Fact Sheets

MEDICARE'S FY 2011 HOSPITAL INPATIENT PROSPECTIVE PAYMENT SYSTEM PROPOSED RULE

OVERVIEW:  On April 19, 2010, the Centers for Medicare & Medicaid Services (CMS) announced a proposed rule that would change Medicare policies and payment rates for inpatient services furnished by both acute care hospitals and long-term care hospitals in fiscal year (FY) 2011.  In late March 2010, the Patient Protection and Affordable Care Act was enacted and was amended shortly afterwards by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively referred to as the �Affordable Care Act�).  A number of the provisions in this new legislation will have an impact on inpatient prospective payment system (IPPS) hospitals and long term care (LTCH) PPS hospitals and the other Medicare providers that would be affected by this proposed rule.  However, due to the timing of the passage of the legislation, CMS was unable to incorporate those provisions in this proposed rule.  CMS expects to provide further information on the implementation of health care reform provisions in these laws that affect FY 2010 and FY 2011 IPPS payments in the near future. 

In this proposed rule, CMS is proposing to update acute care hospital rates by 2.4 percent for inflation and apply an adjustment of -2.9 percentage points to recoup one-half of the increase in FY 2008 and 2009 aggregate payments due to changes in hospital coding practices that did not reflect increases in patients� severity of illness.  By law, CMS must recoup the excess FY 2008 and FY 2009 spending by FY 2012.  This reduction, coupled with other adjustments to maintain budget neutrality and ensure proper payment of outlier claims, are estimated to reduce total payments for operating expenses to IPPS hospitals in FY 2011 by 0.1 percent or $142 million.  CMS is similarly proposing to update long-term care hospital rates by 2.4 percent for inflation and apply an adjustment of -2.5 percentage points for the effect of documentation and coding that did not reflect increases in patients� severity of illness. Under the proposed rule, LTCH payments are estimated to increase by 0.8 percent or $41 million.  CMS is requesting public comment on this proposal.

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 based on the patient�s diagnosis, or, in a few instances, the technology used in treating the patient.  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 more 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 diagnosis, but also the severity of the patient�s illness. 

BUDGET NEUTRALITY AND THE NEW CLASSIFICATIONS:  As explained in the final IPPS rule for FY 2008, CMS believes adoption of the new payment classifications should be budget neutral; that is, total Medicare payments to these hospitals should not increase or decrease solely due to changes in hospital documentation and coding practices, although total spending may change due to other factors.  Anticipating that hospitals would change documentation and coding practices to receive higher payments for patients, CMS planned to adjust inpatient rates by -1.2 percent in 2008 and ‑1.8 percent in FYs 2009 and 2010 to ensure budget neutrality.  The final IPPS rules for both FY 2008 and FY 2009 indicated that CMS planned to revise the FY 2010 adjustment, if a review of actual data for FY 2008 indicated changes in actual documentation and coding were different 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 did not address the projected adjustment of 1.8 percent for 2010, but required CMS to adjust payment rates over FY 2010, FY 2011, and FY 2012 if a retrospective review of claims data from FY 2008 and FY 2009 found that changes in hospitals� documentation and coding practices were different from the adjustments made by the TMA.

In the proposed rule for FY 2010, CMS proposed an adjustment of -1.9 percentage points for hospitals paid under the IPPS and -1.8 percent for hospitals paid under the LTCH PPS.  After reviewing comments, however, CMS did not adopt a documentation and coding adjustment to recover excess payments for FYs 2008 and 2009 for either payment system in FY 2010, nor did it adopt a prospective documentation and coding adjustment for FY 2010 to prevent further accumulation of excess payments. The Medicare Actuary estimates that the cumulative effect of documentation and coding increased spending by 5.4 percent in FY 2009 or 3.9 percentage points more than the amount removed from the rates.  Documentation and coding is estimated to have increased Medicare spending in FYs 2008 and 2009 spending by 5.8 percent.  This is the amount (plus interest) that would have to be taken from payments through a budget neutrality adjustment by FY 2012 for acute care hospitals paid under the IPPS.  An additional adjustment of 3.9 percent will also be required to ensure that future rates do not reflect increases in patients� severity of illness.

PROPOSED ADJUSTMENT FOR FY 2011:  CMS is now proposing to make 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 for FYs 2008 and 2009 due to the adoption of the MS-DRG coding system, but is not proposing any prospective adjustment for FY 2011.  Although CMS has the authority to make a much larger reduction to the FY 2011 rates, CMS believes it is prudent to phase-in additional adjustments carefully over time.  CMS is requesting public comment on its proposal CMS is also proposing to make 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.

The proposed rule also proposes to update FY 2011 LTCH payment policies and rates.  The proposed inflation rate for LTCHs is 2.4 percent for FY 2011.  CMS is proposing to apply an adjustment of -2.5 percent to adjust the LTCH update by cumulative effect of documentation and coding for FYs 2008 and 2009.

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

www.archives.gov/federal-register/public-inspection/index.html.

CMS will accept comments on the proposed rule until June 18, and will respond to comments in a final rule to be issued no later August 1, 2010. 

For more information, please see:

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