CMS proposed rule that would increase payments to acute care hospitals

May 11 2004

The Centers for Medicare & Medicaid Services (CMS) today issued a proposed rule that would increase payments to acute care hospitals for inpatient services in fiscal year 2005, offer additional financial relief to rural hospitals, and for the first time in the history of Medicare, create a direct link between quality services to Medicare beneficiaries and payment for those services.  The proposed rule would implement major payment and policy changes for acute care hospitals required by the comprehensive Medicare modernization legislation signed into law on December 8, 2003.

“The proposed inpatient payment rule that we are announcing today includes many specific changes created by the Medicare modernization legislation, such as updating the labor markets that are used to determine hospital payment rates in fee-for-service Medicare,” said CMS Administrator Mark B. McClellan, M.D., Ph.D.   “The bottom line, particularly for rural hospitals, is significant increases in hospital payment rates.  And the bottom line for Medicare beneficiaries, whether in urban or rural areas, is better access to high-quality inpatient care.” 

CMS projects that the combined impact of the inflation update and other proposed changes will yield an average 4.7 percent increase in payments for urban hospitals in fiscal year 2005, while rural hospitals will see an average increase of 6.0 percent.  In FY 2005, Medicare payments to approximately 3,900 acute care hospitals under the inpatient prospective payment system (IPPS) are projected to be $105 billion, up from a projected $100 billion in fiscal year 2004.

“The proposed rule represents our continuing effort to use the new Medicare legislation and other good ideas to help beneficiaries, in this case by providing regulatory and payment relief to hospitals,” said Dr. McClellan. “Among other things, the rule proposes a full market basket update for hospitals if and only if they report on the quality of their care; it proposes changes to the wage index that will increase the payment rates for rural hospitals significantly; proposes additional payments for hospitals in remote areas to reflect the higher costs associated with having a low volume of Medicare discharges; it proposes to incorporate in regulation a number of policy changes that we are already implementing to benefit critical access hospitals; it increases payments related to the use of some important new medical technologies; and it better targets physician training slots to where they are most needed.”

As required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), hospitals reporting specified quality data will receive an inflation update equal to the hospital market basket percentage increase, currently estimated at 3.3 percent.  Hospitals that do not report this information will receive the market basket percentage increase less 0.4 percentage points, or an estimated 2.9 percent increase.  The market basket percentage increase refers to the projected rate of inflation for goods and services used by hospitals in caring for Medicare beneficiaries.  This is the first time that hospital payment rate increases have been related to performance, in this case by providing incentives for giving information to patients and health professionals related to quality of care.

The proposed rule would also implement Section 406 of the MMA, which requires CMS to make an additional payment to low-volume acute care hospitals that are located more than 25 road miles from another acute care hospital: payments will be based on their additional incremental costs.   CMS has determined that this adjustment will be paid to hospitals with 500 or fewer discharges in a year that meet the distance requirement, because the available evidence shows that costs per case increase below this level of discharges.  CMS is proposing to use the number of discharges from a previous fiscal year both in determining whether a hospital qualifies for the adjustment and in determining the amount of the adjustment to make it possible for hospitals to know in advance whether they will be receiving adjustments and how much. 

The proposed rule addresses the impact of the new Core Based Statistical Areas (CBSAs) on hospital geographic classification.   The CBSAs, which were developed by the Office of Management and Budget on the basis of 2000 Census data, will replace the currently used Metropolitan Statistical Areas and New England County Metropolitan Areas, which reflect 1990 data.  Overall, the impact of the CBSAs is expected to be relatively small, although a number of hospitals, currently located in rural areas, are expected to benefit from being classified into areas with higher payment rates. 

The CBSAs will also have an impact on hospitals that are entitled to automatic geographic reclassification because they are located in rural counties whose workforces tend to commute to adjacent urban areas.  The number of such counties is increasing from 28 to 97 under the proposed rule.

The MMA contained a number of provisions to help critical access hospitals (CAHs) as they serve rural beneficiaries.   The proposed rule addresses these provisions.  For example, these hospitals can now designate up to 25 beds as either acute care beds or swing beds ‑ beds that may be used for either acute or post-acute care, and can set aside units of up to ten beds each to be used exclusively for inpatient rehabilitation and psychiatric services.  These units, which would not count toward the CAH’s 25-bed maximum, will be paid as if they were distinct parts of acute care hospitals, and will have to meet the same standards as units in acute care hospitals.  In addition, payment for both inpatient and outpatient services rendered by critical access hospitals has been increased from 100 percent to 101 percent of reasonable costs.

CMS is also proposing several changes to the diagnosis related groups (DRGs) that serve as the basis for payment under the IPPS.  CMS is proposing to increase payment to hospitals for treating burn patients who have respiratory failure and require the long-term use of mechanical ventilation.  In addition, CMS is proposing to reassign heart assist devices, including left ventricular assist devices or LVADs, to the DRG for heart transplants.  These devices were originally approved only as a “bridge” therapy to keep a patient alive while awaiting a heart transplant, but are now approved as a “destination” therapy for patients requiring permanent mechanical cardiac support, but for whom a transplant is not anticipated.  This DRG will now be called “Heart Transplant or Implant of Heart Assist System.”  This will have the effect of increasing payment for the heart assist system, but is not expected to reduce payments for transplants.

The proposed rule includes several important changes that would affect payment to teaching hospitals for direct and indirect medical education.  CMS is proposing to implement a provision of the MMA that redistributes unused residency slots to teaching hospitals for purposes of calculating both direct and indirect graduate medical education payments.  The additional slots will be allocated first to rural hospitals, then to hospitals in other than large urban areas, and then to hospitals using the slots to train residents in a program that is the only program in that specialty in the state.  Hospitals that have in the past been training fewer residents than their GME resident cap would have their caps reduced.

The proposed rule also discusses, and invites public comment on, a possible change in how CMS pays a hospital for residents pursuing specialty residencies.  The proposal discusses allowing the hospital to receive full payment for the duration of specialty residencies when a resident matches simultaneously to a generalized, preliminary year of training and a subsequent specialty training program.  The proposed rule also would eliminate the requirement that a hospital have a written agreement with a non-hospital site if the hospital wants to count the time a resident spends in the non-hospital site in its IME and direct GME FTE count.

The proposed rule sets the outlier threshold at $35,085, up from $31,000 in FY 2004.  CMS is specifically soliciting comments, including data, from hospitals that will help determine whether this is an appropriate level.

The proposed rule establishes a five-year demonstration project required by the MMA to test the feasibility and advisability of establishing a separate payment system for inpatient services provided by rural community hospitals.  The MMA requires that the demonstration include up to 15 hospitals in rural areas of states with low population densities.  Participating hospitals will be paid on a reasonable cost basis for the first year of the demonstration.  Thereafter, the hospitals will be paid at the lesser of reasonable costs or a target amount.

The proposed rule would modify several policies affecting arrangements in which a hospital that is excluded from payment under the IPPS is located within an IPPS hospital.  Under the proposed rule, the two hospitals could not be under common ownership, and no more than 25 percent of the IPPS-excluded hospital’s admissions could be from the host hospital.  The proposed rule also includes proposed changes to the long-term care hospital DRGs, which are based on the inpatient DRGs.

The proposed rule will be published in the May 18 Federal Register.  Comments will be accepted until July 12, 2004, and a final rule will be published later in the year.

The proposed rule may be viewed at: https://www.cms.gov/.