At the Margins

Our 7 takeaways from Medicare's just-finalized 2021 inpatient payment rule

by Stuart Clark, Ye Hoffman, Melani Matson, and Lauren Robinson

On Wednesday, CMS released the finalized Inpatient Prospective Payment System rule for Fiscal (FY) 2021. Based on our early analysis, CMS kept the proposed version largely intact, with a few modifications.

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One point worth calling out upfront is that CMS is going to waive the 60-day delay in the effective date of the final rule, and the agency instead expects to issue the rule 30 days prior to its effective date, which means hospitals will have less time to review the final rule.

Our takeaways

1. CMS continues trend of generous standardized rate increases for FY 2021

While slightly less than what CMS initially proposed, the standardized payment rate is expected to increase by 2.9% for providers who participate in Hospital Inpatient Quality Reporting (IQR) and attest to EHR meaningful use.

This includes a market basket update of 2.4% (proposed at 3.0%; see note below), a zeroed-out productivity adjustment, and a mandated documentation and coding adjustment of +0.5%

IPPS Payment Rate Update for FY 2021

Note: The lower market basket update (2.4%) relative to the proposed rule (3.0%) was driven by lower than anticipated compensation growth for both health-related and other occupations as labor markets are expected to be significantly impacted during the recession and throughout the recovery. Additionally, CMS is not applying a multifactor productivity adjustment for FY 2021 because CMS is not permitted to make a positive productivity adjustment, and the calculated MFP adjustment was +0.1 percentage point.

With this standardized rate update, CMS estimates that overall payments to hospitals will increase by 2.5% per discharge in FY 2021 compared to FY 2020.  This accounts for applicable percentage increases/changes related to policies impacting MS-DRGs, geographic adjustments, and outliers. 

2. Pricing transparency becomes final—hospital star rating update pushed, again

One of the more interesting—and no doubt controversial—additions to the final rule is that CMS will begin collecting median charge data from Medicare Advantage organizations starting January 1, 2021. 

The goal is to use this data to inform a new, market-based calculation methodology to set MS-DRG relative weights, which will then determine what a hospital will be reimbursed for providing inpatient hospital services.

This rule coincides with the October 2019 executive order that hospitals start reporting negotiated rates with private payers beginning in 2021. While that ruling was challenged in federal court by the American Hospital Association (AHA) and other hospital groups, a District Court judge in the District of Columbia dismissed the case on June 23, finding that HHS could move forward with this requirement, thereby giving CMS the regulatory leeway to add the data collection requirement into the final rule.

And while the proposed rule was more expansive—including charge data from all payers, not just Medicare Advantage (MA)—they concluded that there were too many complications with comparing data across all payers. Given the similarity between MA rates and Medicare fee-for-service (FFS) rates, using MA data will provide a more moderate impact on the new, market-based MS-DRG relative weight calculation process.

CMS' decision to finalize this proposal should signal to hospitals and health systems that CMS intends to push forward with price transparency as a high priority despite legal challenges and the impact of Covid-19.

That said, CMS did not include the anticipated update to the hospital star rating methodology in the final rule, stating that the agency is continuing to solicit comment. CMS acknowledged that stakeholders have raised concerns about the current methodology and that the agency has promised to re-examine the program. However, CMS said it would include updates in future rulemaking as the industry focuses on responding to Covid-19.

3. CMS finalized the new MS-DRG for CAR T-cell therapy

As expected, CMS finalized the creation of a new MS-DRG, MS-DRG 18, specifically for cases involving Chimeric Antigen Receptor (CAR) T-Cell Therapy therapies (ICD-10-PCS procedure codes XW033C3 or XW043C3 would be assigned to this MS-DRG).

Also, CMS increased the payment per case for MS-DRG 018 by 0.18% and the estimated volume by 25% from the proposed to final rule; the FY2021 payment per case will be $239,928.79, with a total payment estimated at $34,789,674.24. The payment rate increase contributes to a 5.57% increase in payments for the oncology (medical) sub-service line. Correspondingly, the new-technology add-on payment (NTAP) for both approved CAR T-cell therapies—Yescarta and Kymriah—will be discontinued.

That said, reimbursement still comes up short against the full price of treatment and administration of these innovative therapies, and with the NTAP set to expire in 2021, those losses are only set to widen. 

One interesting sidebar: CMS did note that it would distinguish between clinical trials and non-clinical trial therapies when calculating relative weights for the proposed DRG. Since the cost of the drug is not factored into a clinical trial, that would have an outsized impact in determining the cost of care calculations that are used to set reimbursement rates (for example, based on prior years claims data, CMS found that non-clinical trial CAR T-cell cases have an average cost of $274,952, while those in clinical trials were $44,853).

