“2015 IPPS Final Rule Continues CMS’ Focus on Quality of Care (and Penalties)”


On August 1, 2014 the Centers for Medicare & Medicaid Services (CMS) issued a final rule updating the fiscal year (FY) 2015 Medicare payment policies and rates under the Inpatient Prospective Payment System (IPPS) (“Final Rule”). The Final Rule applies to approximately 3,400 acute care hospitals and affects discharges occurring on or after October 1, 2014.

The Final Rule contains a net 1.4 percent payment increase for hospitals participating in the Hospital Inpatient Quality Reporting Program. Despite the increase, CMS estimates the new payment policies in the Final Rule will reduce overall Medicare expenditures by $756 million. These reductions are attributable, in part, to adjustments to CMS’ pay-for-performance programs, which collectively expose the DRG payments of underperforming hospitals to a maximum penalty reduction of 5.5 percent in FY 2015. These programs include: the Hospital Value-Based Purchasing (VBP) Program, the Hospital Readmissions Reduction Program and, new for FY 2015, the Hospital-Acquired Condition (HAC) Reduction Program. As explained below, the Final Rule also significantly reduces available Medicare disproportionate share (DSH) payments for FY 2015.

Hospital VBP Program

At present, the Hospital VBP Program permits CMS to reduce or increase DRG payments based on the hospital’s performance in three weighted “domains:” Clinical Process of Care Domain, Outcome Domain, and Patient Experience of Care Domain. Each domain consists of a host of metrics intended to measure healthcare quality, specifically health outcomes, patient experience and cost. For example, the Outcome Domain tracks and may reduce reimbursement based on a 30-day mortality rate for acute myocardial infarctions, heart failure, and pneumonia treated at a facility. In FY 2015, a new Efficiency Domain, composed of a single Medicare Spending per Beneficiary measure, will be included the program scoring.

Under the Final Rule, CMS will now place 1.5 percent of DRG payments (estimated at $1.4 billion) into play as a reduction in payment or a bonus payment, all dependent on performance. This figure will increase annually by a quarter percent until it caps out at two percent of DRG payments in 2017. For FY 2013, 51 percent of Alabama hospitals received bonuses under the program while 49 percent received reductions.

Readmissions Reduction Program

CMS also made revisions to the Readmissions Reduction Program in the Final Rule. Specifically, CMS finalized its third and final increase to the program’s maximum penalty, raising it to three percent for FY 2015. Started in FY 2013, the program began with a one percent reduction in payments for hospitals with excessive readmissions for selected conditions. For FY 2015, the program will measure 30-day readmissions for: (1) AMI, (2) heart failure, (3) pneumonia, (4) chronic obstructive pulmonary disease, and (5) elective hip/knee arthroplasty. According to CMS, the last two conditions represent, when aggregated, the largest procedures costs in the Medicare budget, totaling $11.37 billion. In the Final Rule, and effective FY 2017, CMS added coronary artery bypass graft surgical procedures as a readmission measure. The Readmissions Reduction Program has already had a significant effect on the hospital community. For FY 2013, approximately 2,200 hospitals were penalized under the Readmissions Reduction Program for an amount totaling $280 million.

HAC Reduction Program

The HAC Reduction Program, which formally begins in FY 2015, penalizes the lowest performing quartile of hospitals with respect to the occurrence of hospital-acquired conditions by reducing their DRG payments by a maximum of one percent. Under the HAC Program, hospitals are scored in two different domains: (1) Patient Safety Indicator (PSI) 90, an administrative claims based measure, and (2) a CDC healthcare associated infection measure which tracks occurrences of Central Line-Associated Blood Stream Infection (CLABSI) and Catheter-Associated Urinary Tract Infection (CAUTI). In the Final Rule, CMS added, for FY 2016, surgical site infections to the second domain.

Disproportionate Share Payments

The Final Rule also implements changes to Medicare DSH payments as required by the Affordable Care Act. Specifically, the ACA reduces Medicare DSH payments by $22.1 billion from fiscal year (FY) 2014 through FY 2019. Congress enacted the DSH cuts because the expansion of the Medicaid population and the health insurance exchanges were expected to reduce uncompensated care levels at hospitals. The ACA also provided a new formula to allocate what limited DSH funds remained to hospitals. Under the formula, hospitals that qualify for Medicare DSH payments are to receive 25 percent of the amount for which they previously qualified prior to the ACA. The remaining amount, equal to an estimate of 75 percent of what otherwise would have been paid as Medicare DSH payments, is allocated to hospitals based on their reported amount of uncompensated care as compared to other hospitals for a given time period. In the proposed rule, CMS estimated the total pool of available DSH payments for FY 2015 would be $8.56 billion. However, in the Final Rule CMS decreased this amount to $7.64 billion. The revision was made in response to recent Congressional Budget Office estimates of the uninsured population (13 percent in the final rule compared to 14 percent in the proposed rule).

All told, the Final Rule continues CMS’ advance towards controlling costs through the aforementioned quality of care programs. As documented in the July 2014 Medicare Trustees Annual Report, the efforts have been successful and have helped in part to delay insolvency of the Medicare Trust Fund by four years, to 2030. Nevertheless, hospitals must act to protect themselves from exposure to penalties under the quality of care programs, which will impact six percent of Medicare reimbursement by FY 2017.


Philip M. Sprinkle is the Chairman of the Health Care Practice Group at Balch & Bingham and can be reached at [email protected] Dan Silverboard is an associate in the Atlanta office of Balch & Bingham and can be reached at [email protected]


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