On August 2, 2019, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System Final Rule for FY 2020 (the Final Rule). Highlights include substantial changes to how rural hospitals are treated for wage index and rural floor purposes, a full transition to utilizing Worksheet S-10 data to calculate uncompensated care, changes in capturing graduate medical education occurring in Critical Access Hospitals, a significant increase in add-on new technology payments, and tweaks to various quality reporting programs. A summary of these and other changes is below.

Payment Rates Overview

Under the Final Rule, total Medicare spending on inpatient hospital services, including capital, will increase by about $3.8 billion in FY 2020. The total includes an increase in inpatient operating payments of $3.4 billion, a $0.2 billion increase in new technology payments (a 70 percent increase), a $0.1 billion increase in uncompensated care payments, a $0.1 billion increase in capital payments, and an approximate $7 million decrease in low-volume hospital payments. CMS will make a 3.1 percent update to the FY 2020 national standardized amount, setting the market basket update to 3.0 percent, further reduced by 0.4 percent for the statutory multifactor productivity adjustment and increased by 0.5 percent, purportedly as required under Section 631 of the American Taxpayer Relief Act of 2012. Hospitals failing to submit quality data see a further reduction of 0.75 percent; hospitals who are not Meaningful EHR users will be reduced by 2.25 percent.

Payments to LTCHs will increase by $43 million, as compared to FY 2019, an increase of approximately 1 percent. By statute, all LTCH discharges are paid according to a lower site neutral payment rate unless they meet criteria for exclusion and can be paid the LTCH PPS standard Federal payment amount. This policy was first enacted in FY 2016 and included a transition period of paying a blended rate to mitigate payment reduction. That transition ends for non-excluded LTCH discharges occurring in cost reporting periods beginning in FY 2020, which will now be paid exclusively on the site neutral payment rate.

Medicare Wage Index

Pursuant to the Final Rule, CMS will make upward adjustments over the next four years to the wage indices of hospitals with a wage index value below the 25th percentile nationally. CMS’s purpose in giving this adjustment is to allow hospitals with the lowest wage index values in the country an opportunity to increase their wages. The adjustment for each eligible hospital will be equal to half of the difference between the otherwise applicable final wage index value for the hospital and the 25th percentile wage index value for all hospitals that same year. For FY 2020, the 25th percentile wage index value will be 0.8457. To budget neutralize these adjustments, CMS had proposed to reduce the wage index values of hospitals above the national 75th percentile. Facing strong opposition by commenters, CMS instead opted to apply a budget-neutrality adjustment to the national standardized amount.

CMS also finalized its proposal to exclude the wage data of reclassified rural hospitals from the calculation of the statutory rural floor. The rural floor provision of the Medicare statute provides that the wage index of an urban hospital cannot be less than the wage index assigned to rural hospitals in the same state. In prior years, the rural floor for each state was equal to the wage index assigned to rural hospitals in the state, as calculated based on the combined wage and hour data of all hospitals located in rural parts of the state and all hospitals in the state that had elected to reclassify as rural. In FY 2020 and onward, CMS will calculate the rural floor and the rural wage index separately. In calculating the rural floor for each state, CMS will exclude the data of urban hospitals that have reclassified as rural. CMS stated that this policy is necessary to prevent hospitals from manipulating the rural floor to bring a windfall to other hospitals in their state.

Furthermore, CMS placed a cap on wage index decreases in FY 2020. The maximum amount that a hospital’s wage index can decrease in FY 2020 is five percent. This means that no hospital will be assigned a wage index in FY 2020 that is less than 95 percent of its wage index from FY 2019. This is a one-time transitional policy designed to limit the impact of the wage index policies in the FY 2020 rule and applies to all hospitals, regardless of whether their wage indices have decreased because of the changes in the rulemaking. To ensure that the cap is budget neutral, CMS will make an adjustment to the national standardized amount.

Uncompensated Care (UCC) Pool

CMS’s adjustments to the UCC pool are mostly as expected, although the agency provided additional insight into its use of cost reporting Worksheet S-10. UCC Factor 1 (75 percent of estimated disproportionate share hospital (DSH) payments that would otherwise have been made, absent the UCC pool) is set at $12.643 billion and Factor 2 (reflecting changes in the national uninsured rate related to the Affordable Care Act) reduces the amount in the pool to $8.35 billion (roughly $78 million more than FY 2019). This is the pool of money from which subsection (d) hospitals receive their proportionate share under the individualized Factor 3.

