IPPS Proposed Rule Pinches Hospitals

The impact of proposed changes to Medicare's Inpatient Prospective Payment System in 2015 will vary from hospital to hospital, but federal officials predict providers will take a $241 million payment hit next year.

Medicare and Medicaid have been under the budget knife for years. The proposed 2015 IPPS rules from the federal Centers for Medicare & Medicaid Services released last week have hospital officials asking a pressing payment question: How low can you go?

"It's really starting to chip away at hospitals," says Joanna Hiatt Kim, vice president of payment policy at the American Hospital Association. "We really can't pin it on CMS because they are implementing cuts in a statutory manner."

The IPPS applies to nearly 4,000 acute care and long-term care hospitals across the country. In the proposed rules for 2015, CMS presents two classes of factors that will affect Medicare payments next year: set factors that will impact all hospitals covered in the proposed rules, and variable factors that will differ from hospital to hospital.

The set factors in CMS' proposed 2015 IPPS rules establish a baseline 1.3 percent increase in Medicare payments. The elements of that baseline figure are as follows:

• 2.7 percent hike, "market basket" update
• 0.4 percent reduction, productivity adjustment
• 0.2 percent reduction, Patient Protection and Affordable Care Act
• 0.8 percent reduction, documentation and coding

Federal officials expect the net IPPS payment figure to be in the red because of several variable factors—mostly negative adjustments and penalties under Medicare payment programs. Those payment adjustments and penalties include ongoing cuts to the Disproportionate Share Hospital program that reimburses hospitals for uncompensated care as well as penalties for high rates of readmissions and hospital-acquired conditions.

The proposed IPPS reduction in HACs, which federal officials estimate at 0.3 percent, could be the most prominent pain point for hospitals, according to Kim and several other observers. She says large hospitals and teaching hospitals appear to be hardest hit. "If it's because they treat sicker patients, we don't think that's fair."

Peter Angood MD, CEO of the American College of Physician Executives, says reducing hospital acquired conditions is going to be a challenge for everybody.

"The complexities of reducing those HACs are tough," he said, noting reductions in readmission rates are easier to attain through relatively modest changes in programs and procedures. "It gets to the core of trying to improve the healthcare delivery system… Reduction in HACs is a longer term project. We've been on this journey for about a decade."

While Angood praised CMS for driving the effort to promote value in US healthcare, he said hospitals and other key stakeholders face short- and medium-term risk from the "dichotomous" payment system they face in the transition period. "CMS is using its platform effectively to shift us from volume to value… It's complicated for health systems to navigate both sides of that."

Two-Midnight Rule
The proposed IPPS rules are more about staying the course than breaking new ground, several observers say.

"It's 1,700 pages of a pretty boring rule," Eric Hammelman, VP of data analytics at DC-based Avalere Health, said Friday.

Anyone expecting CMS to chart a new course on its so-called "two-midnight rule" for hospital admissions is surely disappointed. Under the rule CMS set last summer, patients who stay at a hospital for a period of time spanning less than two midnights are generally considered appropriate for payment at outpatient rates under Medicare Part B. Inpatient hospital stays are reimbursed at the higher Medicare Part A rate.

Hospital Execs Hope for Two-Midnight Rule Repeal

In its proposal, CMS invites providers to offer exceptions to the two-midnight rule via email for inclusion on a list of procedures that are automatically designated for inpatient payment. But there is no new guidance on the rule.

"They didn't change any of the regulations," Paul Clark, a supervisor at Wolters Kluwer's Health Reform KnowlEDGE Center, said Thursday. "They just repeated guidance that RACs are at bay until March 2015."

Medicare recovery audit contractors are the biggest two-midnight rule losers for now, he says. "[Contractors] are not going to be making as much money. They are not happy."

Avalere's Hammelman says CMS appears determined to move forward with enforcement of the rule, which has drawn howls of protest from healthcare providers and their allies in Congress. "In their minds, this is a policy [CMS officials] have implemented." While recognizing there are exceptions to any rules, CMS has directed contractors to start looking at Medicare billing with the two -midnight rule in mind, he says.

The proposed IPPS payment statutory reductions such as those mandated under the PPACA and programs that will hit individual hospitals differently such as HAC penalties have been expected.

"It's all stuff that [CMS officials have] telegraphed," Hammelman said. And several quality programs such as HAC have the potential to take bigger and bigger bites out of bottom lines over time. "It will become a growing issue as we see hospitals face penalties in the six, seven, [or] eight percent range."

'Really Hurting'
The proposed 2015 IPPS rules cover several other topics for healthcare providers and other Medicare stakeholders to consider during the 60-day comment period that began April 30.

Wolters Kluwer's Clark says CMS appears to be trying to rein in appeals of decisions made at the Provider Reimbursement Review Board. "About a third of the newly proposed regulations apply to the PRRB," he said. "They're trying to eliminate certain appeals that providers can do. … In recent years, the PRRB has been trying to reduce the number of appeals they have to deal with."

Ongoing cuts to DSH payments will hurt hospitals in states where Medicaid expansion under the PPACA has been blocked, Clark said.

"One of the big issues in this one is going to be DSH reimbursement," he said of the proposed 2015 IPPS rules. "The assumption was the need for DSH payments was going to go down. CMS doesn't seem to be taking into account that the level of uncompensated care is not going down the way regulators, lawmakers and others had expected… For 2015, they're not making dramatic changes. It seems like they're going ahead with the existing formula."

The federal officials who drafted the PPACA expected states to expand Medicaid to more adults under a deal that has Washington paying 100 percent of the bill for the first three years. Federal support of Medicaid expansion is set to taper down to 90 percent in 2020.

"States that didn't expand Medicaid and already had a relatively sick population are really hurting," Clark said of states such as Georgia and Missouri, where hospitals are set to endure another round of double-digit cuts to DSH payments in 2015. "Struggling, marginal hospitals… the DSH payments may have been making them solvent. Those marginal ones are going to be in a bind."