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Volume shifts and penalty shake-ups: What you need to know about CMS's inpatient final rule

August 3, 2017

    Wednesday evening, CMS released the Inpatient Prospective Payment System (IPPS) Final Rule for FY 2018.

    We'll be spending the next few weeks reviewing all 2,462 pages, and you can join our webinar on Thursday August 24th at 3 p.m. ET for the key takeaways. We'll examine the key updates for Medicare payments next fiscal year, including a positive payment rate update, expected growth in Medicare DSH payments, and updates to the quality reporting and pay-for-performance programs.

    In the meantime, here are our early takeaways, focusing especially on two key aspects of April's IPPS proposed rule: the proposed coding shifts and changes to the hospital readmissions program methodology.

    CMS finalizes a 1.2% payment rate update

    The table below summarizes the key payment rate adjustments finalized in this year's regulation.

    Finalized Medicare fee-for-service inpatient payment rate update for FY2018

    In addition to these adjustments, CMS estimates an $800 million increase in uncompensated care payments. Although that represents about $200 million less than CMS estimated in the proposed rule, it's still a sizable increase from FY 2017. Overall, CMS estimates that Medicare spending on inpatient hospital payments will increase by $2.4 billion in FY 2018.

    Final rule's service line volume shifts are less dramatic than proposed

    While payment changes in most years include refreshed DRG-specific relative weights and some minor volume shifts, this year's Rule includes much more significant shifts—although the finalized changes are less dramatic than in the proposed rule.

    CMS in April proposed to rescind operating room (OR) status for roughly 700 procedure codes, re-designating them as non-OR codes following the transition to ICD-10. As a result, many cases that would have been classified under various surgical service lines were relocated to General Medicine.

    According to our analysis, that would have led to a marked in decrease in projected discharge volumes for the Thoracic and General Surgery service lines. Under the final rule, we now estimate similar, albeit less dramatic, effects. We project that overall payments for Medical cases will increase by 2.5%, while surgical payments will drop by 0.3%.

    Estimated service line payment changes, FY 2018 IPPS Final Rule
    FY 2017 to FY 2018

    Click here to download our service line breakdown

    Estimated medical vs. surgical payment change
    FY 2017 to FY 2018

    We will further examine the specific surgical codes that CMS finalized with OR status in the coming weeks, but a high-level look at volumes by service line in our final rule analysis indicates significantly less outflow from General Surgery and Thoracic Surgery compared with the proposed rule. Our proposed rule analyses saw about 30,000 cases shifting from General Surgery and about 10,000 cases shifting from Thoracic Surgery.

    Estimated volume shift by service line
    FY 2017 (V34.0) to FY 2018 (V35.0) (MedPAR FY 2016 Volumes)

    It appears that public comment played a significant role in CMS's re-examination of many codes originally proposed to lose OR status. Most notably, commenters called for 200 new procedure codes to be reviewed, based on the broad requirement for an OR, sterile technique, and anesthesia. CMS agreed and has re-designated roughly 80 of those procedures with OR status. These re-evaluations have reversed a significant proportion of the projected shift observed in our prior analysis.

    Click here for a full list of codes finalized with OR and non-OR designation

    CMS finalizes new methodology for hospital readmission penalties

    Under the rule, CMS finalized its methodology for implementing socioeconomic adjustment of the Hospital Readmissions Reduction Program, starting in FY 2019. CMS will sort hospitals into five cohorts according to each hospital's proportion of dual-eligible inpatient stays. Within each cohort, hospitals' excess readmission ratio for each of the program's six conditions will be compared to the cohort's median excess readmission ratio for that condition. Those hospitals performing worse than the cohort median will receive a penalty.

    As with any budget-neutral change, this methodology shake-up will create winners and losers. CMS notes that the "mean penalty increase for those hospitals seeing an increase is larger than the mean decrease for those hospitals seeing a decrease." In addition, certain groups of hospitals are expected to see swings in their overall penalties.

    Estimated impact of final changes to HRRP methodology on readmissions penalties

    Join our webconference for additional insights

    To learn more about these and other changes in the regulation, make sure to register for our detailed webconference on Thursday, Aug. 24, and watch for more Financial Leadership Council updates as we continue to analyze the final rule.

    Register Now

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