In FY 2018, CMS reached a “tipping point” and determined that SSI and Medicaid data were no longer a better proxy for uncompensated care and began to transition in the use of Worksheet S-10 in the Factor 3 calculation. That transition is now complete, as CMS calculates individual Factor 3 using solely Worksheet S-10 data for FY 2020.

Although CMS used three years of data in the recent past to “smooth over anomalies” and “mitigate undue fluctuations,” for FY 2020, CMS used just a single year’s cost report: FY 2015, rejecting a proposed alternative of FY 2017. The agency gave itself room to return to a 3-year data set “if appropriate” in the future, particularly as more fiscal years are audited. CMS selected providers’ longest cost reports from Federal FY 2015, annualized costs from Line 30 of Worksheet S-10 if that cost report was more or less than 12 months and combined annualized costs for hospitals that merged. The new methodology is reflected in amended 42 C.F.R. § 412.106(g)(1)(iii)(C)(6). Hospitals have until August 31, 2019 to review and submit comments on the accuracy of the DSH data file posted online and pulled from the June 30, 2019 HCRIS file. Comments must be submitted to Section 3133DSH@cms.hhs.gov. CMS will not accept revised Worksheet S-10 data.

Notably, FY 2015 Worksheet S-10 cost reporting pages were subject to Medicare Administrative Contractor (MAC) audit starting in fall 2018, though audited hospitals represented only about half of the uncompensated care payments for FY 2020. CMS noted that it was infeasible to audit all hospitals, and that those audited were selected with a “risk-based assessment process.” Consistent with statements in prior IPPS rulemakings, CMS will not release the Worksheet S-10 instructions issued to the MACs. Nonetheless, the agency proposed to attempt to address concerns about Worksheet S-10 cost reporting instructions through future clarifications, including a forthcoming Paper Reduction Act package for Form CMS 2552-10 that will be open to public comment.

Indirect and Direct Graduate Medical Education Costs

As proposed, CMS will allow hospitals to include in the FTE count residents training at Critical Access Hospitals (CAHs), if such training meets the non-provider setting requirements found at 42 C.F.R. §§ 412.105(f)(1)(ii)(E) and 413.78(g). CMS believed that this will “support the training of residents in rural and underserved areas.” This change is particularly beneficial for hospitals still within their 5-year cap-building period. The hospital claiming the FTEs must be able to demonstrate that it actually paid the residents’ salaries and fringe benefits. CAHs may continue to incur training costs in approved programs and receive payment based on 101 percent of reasonable cost—indirect costs, regardless if another hospital claims the FTEs, and direct costs if the CAH incurs salary and fringe benefits and no other hospital claims the FTEs.

Further, a teaching hospital in Washington, D.C., closed, and CMS will redistribute its Indirect Graduate Medical Education (IME) FTE resident cap (50.5) and Direct Graduate Medical Education (DGME) FTE Resident Cap (52.12). Interested hospitals must apply for the redistributed cap base within 90 days by submitting to the CMS Central Office a “Section 5506 Application Form,” which is available here.

New Technology Add-On Payments

Under 42 C.F.R. § 412.87, medical services or technology can receive an additional add-on payment if new, costly (such that the DRG payment is inadequate) and a substantial clinical improvement over existing services or technologies. CMS revised the substantial clinical improvement criteria in the Final Rule. Applicants for the add-on payment in FY 2021 must submit a formal application, which CMS states will be available here. CMS has approved 18 technologies for add-on payment in FY 2020.

Revising 42 C.F.R. § 412.88, if costs of the discharge involving a new medical service or technology exceed the full DRG payment (including IME and DSH but excluding outliers) Medicare will make an add-on payment of the lessor of 65 percent of the costs of the new service/technology or 65 percent of the amount by which the costs of the case exceed the standard DRG payment. Formerly, the percentage threshold was 50 percent, so this is a payment increase. Certain antimicrobials designated by the FDA as a Qualified Infectious Disease Product (QIDP) have a 75 percent threshold.

Furthermore, starting with applications for FY 2021, if the medical device is the subject of the FDA’s Breakthrough Devices Program or is designated by the FDA as a QIDP, and received FDA marketing authorization, CMS will consider the device new and not substantially similar to an existing technology. Such devices will be eligible to receive the add-on payment, provided they meets the cost criterion. They need not meet the “substantial clinical improvement” criterion at 42 C.F.R. § 412.87(b)(1).

