Fact Sheets

MEDICARES FY 2011 HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEM FINAL RULE

OVERVIEW:  On July 30, 2010, the Centers for Medicare & Medicaid Services (CMS) announced a final rule that establishes Medicare policies and payment rates for inpatient services furnished by acute care hospitals, long-term care hospitals, and certain excluded hospitals in fiscal year (FY) 2011.  In the final rule, CMS is updating acute care hospital rates by 2.35 percent.  This update reflects a market basket increase of 2.6 percent for inflation reduced by 0.25 percent, as required by the Affordable Care Act. In addition, CMS is applying a “documentation and coding” adjustment to recoup a portion of excess aggregate payments in FY 2008 and FY 2009 that do not reflect actual increases in patients’ severity of illness.  Under legislation passed in 2007, CMS is required to recoup the entire amount of FY 2008 and 2009 excess spending resulting from changes in hospital coding practices no later than FY 2012.  CMS has determined that a -5.8 percent adjustment is necessary to recoup all of these overpayments.  The -2.9 percent adjustment for FY 2011 is one-half of the necessary adjustment.   This reduction, coupled with other adjustments, is estimated to reduce total payments for operating expenses to IPPS hospitals in FY 2011 by 0.4 percent or $440 million. 

CMS is similarly updating long-term care hospital rates by 2.5 percent for inflation less an adjustment required by the Affordable Care Act of 0.50 percentage points and applying an adjustment of -2.5 percentage points for the effect of documentation and coding practices in FY 2008 and 2009 that did not reflect increases in patients’ severity of illness. Under the final rule, LTCH payments are estimated to increase by 0.46 percent or $22 million. 

BACKGROUND:  Since FY 1983, Medicare Part A has paid acute care hospitals for inpatient stays under the IPPS, which provides for a single prospectively-determined payment for each case, generally based on the patient’s diagnosis.  In FY 2003, Medicare began paying LTCHs under the LTCH PPS, which used the same patient classifications as the IPPS, but weighted them differently to reflect the different resources and higher treatment costs typically associated with long-term care hospital stays.

Under both prospective payment systems, the payment amount is based on the average costs incurred by the hospital in treating a patient with a specific diagnosis.  In rare cases, where the costs of treatment greatly exceed Medicare’s payment rate, the hospital may be entitled to an additional payment, called an outlier payment.  Physician and non-physician practitioner services are billed separately to Medicare Part B and are paid under the Medicare Physician Fee Schedule. 

From FY 1983 through FY 2007, payments to acute care hospitals were made using the Diagnosis Related Group (DRG) classifications, but over time, CMS discovered that the classification structure needed greater specificity to ensure that hospitals were paid appropriately for more severely ill patients who are more costly to treat relative to less severely ill patients with the same principal diagnosis.  In FY 2008, CMS replaced the 538 DRGs with 745 new Medicare Severity DRGs (MS-DRGs) that reflected not just the patient’s diagnosis, but also the severity of the patient’s illness. 

BUDGET NEUTRALITY AND THE NEW CLASSIFICATIONS:  In the FY 2008 IPPS final rule, CMS anticipated the effect of documentation and coding practices resulting in higher payments that do not reflect real changes in case mix by finalizing adjustments to inpatient rates by -1.2 percent in FY 2008 and ‑1.8 percent in FYs 2009 and 2010.  These adjustments were intended to maintain budget neutrality, and were consistent with the Medicare statute.  As explained in the FY 2008 and 2009 IPPS final rules, CMS planned to revise the FY 2010 adjustment if a review of actual data for FY 2008 indicated that the actual effect of documentation and coding differed from the documentation and coding adjustments applied in FY 2008 and FY 2009. 

Hospitals believed that the adjustments CMS made in the FY 2008 IPPS final rule overestimated the impact of the documentation and coding effect.  In the Transitional Medical Assistance, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), Congress required CMS to reduce the adjustments to -0.6 percent for FY 2008 and -0.9 percent for FY 2009.  The TMA requires that, if CMS determines that implementation of the MS-DRG system resulted in changes in documentation and coding that did not reflect real changes in case-mix for discharges occurring during FY 2008 or FY 2009 that are different than the adjustments required by the TMA, additional adjustments must made to reconcile the difference in payment for these years.  These recoupment adjustments are required to be made by FY 2012. In addition, TMA required adjustments to IPPS rates going forward to ensure that these excess payments are not permanently increased.

In the proposed rule for FY 2010, CMS proposed an adjustment of -1.9 percentage points for hospitals paid under the IPPS to reflect the increase in documentation and coding that occurred in FY 2008.    After reviewing comments, however, CMS did not adopt a documentation and coding adjustment that was intended to prevent further accumulation of excess payments in future rates.

The Medicare Actuary now estimates that the cumulative effect of documentation and coding increased spending by 5.4 percent.  CMS has already applied a -0.6 percent adjustment in FY 2008 and a -0.9 percent adjustment in FY 2009 (for a total -1.5 percent adjustment).  Therefore, a prospective adjustment of -3.9 percent is needed to the baseline going forward to ensure that future payments do not incorporate past increases in documentation and coding.  However, unlike the TMA provision regarding the recoupment adjustment, there is no specified time period for this prospective adjustment.  Until there is this permanent adjustment of -3.9 percentage points, this higher spending will be incorporated into future IPPS rates.  The Medicare Actuary has determined that an adjustment of -5.8 percent is required to recoup total excess spending due to documentation and coding in FYs 2008 and 2009. 

FINAL ADJUSTMENTS FOR FY 2011:   CMS is now finalizing an adjustment of -2.9 percentage points for FY 2011 (or one-half of the total recoupment adjustment of -5.8 percent) to begin recovering the excess payments made during FYs 2008 and 2009 due to the adoption of the MS-DRG coding system.  CMS is not adopting any prospective adjustment for FY 2011.  Although CMS has the authority to make a larger recoupment adjustment, as well as a prospective adjustment, CMS believes that its decision to phase-in adjustments is a reasonable and fair approach which satisfies the requirements of the statue while substantially moderating the impact on hospitals.

CMS is also adopting a prospective documentation and coding adjustment of ‑2.9 percent to the hospital specific rates (HSP) for Medicare Dependent Hospitals and Sole Community Hospitals and to the capital Federal rate applicable to all hospitals for FY 2011 to account for the estimated increase in payments that has occurred due to the adoption of the MS-DRGs that do not reflect real increases in patient severity of illness.   CMS is also making a full prospective adjustment of -2.6 percent to Puerto Rico specific rates. 

The agency is also finalizing an adjustment of -2.5 percent for FY 2011 to the LTCH standard Federal rate for the effects of documentation and coding practices for FY 2008 and 2009 under the MS-LTC DRGs.

The final rule was placed on display at the Federal Register today, and can be found under Special Filings at:

www.ofr.gov/inspection.aspx#special.

For more information, please see:

www.cms.gov/AcuteInpatientPPS/01_overview.asp.