Why the Inpatient Prospective Payment System (IPPS) Proposed Rule matters for Medicaid

July 13, 2018 Genia I. Kelley

Medicaid programs typically consider Medicare’s Final Rule when updating their inpatient payment methodologies. Why? The proposed rule offers an early preview of potential changes that can impact Medicaid planning efforts. Examples of these updates include ICD-10 coding changes, labor and non-labor shares of the wage area and wage index values used in rate-setting, cost-to-charge ratios (CCRs) and Medicare Severity Diagnosis Related Groups (MS-DRGs).

The FY 2019 IPPS proposed rule was published in the Federal Register on May 7, 2018, with the annual updates and changes to payment rates and policies. Among notable changes this year, The Center for Medicare and Medicaid Services (CMS) proposes streamlining measures reported across five hospital programs and improving hospital price transparency for consumers. It also proposes significant changes to the Meaningful Use program, which will transition to a program called Promoting Interoperability.

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

Spending Increase. For the FY 2019 proposed annual update, CMS expects an overall increase of $4.1 billion in payments. For FY 2018, the increase was lower at $2.4 billion.

Rate Increase. The proposed IPPS market basket rate of increase is 2.8 percent. The proposed update factor for inpatient hospital rates is 1.25 percent, after the required adjustments.

Rates and Payment Impact. The overall average payment per discharge in the proposed rule is estimated at $12,418, based on 3,257 acute care hospitals included in the analysis. In its impact analysis of the proposed changes, CMS indicated that hospitals in urban areas would experience a 2.1 percent increase in payments per discharge, while for rural areas the estimated increase is 1.1 percent compared to FY 2018.

Wage Area and Wage Index Updates. CMS proposes various updates and changes to its wage area and wage index policies. These include adding a new urban wage area in Idaho to address a corresponding change issued by the Office of Management and Budget in 2017, and eliminating other wage-related costs (non-core list of wage costs). CMS estimates that 44.8 percent of the 3,226 hospitals with wage data would experience an average hourly wage increase of 1.02 percent, based on the proposed updates.

Wage Index Reclassification and Adjustments. Of the 3,620 hospitals used in calculating the proposed wage index, 941 would have a reclassified status for FY 2019. CMS also proposes codifying two other changes: reducing documentation requirements for sole hospitals in a labor market area seeking to reclassify to a higher wage index; and requiring hospitals with multicampus locations to demonstrate that both the main campus and the remote locations meet the qualification criteria for certain rural designations or reclassifications.

MS-DRG Updates. Various grouping changes are proposed to the MS-DRG grouper, including several changes related to maternity DRGs and high-cost drug treatments. In addition, a change to the post-acute care transfer policy would be expanded to include hospice care-related discharges.

ICD-10 Coding. For the FY 2019 ICD-10 update, 279 diagnosis codes and 392 procedure codes are newly added.

National Statewide Average Cost-to-Charge Ratios (CCRs). The proposed Medicare statewide CCRs continue their declining trend in FY 2019, especially among urban hospitals. Overall, the proposed urban CCRs in 37 states drop or stay the same as in FY 2018, while the proposed rural CCRs declined or remained the same in 31 states.

Disproportionate Share Hospital (DSH) Payments. CMS proposes distributing approximately $8.2 billion in uncompensated care in FY 2019, an increase of approximately $1.6 billion from the FY 2018 amount. CMS also proposes requiring hospitals to provide detailed lists of their Medicaid and charity care days in their cost reports to support the corresponding day count totals in those reports.

Transparency: Online access to standard hospital charges. CMS proposes requiring hospitals to post their standard charges on the internet in machine-readable form beginning January 1, 2019. Additionally, CMS sought comment on a variety of other considerations for promoting price transparency.

Hospital Readmissions Reduction Program (HRRP). No changes are proposed for the six conditions currently used to target readmissions. The FY 2019 proposed rule estimates that 2,610 hospitals would experience a reduction in their operating payments, resulting in projected savings of approximately $566 million. From FY 2019 forward, HRRP adjustments are to be based on comparisons within peer groups containing a similar proportion of dual-eligibles. This provides an important adjustment for sociodemographics in the penalty assessment, so as to avoid over-penalizing hospitals that disproportionately serve lower-income patients. For FY 2019, CMS proposes codifying the time period and calculation for these adjustments.

Other hospital quality programs. For FY 2019, CMS proposes streamlining the measures included in all five hospital inpatient quality programs to reduce measure duplication and improve cost effectiveness. Other proposed changes include the criteria for removing measures.

CMS has provided a fact sheet for more information on other proposed changes. The final rule is expected to be released in August 2018, effective beginning October 1, 2018. 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

Director, Consulting Services, Payment Method Development, Government Healthcare Solutions

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