On May 11,2004, CMS issued a proposed rule providing for payment increases to acute care hospitals for inpatient services in FY 2005. Total Medicare payment to hospitals is projected to increase to $105 billion from approximately $100 billion in FY 2004. On average, urban hospitals will receive a 4.7 percent increase in payment while rural hospitals will see an average increase of 6 percent. Some of this increase will depend on whether hospitals report specified quality data to CMS such as information on heart attacks, heart failure, and pneumonia. As required by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"), reporting hospitals will receive the full market basket rate-of-inflation increase (3.3 percent). Hospitals that fail to report will receive an increase of only 2.9 percent. The new rule also changes the currently used Metropolitan Statistical Areas (or "MSAs") and New England County Metropolitan Areas to Core Based Statistical Areas ("CBSAs"), which were developed by the Office of Management and Budget ("OMB") on the basis of 2000 census data. The impact of the new CBSAs is estimated to be relatively small, but it is projected that a number of rural hospitals will benefit from being transferred into areas with higher payment rates. The labor share part of the PPS formula will be set at 62 percent, down from 71.1 percent and changes are proposed for the occupational mix adjustment. Additionally, critical access hospitals ("CAH") will receive a payment rate of 101 percent of reasonable costs (up from 100 percent) and they can designate up to 25 beds as either acute care beds or swing beds. An additional 10 beds will not count towards the CAH 25 bed maximum and may be used for inpatient rehabilitation or psychiatric services. The outlier thresholds are proposed to be set at $35,085 up from $31,000 in FY 2004. CMS also is proposing to redistribute unused medical residency slots to teaching hospitals to help calculate direct and indirect medical education payments. The slots will initially be made available to rural hospitals, then large urban hospitals, then to facilities that will use them to train residents in state-specific programs. The rule also proposed to change the requirements for a hospital within a hospital such that a single test for separate performance of basic hospital functions (rather than multiple tests) will be used and that a hospital within a hospital must admit at least 75 percent of its patients from a hospital other than its host facility. The proposed rule also would implement section 406 of the MMA, requiring 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. The rule will be available on the Federal register website on May 18. Comments on the proposed rule are due July 12, 2004, with a final rule to be published in August.

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