Blog Post

Early impressions: CMS's FY 2018 Inpatient Proposed Rule

April 17, 2017

    CMS released its Inpatient Prospective Payment System (IPPS) Proposed Rule earlier than in recent years. Once more, we're happy to wade through its 1,837 pages so you don't have to. Join us for our annual review of the proposal on Wednesday, May 17, at 3 p.m. ET. We'll examine what's on the table for Medicare inpatient payments in the coming fiscal year.

    Larger increase than in recent years

    CMS was less guarded than usual in announcing the net effects of its proposed payment adjustments—perhaps because it's always easier to be the bearer of good news. In short, CMS foresees a 1.6% increase in operating payment rates in FY 2018. 

    This substantial update—the healthiest we have seen in a while—is the result of a strong market basket update of 2.9% that has suffered fewer and smaller downward adjustments than in recent years.  Furthermore, CMS estimates a 1.2% ($1 billion) increase in uncompensated care payments and a 2.4% ($212 million) increase in capital payments.  All told, CMS expects an overall increase of $3.1 billion in payments in FY 2018, a nearly six-fold improvement on FY 2017's increase of $539 million.

    Sunsetting of cuts drive most of the changes

    We're proud to point out that we predicted that FY 2018 would see a stronger update.  But that's not as hard to do as it may sound, since many of the positive developments had already been scheduled in previous law.

    As always, the -0.75% reduction mandated by the Affordable Care Act and the -0.4% productivity adjustment ate into the market basket update.  But the expiration of the American Tax Relief Act (ATRA) takebacks more than made up for it. For years, we've been following the ATRA cuts, designed to compensate for significant overpayments following the conversion to Medicare Severity-Diagnosis Related Groups (MS-DRGs) in 2008.  It's always darkest before the dawn, and indeed FY 2017 saw a weighty 1.5% cut to the standard amount, as CMS scrambled to meet its goal of $11 billion in recoupments.

    But now ATRA cuts are—finally—a thing of the past.  MACRA had already established a six-year series of 0.5% payment increases in order to bring payments back on course after the recoupment was complete.  A provision in the 21st Century Cures Act reduced the first increase to 0.4588% in FY 2018. But CMS notes that this is a one-off reduction and foresees a return to the full 0.5% scheduled increase for the remaining five years.

    We are also seeing the end of the two-midnight adjustment.  In FY 2014, CMS instituted a permanent 0.2% payment reduction to balance out payment increases that they expected would come from inflated volumes in response to the two-midnight inpatient admissions standard.  In this case, CMS's worries were unfounded: the volume bump never materialized.  In FY 2017, they instituted a one-time prospective increase of 0.6% to make hospitals whole.  Now that payments are back where they should have been, CMS is instituting a -0.6% adjustment in FY 2018.  I know it's confusing.  But this is not a policy reversal.  It is a scheduled one-time course correction.

    Proposed IPPS Payment Rate Update for FY 2018

    Changed DSH methodology significantly expands resources for uncompensated care

    In what is probably the biggest surprise of the rule, CMS has increased the allotment of available uncompensated care payments by $1 billion to a total of $6.9 billion.  As with the payment changes discussed above, this change had in fact been in the works for a while.

    Total available uncompensated care payments are determined by the percent change in the rate of uninsurance since 2013—the last year before ACA-driven coverage expansion.  FY 2017 was the final year in which CMS was required by statute to use uninsurance numbers from the Congressional Budget Office.  Now they are proposing to switch to estimates produced by CMS's Office of the Actuary as part of the development of the National Health Expenditure Accounts.  I won't get into the details here, but the upshot is that under the new calculation, the reduction in the uninsured since the ACA is significantly smaller, which substantially increases the total available dollars for uncompensated care.

    And CMS also is finally following through on its proposal to change how uncompensated care funds are distributed.  After years of study, they are beginning to phase out the calculation based on a hospital's share of Medicare SSI and Medicaid patient days.  Instead, they are starting to use uncompensated care estimates from Worksheet S-10 for one year of the three-year average calculation.  The move toward Worksheet S-10 promises not only to be more accurate; it also will be more fair to hospitals in states that did not expand Medicaid.

    Pay-for-performance holding steady with 6% of inpatient Medicare payments at risk

    As usual, CMS proposed several key changes to the mandatory inpatient quality based reimbursement programs: the Hospital Readmissions Reduction Program (HRRP), the Hospital Inpatient Value Based Purchasing Program (VBP), and the Hospital Acquired Conditions Reduction Program (HAC).  We'll spend time on all of the details during our upcoming webinar, including updates to metrics, data collection timeframes, and scoring methodologies. For now, we'll give you the highlights.

