The FY 2020 Inpatient Prospective Payment System (IPPS) Proposed Rule from the perspective of Medicaid

June 11, 2019 Genia I. Kelley

Medicaid programs should consider Medicare’s final rule when updating their inpatient payment methodologies. Annual updates that could impact Medicaid programs include labor and nonlabor shares of the wage area, wage index values, cost-to-charge ratios (CCRs), and postacute transfer policy.

The FY 2020 IPPS proposed rule was published in the Federal Register on May 3, 2019. Among notable changes this year, the Center for Medicare and Medicaid Services (CMS) proposes changes to the wage area calculation. It also proposes continued changes to the Promoting Interoperability program.

Medicaid programs that pay for inpatient hospital services based on Diagnosis Related Groups (DRGs) and quality programs should be planning for some elements in the IPPS proposed rule:

New technology add-on payments (NTAP). For FY 2020, CMS proposes to pay 65% of the marginal cost of DRG rate, rather than the current 50%. Also, if a new transformative or breakthrough medical device receives marketing authorization from the Food and Drug Administration (FDA) it would only need to meet the cost criterion to receive an add-on payment (meaning the clinical criterion is no longer a requirement). This change would begin with applications received in FY 2021. 

Wage area disparities and rural floor. CMS is proposing changes to the wage index calculation to include a methodology to increase the wage index for certain low wage index hospitals (values below the 25th percentile) and decrease the wage index for certain high wage index hospitals (values above the 75th percentile); change how the statutory rural floor wage index values are calculated by removing urban-to-rural hospital reclassifications; and provide a four-year transition for hospitals that experience significant decreases in their wage index values because of these proposed changes. This proposal will likely garner many comments, both for and against this proposal, by the June 24, 2019 comment period deadline for the proposed rule.

Hospital pay-for-performance quality programs. CMS is continuing their efforts to align the programs to decrease administrative burden. For the Hospital Readmission Reduction Program (HRRP), CMS is proposing to adopt eight factors when deciding whether a measure should be removed (these factors were previously adopted by the Hospital Inpatient Quality Reporting (IQR) and Hospital Value Based Purchasing (VBP) Programs), plus including hospital-specific reports data stratified by patient dual-eligible status for the six readmissions measures. For the VBP program, CMS is proposing to use the same data as the Hospital Acquired Conditions (HAC) Reduction Program to calculate the National Health Safety Network (NHSN) Healthcare-Associated Infection (HAI) measures. For the HAC program, CMS is proposing to specify the dates to collect data used to calculate hospital performance, adopt the eight factors CMS would use when deciding a measure should be removed from the program, and clarify administrative processes for validating NHSN HAI data submitted by hospitals to the Centers for Disease Control and Prevention (CDC). For the IQR program, CMS proposes determining the hospital-wide all-cause readmission measure from both claims and electronic health record data, as well as adding electronic clinical quality measures (eCQMs) related to opioid use and opioid adverse events.

Medicare and Medicaid promoting interoperability programs. In FY 2020, CMS is proposing to remove the Verify Opioid Treatment Agreement measure beginning in CY 2020 from the Promoting Interoperability program because of feedback from stakeholders that this measure presents significant implementation challenges, leads to an increase in burden, and does not further interoperability. CMS is requesting information on the inclusion of more meaningful measures to combat the opioid epidemic. After receiving feedback from stakeholders, CMS expects to consider adopting other opioid measures that will have more value in combatting the opioid epidemic.

Spending Increase. For the FY 2020 proposed update, CMS estimated an overall increase of $4.7 billion in payments to acute care hospitals. In FY 2020, the IPPS rule applies to approximately 3,300 acute care hospitals used in the impact analysis.

Rate Increase. The proposed unadjusted IPPS market basket percentage is 3.2%. The proposed final percentage is 2.7%, after the required statutory adjustments. A hospital’s percentage increase may be further reduced depending on its status as a meaningful electronic health records (EHR) user, its participation in the Hospital Inpatient Quality Reporting (IQR) Program, and its compliance with the submission of quality data to Medicare. The estimated overall average payment per discharge in the FY 2020 proposed rule is $13,169.

Base rate. The FY 2020 proposed operating base rate is $5,823.33, unadjusted for geographic factors. The proposed federal capital rate is $463.81.

Labor/nonlabor-related shares. For FY 2020, CMS is not proposing changes to the labor and nonlabor-related shares. The proposed labor-related share used to adjust the base rate by the wage index remains 68.3% for hospitals with a wage index greater than 1. The proposed nonlabor-related share is 31.7%. 

Wage area and wage index updates. CMS estimates that 50.6% of the 3,204 hospitals with wage data would experience an average hourly wage increase of 1.02% or more in FY 2020.
Of the 3,204 hospitals used in calculating the wage index, 997 have a reclassified status for FY 2020. 

National average cost-to-charge ratios (CCRs) by cost center. There are no additions or deletions to the nineteen revenue cost centers used by CMS in FY 2020.

National statewide average cost-to-charge ratios (CCRs). For FY 2020, the CMS proposed national statewide average CCRs continue their declining trend. This declining trend underscores the importance of Medicaid programs updating CCRs annually. The ceilings were set at 1.159 for operating CCRs and 0.151 for capital CCRs. 

Disproportionate share hospital (DSH) payments. A total of $12 billion in DSH payments ($4 billion for Medicare Supplemental Security Income (SSI) recipients and $8 billion in uncompensated care) is estimated for FY 2020. 

Outlier payment. CMS does not propose changes to the high-cost outlier methodology for FY 2020. The proposed outlier pool is proposed at 5.1% of operating payments and the proposed fixed-loss or outlier threshold amount is $26,994. 

Postacute transfer policy. CMS did not propose any changes to patient discharge status codes included in policy.

Present-on-admission (POA) indicators. CMS did not change POA indicators or POA definitions for FY 2020. 

Hospital-acquired conditions (HAC) program. CMS did not change the list of HAC categories for FY 2020. The list remains constant with fourteen categories. Updates are proposed to the ICD-10-CM diagnosis and ICD-10-PCS procedure codes used to identify a HAC condition for FY 2020. 

Hospital readmissions reduction program (HRRP). CMS did not change the six conditions currently used to target readmissions. 

CMS has provided a fact sheet for more information on other proposed changes. The final rule is expected to be released in August 2019, effective beginning October 1, 2019. Medicaid programs should validate the proposed changes to the final rule as CMS can make changes based on feedback received during the comment period.



About the Author

Genia I. Kelley is Director, Consulting Services, Payment Method Development, Government Healthcare Solutions for Conduent

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