Care Transformation Center Blog

Early takeaways from the final FY 2015 inpatient rule

by Eric Fontana

Late yesterday, CMS issued its final inpatient rule for FY 2015. Here are some early thoughts on what’s in store for inpatient payments. You can also save yourself from reading 2,400 pages of regulatory text and join us for our complete review of the rule on August 19 at 3 p.m. ET.

Hospitals will see reduced payments in FY 2015

While the top line figure of a 1.4% Medicare payment rate update is higher than CMS's earlier proposal, operating payments to hospitals are set to decrease by 0.6% in FY 2015 compared to FY 2014. This reduction in payments is driven by a number of high-profile adjustments for DSH, hospital-acquired conditions (HAC), and readmissions penalties, amongst others.

CMS also finalized a documentation and coding adjustment, the second consecutive year that the 0.8% payment reduction has been implemented. CMS has indicated that additional cuts will be required in FY 2016 and FY 2017 as CMS carries out the American Tax Relief Act (ATRA) mandate to recoup $11 billion in hospital payments by FY 2017. We’ll cover these adjustments in greater detail in our upcoming presentation.

Hospitals that fail to satisfy quality reporting or meaningful use requirements will see additional reductions to their rate updates. Keep in mind these payment updates also don’t consider the ongoing 2% payment reductions for sequestration that apply for inpatient (and outpatient) hospital payments.

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DSH payment reductions a key driver of operating payment decrease

As expected, CMS has continued to reduce the amount of dollars available for DSH payments in response to the growth in the insured population under Obamacare. However, the size of the payment reduction is larger than what CMS had originally proposed. DSH reductions are now expected to reduce payments by 1.3% (compared to the proposed estimate of 1%), meaning roughly $900 million fewer dollars will be available for DSH payments than previously announced as CMS moves its estimate from $8.56 to $7.65 billion dollars.

P4P moves into higher gear, significant updates finalized

FY 2015 marks the first year that three pay-for-performance (P4P) programs—value-based purchasing, readmissions, and hospital-acquired-conditions—will apply for inpatient payments. Collectively, these programs place 5.5% of inpatient reimbursement at risk for hospitals, with only VBP having any potential financial upside for good performance.

Over the next few weeks, we'll be updating our Customized Assessment Portal to reflect the changes in the rule and the latest release of Hospital Compare data. We recommend all hospital members visit the portal to access their organization-specific analyses.

Hospital-Acquired Conditions Reduction Program

Acute care hospitals that report the most hospital-acquired conditions will see Medicare reimbursement reductions of 1% in FY 2015. Our earlier analysis of the proposed rule highlighted this added margin pressure, especially for the hospitals seeing financial losses under the VBP and readmissions programs. Our presentation on August 19 will take a deep dive on the changes expected for the HAC program in FY 2016 and discuss financial implications for hospitals.

Value-Based Purchasing Program 

CMS finalized several new additions to the VBP program for future years.

For FY 2017, CMS will include C. Difficile, MRSA Bacteremia, and Elective Delivery Prior to 39 Completed Weeks Gestation. CMS also finalized its proposal to significantly truncate the "Clinical Care: Process" domain in FY 2017 by removing six “topped out” measures.

For FY 2019, CMS finalized the addition of the THA/TKA complication rate. As expected, CMS also finalized data collection periods and performance standards for future years, as far ahead as FY 2020. Hospital executives should also be aware that data collection has already begun for years well ahead of the present—the performance period for mortality measures commenced on July 1, 2014.

Readmissions Reduction Program 

Of the three P4P programs, the readmissions penalties are the most significant for inpatient payments in FY 2015. Hospitals may now lose up to 3% of reimbursement moving forward, depending on their readmissions performance.

CMS also used the rule to further expand the measure set for the readmissions reduction program in FY 2017, finalizing the proposed 30-day CABG readmissions measure. The addition of CABG to the program means that five of seven high-cost conditions first identified by MedPAC in the June 2007 Report to Congress are now included in the program. The remaining two, percutaneous transluminal coronary angioplasty (PTCA) and "other vascular" readmission measures are yet to be included.

CMS stands ground on socioeconomic status risk adjustment

CMS received significant public feedback about its socioeconomic status (SES) risk adjustment for quality measures, with commenters urging CMS to either incorporate or resist calls to consider SES, particularly with regard to the pay-for-performance programs.

It appears for the time being, CMS will continue to use quality measures that do not incorporate SES adjustment, stating that they "continue to have concerns about holding hospitals to different standards for the outcomes of their patients of low SES" to avoid concealing "potential disparities or minimize incentives to improve the outcomes of disadvantaged populations." CMS also stated that several hospitals caring for large volumes of lower socioeconomic patients have demonstrated the ability to perform well on quality measures in the past.

While CMS acknowledged recent endorsements by both the NQF Expert Panel on Risk-Adjustment for Sociodemographic Factors and Congress calling for SES to be included in quality measurement (S. 2501, “The Hospital Readmissions Program Accuracy and Accountability Act,” and H.R.4188, the “Establishing Beneficiary Equity in the Hospital Readmission Program Act”), it appears resistant to applying any type of broad brush SES adjustment to quality measurement without further information.

Discussion on short inpatient stays continues on slow boil

As conversations about alternatives to the two-midnight rule continue in Washington, CMS used the rule to address public feedback on how to design a short stay payment methodology. CMS has requested feedback on two key pieces of information: how to define a short or low-cost hospital case, and how to pay for them.

We’ll explore these comments and the broader events surrounding the controversial two-midnight rule on August 19. Per the proposed rule, CMS again provided limited commentary on two midnight rule itself.

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