At the Margins

The winners (and losers) in Medicare's 2020 inpatient proposed rule

by Eric Fontana and Kenna Hawes

Late yesterday, CMS released the Inpatient Prospective Payment System Proposed Rule for Fiscal Year (FY) 2020. Over the next few weeks, our team will be scrubbing through the regulations to examine the key provisions.

Below we've highlighted some initial reactions to the proposal, but be sure to join us for our full review of the regulation on Monday, May 13, at 3 p.m. ET. We'll unpack the proposal in full, expanding on the payment updates and other key modifications such as changes to quality measures, pay-for-performance programs, and more.

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Three early takeaways from the proposal

  1. The proposed payment rate increase for FY 2020 would be the largest in a decade

    The +3.2% update for payment rates detailed in this year's proposal represents a return to updates in the vicinity of pre-ACA levels. If you've been following our coverage over the past few years, you'll be aware that a significant bump in rates was expected. Our modeling indicated that the expiration of the decade long ACA-mandated downward adjustments (in FY 2019, this downward adjustment was a whopping -0.75%), combined with a MACRA mandated positive payment rate bump of +0.5%, would inevitably cause the rate update to jump substantially in FY 2020.

    Cheat sheet: What you need to know about IPPS

    Translated into real dollars, the proposal is estimated to increase payments to hospitals for Acute Care Medicare by $4.67 billion in FY 2020 if finalized as proposed.

  2. Wage index changes would create 'winners' and 'losers' among hospitals

    While the large positive payment update may seem cause for celebration, not all hospitals will get to share equally in this increase. CMS has proposed substantial modifications to the wage index calculation methodology, with the ultimate goal of increasing payment rates for hospitals in the lowest-cost areas of the country. As these changes are budget-neutral, this sets up a "winners vs. losers" scenario, with some hospitals in high cost areas expected to see reduced payment rates.

    For the uninitiated, the wage index is a mechanism designed to adjust a hospital's inpatient payment rates to account for local differences in labor costs. Critics of the wage index, including influential advisory groups such as MedPAC (and even CMS itself), contend that the current system—which is based on a hospital's historical wage data—exacerbates disparities between high (typically urban) and low (typically rural) wage index hospitals: High-wage-index hospitals receive escalating inpatient payments as they report more years of higher wages, while low-wage-index hospitals' payments continue to fall as a result of lower wages being reported.

    To address this growing disparity, CMS proposes to make payment modifications in FY 2020 so that hospitals with a wage index below the 25th percentile would receive a wage index increase, while hospitals above the 75th percentile would see a wage index decrease. To ameliorate financial strain on those high-wage-index hospitals receiving lower inpatient rates, decreases would be capped at 5% for fiscal year 2020. CMS promotes this change as a boon for struggling rural hospitals.

    CMS is also proposing to change the "rural floor" methodology behind wage index calculations in an effort to prevent gamesmanship between states. The "rural floor" policy dictates that urban hospitals in a state may not have a lower wage index than rural hospitals in the same state. Starting in FY 2020, CMS proposes to exclude wage data for hospitals that reclassify from urban to rural, citing concerns that the existing rural floor policy has allowed "States to manipulate the wage index system to achieve higher wages for many urban hospitals in those States at the expense of hospitals in other States."

    Such a statement has some historical precedent. One notable example occurred in FY 2012, when the ripple effects of a single small Massachusetts hospital reclassifying from Critical Access to a rural hospital created wild swings in payment rates for that state at the expense of many others.

  3. Expect "winners" and "losers" among hospitals' different service lines, too

    Our initial, volume-weighted analysis of the proposed payment rate changes indicates a +3% update for inpatient payments can be expected in FY 2020, if provisions are finalized as proposed. While most service lines will receive increases in the general vicinity of this amount, there are a few notable exceptions.

    Service lines such as neurosurgery, other trauma, vascular services, neurology and orthopedics are expected to receive updates greater than 3%, while general surgery, cardiac services and medical oncology/hematology are proposed to see payment updates falling short of 3%. 

Cheat sheets: Medicare payment 101

Feeling overwhelmed by all of the new proposed rules CMS has released? Get back to basics by viewing our cheat sheets which provide an overview of different payment programs, who they affect, when they're updated and what goes into payment calculations.

Download our one-page cheat sheets for a quick overview of each rule's scope:

Access the Cheat Sheets