Corporate Compliance

Note from the instructor: Summary of potential adjustments to Inpatient Prospective Payment System (IPPS) payment for inpatient hospital discharges during FY 2015, Part I

Medicare Insider, October 14, 2014

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This week’s note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.  
The most significant changes to the IPPS are implemented as of the beginning of the government’s FY, which is October 1. Most inpatient short-term acute-care hospitals are reimbursed for inpatient stays based upon the IPPS. The IPPS is a prospective payment system implemented in 1982. Under the IPPS, hospitals generally receive a single payment for all of the services provided to a particular patient during that inpatient stay. That single payment is based upon the DRG to which the stay is assigned. The reimbursement for each DRG is based upon the average resources necessary to treat a patient with the same principal and secondary diagnoses, procedure(s) and other relevant factors. 
In recent years, CMS has implemented a number of programs designed to encourage cost and administrative efficiency, while preserving the quality of inpatient hospital services. Many of these programs fall under the rubric of what CMS refers to as “pay for performance.” Recently, I have been reviewing the IPPS FY 2015 Final Rule (FY 2015 FR), including the potential adjustments to the otherwise applicable IPPS payment for a particular inpatient stay. Trying to find all of the relevant information on these adjustments has been a daunting task. I thought it might be helpful to provide a brief summary of the major adjustments to which hospitals’ IPPS payments may be subject during FY 2015. This is Part I of a two-part series that will focus on these adjustments. Part II will appear in the November 4 edition of the Medicare Insider.
Since not all of the particulars are set out in the FY 2015 FR, I will list the principal souces I used to identify relevant information at the end of this Note. Also, to keep the summary as brief as possible, I will use acronyms for a number of the particulars. Please see the source authorities for more information on these acronymns and other details with respect to the IPPS adjustments discussed. Finally, these potential adjustments apply to IPPS payment for inpatient discharges during FY 2015 (October 1, 2014—September 30, 2015).
Potential adjustments to the Operating Standardized Amount (OSA)
The IPPS payment is composed of two separate payments: the DRG operating payment (Operating Payment) and the DRG capital payment. The majority of adjustments, if any, are made to the Operating Payment. To calculate a particular hospital’s Operating Payment during FY 2015, the hospital has to begin with the applicable OSA, from Table 1A or 1B of the FY 2015 FR. The OSA is the average per case operating costs for all inpatient stays in IPPS hospitals for that FY. Those hospitals whose wage index (WI) is greater than one will find their OSA in Table 1A. Those whose WI is equal to or less than one will find their OSA in Table 1B. Each year, CMS determines the OSA for that year, based upon the full market basket increase, which is 2.2% for FY 2015. They then divide each OSA into a labor and non-labor related portion. 
Inpatient Quality Reporting Program (IQR). A number of years ago CMS implemented the first of its quality initiatives, currently referred to as the IQR. Under the IQR, hospitals are required to meet certain quality reporting and reliability criteria in order to receive the full market basket increase for that FY. For FYs prior to FY 2015, hospitals that failed to meet these criteria were subject to a two percentage point reduction to the otherwise applicable full market basket increase for each of their Operating Payments. 
For FY 2015, any hospital that fails to meet the relevant IQR requirements will be subject to a one-quarter reduction of the full market basket update, rather than a two percentage point reduction. This will result in its receiving an update of 1.475%, rather than the full market basket update of 2.2%. 
EHR Incentive Program. In addition, any hospital that is subject to the EHR Incentive Program, but is not a meaningful EHR user for FY 2015, will also be subject to a one-quarter reduction of the full market basket update. This will result in its receiving an update of 1.475%, rather than the full update of 2.2%. 
These two reductions are cumulative. Therefore, any hospital that fails to meet both the IQR and EHR requirements for FY 2015 will be subject to an update of .75, rather than 2.2%, for all discharges during FY 2015.
Tables 1A and 1B include the applicable OSA amounts (divided into labor and non-labor related portions) for each of the above-noted scenarios for FY 2015.
WI adjustments. CMS has long recognized that inpatient hospital services are labor intensive, constituting a significant portion of a hospital’s total operating costs. CMS has also long recognized that labor costs vary, depending upon where a hospital is located. Therefore, CMS, with the assistance of the Office of Management and Budget (OMB), periodically classifies hospitals into certain common geographic areas (currently referred to as core-based-statistical areas [CBSAs]). These classifications presume comparability in terms of labor and other related hospital operating and capital costs. Once classified to a particular CBSA, CMS determines the WI for all hospitals located in that CBSA. The WI is a comparison of the average labor costs for all hospitals located in that CBSA to the average labor costs for all hospitals across the country. 
During the calculation of a particular hospital’s Operating Payment, Medicare adjusts the labor-related portion of that hospital’s OSA by multiplying it by the hospital’s current WI. Once adjusted, the WI-adjusted labor-related portion of the OSA is added back to the non-labor-related portion of the OSA, before continuing the computation process. 
OMB has just completed a revision of the market basket CBSAs, based upon the 2010 Census data. This revision resulted in a number of changes to the CBSAs to which specific hospitals are assigned, and, in many cases, changes to the WIs for those hospitals. During FY 2015, hospitals standing to benefit from these changes will be subject to the WI of the CBSA to which they were assigned under the new OMB delineations. To minimize any adverse impact on Operating Payments due to the adoption of these new OMB delineations, CMS is adopting a one-year transition for all hospitals standing to experience a decrease in their wage index exclusively due to the implementation of the new OMB delineations. During FY 2015, their WI will be based on a 50/50 blend of the WI of the CBSA in which they were geographically located in FY 2014 and the WI of the CBSA to which they were classified under the new OMB delineations. The new OMB delineations will be fully implemented for these hospitals in FY 2016, at which time they will be fully subject to the WI of their new CBSA classification.
CMS is also adopting a three-year transition for the relatively few hospitals previously located in an urban county that would become rural under the new OMB delineations. For FYs 2015, 2016, and 2017, assuming no other form of WI reclassification or redesignation is granted, CMS will assign these hospitals to the area WI of the urban CBSA in which they were geographically located in FY 2014.
Source authorities
More information on the issues discussed can be found in the following principal source authorities:
FY 2015 IPPS Final Rule, 79 Fed. Reg. 49854–50449 
FY 2014 IPPS Final Rule, 78 Fed. Reg. 50496–51040 
FY 2013 IPPS Final Rule, 77 Fed. Reg. 53258–53750 
Fact sheets: CMS to Improve Quality of Care during Hospital Inpatient
Fact sheets: Fiscal Year 2015 Policy and Payment Changes for Inpatient
Stays in Acute-Care Hospitals and Long-Term Care Hospitals
Part II
In the November 4 edition of the Medicare Insider we will continue our discussion on IPPS payment adjustments, focusing on FY 2015 adjustments under the Hospital Readmission Reduction Program, the Hospital Value-based Purchasing program, and the Hospital-acquired Condition Reduction Program.

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