On August 1, 2012, the Centers for Medicare & Medicaid Services (CMS) issued its final inpatient prospective payment system (IPPS) rule for fiscal year (FY) 2013 (the final rule was published in the Federal Register on August 31, 2012).[1] In addition to the annual Medicare payment updates, the final rule gives notice that the Medicare program will, for the first time beginning in FY2013, adjust IPPS payments based on quality performance under the Hospital Value-Based Purchasing Program and the Hospital Readmissions Reduction Program. Both programs were created as a part of the Patient Protection and Affordable Care Act (ACA). The following is a brief overview of some of the final rule’s significant provisions.

IPPS Payment Rate Update. Overall, CMS increased operating payment rates by 2.8%. This increase reflects the net effect of productivity improvements, inflation adjustments, ACA statutory modifications, and hospital coding and documentation changes. Combined with other policies in the final rule, the payment updates will increase payments by an estimated 2.3% or $2 billion.

Hospital Value-Based Purchasing Program. The final rule implements the previously-adopted Hospital Value-Based Purchasing Program (VBP),[2] which, starting in FY2013, provides value-based incentive payments for hospitals that meet specified performance standards. Under the VBP, CMS will base a portion of hospital reimbursement payments on how well hospitals perform on 13 measures in FY2013 and 17 measures in FY2014, with the details for future fiscal years still to be finalized. The measures reward hospitals that avoid certain infections, enhance patients’ experiences of care, and follow best practices. The hospitals that perform best during a fiscal year will receive higher payments, funded by an across-the-board inpatient payment reduction (the reduction is 1% starting in FY2013 and escalates in subsequent fiscal years until it reaches 2% for FY2017 and beyond). This funding mechanism ensures that the VBP remains budget neutral.

Hospital Readmissions Reduction Program. The Hospital Readmissions Reduction program, which begins on October 1, 2012, imposes payment reductions for hospitals that have excessive preventable readmission rates. CMS defines readmission as a patient admission to an acute care hospital under IPPS that occurs within 30 days of discharge (from the same or another acute care hospital) for certain conditions, namely, acute myocardial infarctions, heart failure, and pneumonia. The final rule outlines the methodology and payment adjustments assigned for hospitals with higher than expected readmission rates for these conditions. After finalizing the readmissions adjustment factor, CMS estimates that the readmission penalties will reduce hospital payments by 0.3%, or approximately $280 million, in FY2013.

Quality Reporting Programs.
Hospital Inpatient Quality Reporting (IQR) Program. Most hospitals have a history of submitting IQR data on a voluntary basis. While participation remains voluntary, hospitals that do not choose to submit IQR data will now face a 2% penalty for non-submission. The IQR program currently utilizes 72 quality measures; the final rule reduces this number to 59 for the FY2015 payment determination and 60 for the FY2016 payment determination. According to CMS, these changes should reduce hospital burdens, create a more streamlined measure set, and improve care by putting greater emphasis on perinatal care, surgical complications, readmissions, and care transitions.

New Ambulatory Surgical Center Quality Reporting (ASCQR) Program. The final rule also establishes requirements for the ASCQR program. Most of these requirements are effective for the Calendar Year (CY) 2014 payment determination (the first payment determination under the ASCQR program).

New Inpatient Psychiatric Facility Quality Reporting Program. A new Inpatient Psychiatric Facility (IPF) Quality Reporting Program establishes a 2% reduction in any update to the standard federal rate for discharges for any inpatient psychiatric hospital or psychiatric unit reimbursed under Medicare IPF PPS that does not, starting with FY2014, comply with quality data submission requirements during the applicable rate year. The Secretary will publish the quality measures for FY2014 by October 1, 2012.

Postponement of Rule Regarding Routine Hospital Services Furnished “Under Arrangements.” The IPPS FY 2012 final rule limited services that may be furnished “under arrangement” outside of a hospital to Medicare beneficiaries. Under this rule, only therapeutic and diagnostic services may be furnished under arrangement outside the hospital, while “routine services,” including bed, board, nursing and other related services, may not be furnished under arrangement and may only be furnished in the hospital by the hospital itself. The proposed FY2013 IPPS rule recognized that hospitals require time to restructure existing arrangements and establish necessary operational protocols to comply with the requirement that therapeutic and diagnostic services are the only services that may be provided outside the hospital to Medicare beneficiaries “under arrangement” while “routine services” must be provided in the hospital by the hospital. The IPPS FY2013 final rule confirms that CMS will postpone implementation of this requirement until FY2014.

Inclusion of Labor and Delivery Beds in Disproportionate Share Hospital (DSH) and Indirect Medical Education (IME) Formulas. The IPPS FY 2103 rule finalizes a proposal to include ancillary labor and delivery beds in the available bed count used to determine the DSH and IME payment adjustments. Certain hospitals that previously did not meet the minimum bed count to receive a DSH payment adjustment may now qualify. At the same time, this policy is expected to decrease IME payments by $40 million in FY2013 by increasing the available beds, decreasing the resident-to-bed ratio, and, consequently, decreasing the amount of IME payments to teaching hospitals.

Long-Term Care Hospital (LTCH)-Specific Market Basket. CMS issued a payment update for LTCHs, increasing Medicare operating payments for those facilities by about 1.7%. CMS estimates this update will increase LTCH payments by $92 million from FY2012 to FY2013.

[1] 77 Fed. Reg. 53257 et seq. (Aug. 31, 2012).
[2] 76 Fed. Reg. 26489 et seq. (May 6, 2011).