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Proposed Changes to Medicare Hospital Inpatient Prospective Payment System ("PPS") for Federal Fiscal Year 2006

The following is a brief outline of the changes proposed to hospital inpatient PPS by the Centers for Medicare and Medicaid Services (“CMS”). The proposed rule will be published in the Federal Register next week, but is currently available on-line at http://www.cms.hhs.gov/providers/hipps/frnotices.asp. Comments on the proposed rule are due June 24, 2005. Among the changes that CMS proposes are:

PPS Update

• The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MAA”) requires CMS to update hospital payments by the full market basket, which is 3.2% for federal fiscal year 2006. Hospitals that do not submit data on 10 quality indicators receive only a 2.8% update. This market basket is based on fiscal year 2002 costs (CMS had been using fiscal year 1997 costs).
• CMS proposes to change the labor-related share of the standardized amount to 69.731%, except that the labor-related share percentage will be 62% for hospitals that will benefit by using that percentage (i.e., hospitals with a wage index less than 1.0).
• CMS proposes to use the rebased FY2002 excluded hospital market basket, which is 3.4%, to update the target amount for the reasonable cost-based portion of payments to long-term care hospitals (LTCHs) and inpatient psychiatric facilities (IPFs) in the transition period.
• CMS proposes to update the target amount for children’s and cancer hospitals using the market basket update applicable to acute-care hospitals (3.2%), but invites comments on this proposal.

• CMS proposes to change the outlier threshold to $ 26,675.

• The proposed rule includes CMS’s evaluations of the add-on status for federal fiscal year 2006 for three technologies that currently receive an add-on and eight technologies that applied for add-on status.

• CMS proposes that the adjustment for occupational mix will continue to be 10%.

• Due to inconsistent reporting of pension and other deferred compensation plan wage-related costs, the rule clarifies that providers are to follow the PRM. (It appears that there will be increased scrutiny on pension and deferred compensation wage-related costs.).

• CMS clarifies that salaries for employees of provider-based clinics are to be included in the wage data, despite suggestions that they should not.

• Hospitals wishing to withdraw their wage index reclassification must do so within 45 days of publication of the proposed rule.

• CMS proposes new criteria for determining whether a DRG should be included in the postacute care transfer policy, under which the number of DRGs subject to the policy would increase from 30 to 223. A list of the affected DRGs is included in the proposed rule. The proposed criteria are:

  • The DRG has at least 2,000 postacute care transfer cases;

  • At least 20% of the cases in the DRG are discharged to postacute care;

  • At least 10% of the discharges to postacute care occur before the geometric mean length of stay;

  • The DRG has a geometric mean length of stay of at least 3 days; and

  • If the DRG is paired with another DRG based on whether there is a comorbidity or complication, both DRGs are included if either meets the first three criteria above.

• For hospitals that were excluded from inpatient PPS for the cost reporting period ending on or before December 31, 1996 (and therefore did not receive an IME resident cap, but received a GME resident cap), intermediaries are to calculate the IME resident cap using the GME resident cap. CMS is soliciting comments on how to address situations in which data from the 1996 year is no longer available.

• CMS proposes that, for cost reporting periods beginning on or after October 1, 2005, if a hospital can document that a resident, prior to the first year of training, matched in a specialty program for the resident’s second year, the resident’s initial residency period (“IRP”) is based on the period of board eligibility for the second year program. (The current rules states that, effective with cost reporting periods beginning on or after October 1, 2004, for residents who simultaneously match for a first year of training in a clinical base year in one specialty and for additional years in a different specialty, the resident’s IRP is based on the period of board eligibility for the second year program.)

• Currently, urban hospitals that begin training residents after the establishment of the fiscal year 1996 caps will receive a cap amount based on their new programs, but are not permitted to enter into affiliation agreements. Rural hospitals in the same situation are permitted to enter into affiliation agreements. CMS proposes to allow urban hospitals with new residency programs to enter into affiliation agreements but only if the affiliation agreement increases the hospital’s cap.

• CMS proposes to allow rural teaching hospitals that have become urban due to the MSA designations effective in federal fiscal year 2004 to retain some of the favorable treatment applicable to rural teaching hospitals. Specifically, if such a hospital received an adjustment to its FTE cap for a new program while it was rural, it will be able to retain the adjustment to its FTE cap, even though it would not have received the adjustment had it been urban at the time it started the new program. These hospitals will also retain the 130% adjustment to the fiscal year 1996 resident caps applicable to rural hospitals. Similarly, urban hospitals with rural track programs are permitted to keep the resident cap adjustment for those programs even if the rural track program is now located in an urban area.

• The MAA requires CMS to provide hospitals with data to compute the number of patient days used to compute DSH payments. Currently, a hospital may obtain the MedPAR data used to calculate the Medicare (or SSI) fraction (for a fee) only if it has an appeal before the PRRB or Intermediary related to DSH. For cost reporting periods that include December 8, 2004 (one year of the enactment of the MAA), CMS proposes to furnish MedPAR data regardless of whether there is a pending DSH appeal and at no charge. Hospitals will be able to verify the Medicare fraction and determine whether they want their fraction determined on the basis of the hospital’s fiscal year rather than the federal fiscal year. With regard to the Medicaid fraction, CMS states that it believes that mechanisms are in place to obtain this data from state Medicaid agencies, but that if it determines that state Medicaid agencies are not voluntarily providing this information to hospitals, it will consider amending the Medicaid regulations to impose this requirement on states.

• CMS proposes some clarifying and technical changes to the regulations, including one that deletes the requirement that provider-based entities operate under the same name as the provider. Rural health clinics affiliated with hospitals with 50 or more beds no longer have to apply for provider-based status. CMS is also soliciting comments on whether the provider-based criteria should be made more lenient for neonatal intensive care units located off-campus.

• CMS states that it believes that certain specialty hospitals that have sought an exception from the 18-month moratorium on physician investment because they satisfy the “under development” criteria may be primarily providing outpatient services. CMS warns that if a hospital is not primarily engaged in providing inpatient care, its Medicare provider agreement will be terminated.

• CMS propose that CAHs located in counties that were designated as Lugar counties effective October 1, 2004 may maintain their CAH status until September 30, 2006. CMS also proposes a process to determine whether a CAH that replaces or relocates a facility should still be considered a CAH.

• CMS proposes that the payment for blood clotting factor provided to hemophilia inpatients should be changed from 95% of the average wholesale price to 106% of the average sales price.

• In response to MedPAC recommendations that CMS should improve payment accuracy in hospital inpatient PPS, CMS is planning a “comprehensive and systematic review” of the complications and comorbidities DRG list for federal fiscal year 2007. It is also considering a selective review of certain DRGs that have been alleged to have been overpaid and create incentives for physicians to create specialty hospitals. In addition, it is considering the use of alternative DRG systems.

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If you have any questions, please call Barbara Straub Williams at 202.872.6733 or the attorney with whom you usually work.