Guest post by Ken Perez, vice president of healthcare policy, Omnicell.
On April 30, 2014, the Centers for Medicare & Medicaid Services issued its proposed rule for the Inpatient Prospective Payment System (IPPS), which pays about 3,400 acute care hospitals, and the Long-term Care Hospital Prospective Payment System (LTCH PPS), which pays about 435 LTCHs.
The issuance of this proposed rule is a significant event, as it discloses CMS’s intent regarding the average change (increase or decrease) to the IPPS reimbursement rate, what one might call an “annual inflation adjustment.”
While CMS projects that the payment rate update to general acute care hospitals will be 1.3 percent in FY 2015—which on the face of it doesn’t look too bad—it’s important to understand how CMS arrived at that figure, what is the projected overall impact on hospital payments because of other regulatory changes, and how the proposed update compares with the recommendation of the nonpartisan Medicare Payment Advisory Commission (MedPAC).
How did CMS arrive at the 1.3 percent update (adjustment)?
CMS started with a proposed annual market basket update (inflation projection) from research firm IHS of 2.7 percent. That starting point was then reduced, per the Affordable Care Act, by a multi-factor productivity adjustment of 0.4 percent and a specified reduction to the market basket update of 0.2 percent, yielding 2.1 percent. Then CMS reduced it by a documentation and coding recoupment adjustment (basically to correct for past, unintended documentation and coding over payments) of 0.8 percent, resulting in a net update of 1.3 percent.
What is the projected overall impact on hospital payments due to other regulatory changes?
In addition to the general payment rate update, the proposed rule includes a number of other regulatory changes that will impact hospital payments. Three of them reflect the continued ACA-mandated shift from the current fee-for-service system to an increasingly fee-for-value approach:
The Hospital Value-based Purchasing (VBP) program: The percent reduction increases from 1.25 percent in FY 2014 to 1.5 percent in FY 2015.
The Hospital Re-admissions Reduction Program (HRRP): The maximum reduction in payments increases from 2.0 percent in FY 2014 to 3.0 percent in FY 2015.
The Hospital-acquired Condition (HAC) Reduction Program: In FY 2015, hospitals in the worst quartile will face a reduction in their Medicare IPPS payments of 1.0 percent.
Because of these changes and some others, CMS has concluded that the proposed average decrease in payments under the IPPS for all hospitals is 0.8 percent in FY 2015 relative to FY 2014. In other words, the average hospital will get 0.8 percent less from Medicare next fiscal year, further squeezing profit margins.
How does the proposed update compare with the recommendation of MedPAC?
The nonpartisan Medicare Payment Advisory Commission (MedPAC) recommended a more generous 3.25 percent, noting the financial pressures faced by most hospitals.
Implications for Hospitals
Hospitals continue to face margin pressure on the Medicare front, with a reimbursement rate update that will arguably not keep pace with inflation and more revenue at risk because of more impactful fee-for-value healthcare delivery reforms. While CMS will accept comments on the proposed rule until June 30, 2014, traditionally there has been relatively little movement in the update percentage between the proposed and final rules. CMS will issue a final rule by Aug. 1, 2014.