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IPPS Final Rule Brings Annual Changes to Inpatient Payments

Medicare’s Inpatient Prospective Payment System (IPPS) Final Rule for FFY 2018 brings myriad changes to payment policies and rates. Medicaid programs rely on the Final Rule to update their inpatient payment methodologies. While the changes may affect some states more than others, all are touched in some way.

The Final Rule was published in August 2017 with all updates effective for admissions on or after October 1, 2017. A Correction Notice was published October 4, 2017. Updates to the Final Rule that could impact Medicaid programs include coding, labor and nonlabor shares of the wage area, wage index values, cost-to-charge ratios (CCRs) and MS-DRGs.

Coding changes

CMS has finalized the addition of 360 new ICD-10-CM diagnosis codes and 3,562 ICD-10-PCS procedure codes for FY 2018. The CMS website has more details on the ICD-10 diagnosis codes and the ICD-10 procedure codes. Timely annual implementation into the MMIS will continue to be crucial for Medicaid programs.

Labor and Nonlabor-Related Shares

CMS adjusts the IPPS base rates (standardized amounts) by hospital depending on the local wage area index. The values, calculated annually by CMS, reflect differentials in the local market wages for clinical staff employed by short-term, acute care hospitals.

The base rate is divided into labor-related and nonlabor-related shares. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located. For FY 2018, CMS updated the labor and nonlabor percentages for hospitals with a wage index greater than 1. The changes reflect the 2014-based IPPS market basket, rebased and revised this year.

  • 3 percent labor related share, 31.7 percent nonlabor share for hospitals with a wage index greater than 1
  • 0 percent labor related share, 38.0 percent nonlabor share for hospitals with a wage index lower than 1

Wage Area and Wage Index Updates

The annual wage index update is calculated and assigned to hospitals based on the labor market area in which the hospital is located (wage area). CMS assigns hospitals to labor market areas using Core-Based Statistical Areas (CBSAs) and a county-to-CBSA crosswalk. CMS updates these wage area assignments annually to reflect census data with periodic changes issued by the Office of Management and Budget (OMB). Wage areas are currently based on OMB’s 2010 Census CBSA standards and delineations, revised July 2015.

For FY 2018, CMS finalized a change to the basis for assigning a county to a CBSA. CMS will use only the Census Federal Information Processing Standard (FIPS) codes to identify and crosswalk counties to CBSA codes for wage index purposes, since they are maintained regularly. For FY 2018, three county-CBSA updates were made with no resulting impact to hospitals that continued to be considered rural. No changes to the CBSA codes or names were noted.

Other policies and adjustments related to the wage index include hospital wage area/index reclassification, the occupational mix adjustment, the outmigration adjustment, and the rural, imputed rural and frontier floors. For FY 2018, CMS finalized these exception policies and adjustments, including a one-year extension of the imputed rural floor policy for hospitals in three all-urban states (a reversal from the proposed rule).

National Statewide Average CCRs and Ceilings

Medicare uses CCRs to determine whether a hospital stay qualifies for outlier payments. Typically, a hospital-specific CCR is used. Medicare calculates the CCR ceilings and uses the national statewide average CCRs in outlier stays when a hospital’s CCR exceeds 3.0 standard deviations from the mean of the log distribution of CCRs for all hospitals. The statewide average CCRs are used for outlier payment when hospital-specific CCRs are greater than the ceiling or when a CCR can’t be calculated.

For FY 2018, CMS set the ceilings for operating CCRs at 1.16 and for capital CCRs at 0.155. CMS also updated the national statewide average CCRs. The national average CCRs continue their declining trend, especially for urban hospitals. It is another reminder of the importance of Medicaid programs updating CCRs annually. The CCRs can be found at the CMS webpage for the FY 2018 Final Rule Tables.

MS-DRG Updates

For FY 2018, CMS has reduced the number of MS-DRGs from 757 to 754. No new MS-DRGs are being implemented for FY 2018. MS-DRG changes typically relate to Medicare. But they are relevant to Medicaid as an indication of ongoing refinements due to ICD-10 coding changes or specific issues with the DRG grouper logic (e.g., the unrelated surgical procedure DRGs and rehabilitation DRGs).

  • Rehabilitation: The grouping for rehabilitative care has been an important DRG to monitor for Medicaid. For FY 2018, CMS made no changes to the rehab DRG grouping and no new codes were added for “encounter for rehabilitative services.” CMS indicated that rehab services will continue to be coded and grouped as they have since the transition to ICD-10, given that changes to the grouper classifications are driven by new codes being added. The fact that CMS addressed the rehab DRG suggests that movement on new code proposals and/or grouping changes are possible for FY 2019. Under ICD-9, inpatient rehab services were primarily tied to APR-DRG 860 (MS-DRGs 945 & 946) with one diagnosis code. With ICD-10, the coding guidelines changed indicating the reason for the rehabilitation should be the principal diagnosis. This often affected the APR-DRG assignment, even if the newly required rehab ICD-10-PCS code was also reported on the claim.
  • Maternity: For DRGs related to maternity, CMS has finalized its policy to remove 314 ICD-10-CM codes identified with “unspecified trimester” from MS-DRG 998 (principal diagnosis invalid as discharge diagnosis) and reassign them to the MS-DRG in which their counterparts (first, second, third trimester) are currently assigned. Additionally, ICD-10-CM diagnosis codes O09.41, O0.942 and O09.43 (which describe the supervision of pregnancy) are being reassigned from MS-DRG 782 (other antepartum diagnoses without medical complications) to MS-DRG 998. A total of 14 ICD-10-CM diagnoses codes that describe observation and evaluation of newborns for suspected conditions ruled out are to be added to MS-DRG 795 (normal newborn) effective October 1, 2017.
  • Specificity of Certain Operating Room (OR) Procedures: For FY 2018, CMS is removing MS-DRGs 984, 985 and 986 (prostatic O.R. procedure unrelated to principal diagnosis with major complication or comorbidity (MCC), with complication or comorbidity (CC) and without CC/MCC, respectively). The procedures associated with these DRGs are reassigned to MS-DRGs 987 through 989 (non-extensive OR procedure unrelated to principal diagnosis with MCC, with CC and without CC/MCC, respectively). CMS reviews these unrelated procedure to diagnostic groupings each year to determine necessary changes based on MedPAR data.

The Final Rule also addresses other aspects of IPPS payment. These include an IPPS market basket rate increase, base rate updates, outlier policy, updated CCRs by revenue center, disproportionate share hospital payments, Hospital-Acquired Conditions (HACs) Program, present-on-admission indicators, and other hospital quality programs.

The Payment Method Development team at Conduent can help Medicaid programs understand the impact that the Final Rule has on their states. Contact Andrew Townsend to learn more.

You can read more Conduent insights about Medicaid payment in previous editions of Medicaid Payment Perspectives.