Quality Reporting Programs

• Hospital Readmissions Reduction Program, which requires a payment reduction for excess readmissions, relative to other hospitals with similar proportions of dual-eligible beneficiaries—CMS updated definitions of several key regulatory terms, including “dual-eligible,” “aggregate payments for excess readmissions,” “applicable condition,” and “base-operating DRG payment amount.” See 42 C.F.R. § 412.152. The biggest change is that the “dual-eligible” definition now specifies that, effective FY 2021, data for patients who died should be pulled from the State Medicare Modernization Act files from the prior month. There is no change in required measures, though CMS finalized a measure removal policy based on eight factors, consistent with other quality programs. CMS also adopted a policy to make non-substantive updates to payment adjustment factor components in a sub-regulatory manner, outside of notice-and-comment rulemaking.
• Inpatient Quality Reporting Program, which decreases payment for hospitals who do not successfully report quality data—As proposed, CMS removed the Claims-Based Hospital-Wide All-Cause Unplanned Readmissions Measure starting with the July 1, 2023 through June 30, 2024 reporting period and affecting the FY 2026 payment determination. This measure is replaced with the Hybrid Hospital-Wide All-Cause Readmission Measure and Claims and Electronic Health Record Data Measure, also beginning with the FY 2026 payment determination. CMS also adopted new measure Safe Use of Opioids – Concurrent Prescribing electronic clinical quality measure but did not finalize its proposal to adopt the Hospital Harm – Opioid-Related Adverse Events electronic clinical quality measure.
• Hospital Value-Based Purchasing Program, which adjusts hospital payments based on quality measure performance— CMS aligns the VBP Program with the Hospital-Acquired Conditions Reductions Program, utilizing the same data to calculate the National Health Safety Network Healthcare-Associated Infection measures starting with CY 2020 data collection.
• Hospital-Acquired Conditions Reduction Program, which reduces payment by 1 percent for hospitals performing in the lowest quartile of applicable hospitals on incidence of hospital-acquired conditions—CMS adopted the same eight measure-removal factors discussed above and clarified the administrative process for validating the National Healthcare Safety Network Healthcare-Associated Infection data, which is submitted by hospitals to the Center for Disease Control and Prevention.
• Medicare and Medicaid EHR Incentive Programs, now known as the “Promoting Interoperability Programs,” which requires eligible professionals and hospitals to use 2015 edition certified electronic health record technology (CEHRT) or face a payment reduction—CMS finalized its policy that the EHR reporting period for CY 2021 is a minimum of any continuous 90-day period for new and returning participants attesting to their compliance. Reporting on the Query of Prescription Drug Monitoring Program measure remains optional and available for bonus points, given stakeholder implementation issues. The measure will be converted to a yes/no attestation starting with the CY 2019 reporting period. CMS removed the Verify Opioid Treatment Agreement measure and adopted Safe Use of Opioids—Concurrent Prescribing electronic clinical quality measure, in alignment with the IQR program.
• LTCH Quality Reporting Program, which reduces the standard payment rate by 2 percent for LTCHs failing to satisfy program requirements—CMS adopted two new quality measures related to the transfer of health information and several Standardized Patient Assessment Data Elements (SPADEs). CMS also modified the Discharge to Community measure to exclude nursing home residents. It will no longer publish a list of compliant LTCHs on the LTCH QRP website.

Provider Reimbursement Review Board and Medicaid-Eligible Day Counts

With the FY 2020 IPPS proposed rule, CMS solicited comments on how providers might update Medicaid eligibility data after filing of the cost report. The Provider Reimbursement Review Board sees a large volume of appeals related to the DSH Medicaid fraction, and CMS is interested in reducing this backlogged docket. Nonetheless, CMS enacted no changes regarding refreshing Medicaid eligibility in response to comments. CMS considered ordering MACs to reopen cost reports near the end of the three-year reopening window to refresh the Medicaid data used in the DSH calculation. The agency also explored undertaking rulemaking to allow hospitals a one-time option for resubmission of updated Medicaid eligibility information.

The display copy of the Final Rule is available here. CMS’s fact sheet is available here. The Final Rule is effective October 1, 2019.