    HRRP to adjust hospitals' penalties based upon dual-eligible patients, starting FY 2019

    One of the most eagerly awaited parts of this rule was a first look at CMS's proposed methodology for adjusting hospitals' performance in HRRP to account for their patients' socioeconomic status (SES). 

    Historically, HRRP has assessed readmissions rates for certain conditions and has penalized those hospitals whose patients had higher readmission rates than would be expected. However, the expected readmission rates used in the program have not accounted for the demographics of a hospital's patient population. Since HRRP began in 2013, a variety of stakeholders have argued that HRRP disproportionately penalizes institutions that serve low-income and clinically complex patient populations, and they have advocated for further adjustment based on patient SES.

    On December 13, 2016, Congress passed the 21st Century Cures Act, which mandated that HRRP begin to account for SES in its assessment of readmissions performance. The Act directed CMS to compare hospitals in cohorts based upon the overall proportion of those hospitals' Medicare inpatient stays that were for full-benefit dual-eligible beneficiaries.

    In the current Proposed Rule, CMS has laid out its plan to implement the 21st Century Cures Act mandate, starting in the FY 2019 payment year.  CMS intends to sort hospitals into five peer groups according to their dual-eligible inpatient stay ratio. Within each peer group, hospitals' excess readmission ratio for each of the program's six conditions will be compared to the group's median excess readmission ratio for that condition.

    The proposed change, which is designed to be budget-neutral for Medicare, would shake up the magnitude of HRRP penalties, especially for some safety-net hospitals. CMS's initial estimates show that the change would:

    • Decrease the average safety-net hospital HRRP payment reduction by about one-tenth, to 0.56%;
    • Hold the average non-safety-net hospital HRRP payment reduction steady at 0.61%;
    • Reduce the share of HRRP penalties incurred by rural hospitals;
    • Reduce the share of HRRP penalties incurred by safety net hospitals; and
    • Increase the share of HRRP penalties incurred by non-DSH eligible hospitals.

    We'll be providing a more in-depth analysis of CMS's proposal in our upcoming webconference, so stay tuned!

    It is possible we'll see more SES adjustment in Medicare's pay-for-performance and quality reporting programs in the future. In this Proposed Rule, CMS has requested stakeholder feedback on how best to factor SES adjustment into the Value-Based Purchasing (VBP), Hospital-Acquired Condition (HAC), and Inpatient Quality Reporting (IQR) programs.

    VBP focus on episodic spending continues with new pneumonia measure

    CMS has proposed a new episodic spending measure to debut in FY 2022: 30-day episodic spending for pneumonia. The pneumonia measure follows on the heels of two cardiac episodic spending measures introduced to the VBP in last year's IPPS Final Rule. Those two measures—30-day episodic spending for Acute Myocardial Infarction and Heart Failure—will enter the VBP Efficiency and Cost Reduction domain in FY 2021.  The pneumonia measure will enter that same domain the following year.

    CMS's intention to expand VBP's Efficiency and Cost Reduction domain isn't a surprise. Last year's IPPS Final Rule that CMS intends to focus more strongly on cost as an element of value in the VBP program. If CMS wants to add additional episodic spending measures to the VBP in future years, it has plenty to choose from in the IQR: CMS has finalized 10 episodic payment measures  to date for conditions including THA/TKA and spinal fusion.

    Proposed Rule contains interim VBP and Readmissions values, not final adjustments

    Each year we hear from a few members who have reviewed CMS's proposed hospital-specific adjustments and are surprised or concerned. We encourage providers to consider these adjustment factors in the appropriate context. The factors released with the IPPS Proposed Rule each year are proxy adjustments based on the same historical detail that was used to calculate FY 2017 adjustments. As a result, most organizations can expect their final adjustments to differ when CMS releases the updated final adjustment factors in August. Please note that while CMS has typically released final HRRP penalties in conjunction with the Final Rule in August, VBP and HAC results have typically been released in November or December.

    Change always possible from Proposed to Final Rule

    We've entered a 60-day comment period that is set to close at 5 p.m. EDT on June 13, 2017.  As always, it is possible that we'll see significant shifts between the Proposed and Final Rules based on public feedback and further analysis by CMS.  We encourage you to provide feedback to CMS regarding any aspects of the regulations that cause you concern.

    Stay tuned for additional insights from the Financial Leadership Council, including our service line analyses.  There is a higher proportion of MS-DRGs experiencing volume changes than in prior years.  We're running some analyses and will be able to tell you where to look for unexpected changes.

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