4. Incentives to foster innovation

CMS has finalized add-on payments for 24 new technologies, up from 18. Also, in recognition of the concerns and impacts related to antimicrobial resistance, CMS in the final rule established several new changes regarding NTAPs for certain antimicrobials for FY 2021. 

Providers could begin receiving NTAPs for those products for discharges that occur the quarter after the products receive a marketing authorization from FDA, as long as FDA issues the marketing authorization before July 1 of the year in which the product's NTAP application was submitted. The changes would apply to antimicrobial products that apply for NTAPs for FY 2022 and beyond.

Overall, Medicare spending on new technologies in FY 2021 will increase by 120% compared to FY 2020, for a total of $874 million.

5. Downward payment shifts across cardiac, general surgery, and orthopedics

In our initial analysis on how changes in the proposed rule would impact service line reimbursement, we found that most service lines would see a healthy increase against the proposed weighted average payment rate update of 2.93%, if finalized as proposed. Cardiac and general surgery—two of the higher volume service lines—were the exception, coming in below that rate update.

In our analysis of the final rule, we see high volume service lines affected by the decrease in the market basket. The finalized weighted average payment rate increase of +2.6% (a decrease attributed to the finalized lower market basket update) left 5 of 14 service lines with payment rates drop below the weighted average, including high-volume service lines like general surgery (1.84%), orthopedics (2.39%), and cardiac services (2.48%).

Payment Change for Select Service Lines, Proposed vs. Final Rule (FY 2020 -FY 2021)

Estimated volumes computed from FY 2019 MedPAR volumes grouped to CMS final v38.0 grouper for FY 2021.

Note: Advisory Board calculations were computed with Tables, 1A-1E, 5, and 7A and 7B as of 9/3/2020. Our calculations were completed even though CMS MedPAR volumes have a delta discrepancy of 168 cases.

Download Analysis

6. Notable shifts in orthopedics reimbursement

In the proposed rule, CMS created 12 MS-DRG’s, deleted six, and reassigned a number of procedure codes. In the final rule, CMS finalized all 12 of the proposed MS-DRGs. And in our analysis from the proposed rule, we found that the most notable shift in volumes is for new MS-DRGs 521 and 522 (hip replacement with fracture) that collectively make up 65,338 cases—which could have significant financial impact for providers.

Our modeling shows that the final payment per case for MS-DRG 469 will decrease by 0.68% when reassigned to MS-DRG 521. However, the proposed payment per case for MS-DRG 470 will increase by 15.2% when reassigned to MS-DRG 522.

Finalized the addition of 12 MS-DRGs

7. CMS will begin public reporting of eCQM data in 2021, requires full-year reporting by 2023

For participants in the hospital Promoting Interoperability (PI) program, there’s no change to the PI objectives or the continuous 90-day reporting period for 2021. But the rule brings important changes to electronic clinical quality measure (eCQM) policies for both the PI and the Inpatient Quality Reporting (IQR) programs. CMS finalized policies to increase the eCQM reporting timeframe and the visibility of that data:

  • Hospitals must report two self-selected calendar quarters in 2021, compared to one quarter in 2020. In future years, the required timeframe will quickly expand to three quarters in 2022 and all four quarters in 2023; and
  • For the first time, CMS will make eCQM data publicly available on Hospital Compare starting with data reported for the 2021 program year.

Many IT leaders we've spoken to are concerned about the effort needed to collect and report eCQM data cross two quarters in 2021, especially given constraints on their resources due to the Covid-19 pandemic. The self-selected quarters need not be consecutive, which affords hospitals some flexibility in their reporting strategy in choosing which are the two best quarters of data to report. CMS will continue to rely on its extraordinary circumstances exception (ECE) policy for providers who encounter challenges collecting and reporting eCQM data for the duration of the public health emergency.

Heading into 2021, it's more important than ever to evaluate the “quality” of hospital eCQM data. In fact, data validity was the top concerns among commenters. The policy to make eCQM data publicly available could be problematic for hospitals that haven’t yet focused on eCQM data accuracy or performance improvement. If eCQM data reflects poor performance, that can have a negative impact on hospital reputation. The most effective eCQM initiatives involve both IT and Quality leaders working closely together to identify potential areas for improvement. That's because improving eCQM performance requires interdepartmental efforts to address various underlying factors, such as technology, data mapping and validation, clinical workflow and documentation—or some combination across multiple areas.

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