guam, American Samoa and Northern Mariana Islands. All of these hospitals aren’t covered by a PPS system but are reimbursed based on cost subject to a rate-of-increase ceiling. The rules often are referred to as Tax Equity and Fiscal Responsibility Act of 1989 (TEFRA) reimbursement.

For FFY 2018, CMS is proposing to update the based year for their increase computations from 2010 to 2014. They’re proposing to update the TEFRA target rates by 2.9 percent.

There are LTCHs under these rules. CMS has coined a new term to refer to these cost-based LTCHs, long-term care Neoplastic Disease Hospitals. These hospitals will receive the same increase as other TEFRA hospitals, 2.9 percent.

Hospitals-Within-Hospital (HwH) Regulations

HwHs of all types adhere to CMS regulations on separateness and control to show they were independent of the hospital with which they were co-located. CMS now proposes to apply the separateness and control rule only to IPPS-excluded hospitals (LTCH, rehab, psychiatric, etc.) co-located within an IPPS hospital. All co-located hospitals will still carry the HwH designation, but an LTCH within a rehab hospital, for example, won’t have to adhere to the separateness regulations. CMS is seeking comments on whether the separateness and control rules should be dropped for all HwH situations.

Critical Access Hospitals (CAH)

Last year, CMS began a demonstration project with certain CAHs in frontier states. No recoupment of excess cost from that project will begin until FY 2020, so there’s no adjustment in FY 2018. CMS has instructed many of the review organizations not to conduct medical record reviews for the CAH 96-hour certification rule unless fraud or abuse is suspected. Office of Inspector General, Department of Justice and Zone Program Integrity Contractors aren’t affected by this rule. This isn’t the length-of-stay requirement. There is a rule governing a physician certifying that the patient should be able to be treated and discharged or transferred in 96 hours.

Cost Reporting Requirements

Currently, providers are required to submit a hard copy of the settlement summary and certification statement with the original signature with the filing of their Medicare cost report. CMS is proposing to allow the use of an electronic signature beginning for cost reporting periods on or after October 1, 2017, which will allow providers more flexibility in signing the cost report. The proposal also allows for electronic submission of the Certification and Settlement Summary Page to be included with the electronic filing of the cost report. Providers will have to check a box on the cost report if they wish to sign electronically but will still have the option of sending in a hard copy with original signature if they choose.

Due to a rise in questions, the proposed rule also clarifies that Medicare doesn’t recognize a provider’s gain or loss on the sale or scrapping of an asset that occurs on or after December 1, 1997, regardless of whether the asset is sold incident to a provider’s change of ownership or is otherwise sold or scrapped as an asset of the Medicare participating provider.

Contact your BKD advisor if you have questions.

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