United States: Medicare Program Publishes Final Rule on Hospital Inpatient Prospective Payment System

On August 11, 2004, the Centers for Medicare & Medicaid Services (.CMS.) published a final rule implementing certain changes to the hospital inpatient prospective payment system (.IPPS.) for fiscal year 2005 (the .Final Rule.). The provisions of the Final Rule are effective for hospital discharges on or after October 1, 2004, and implements major payment and policy changes required by the Medicare Prescription Drug Improvements and Modernization Act of 2003 (.MMA.).

Under the Final Rule, Medicare payments to hospitals will increase an average of 5.8 percent in fiscal year (.FY.) 2005, with an average increase of 5.7 percent for urban hospitals, while payments to rural hospitals will increase an average of 6.2 percent. Significant policy and reimbursement changes adopted by CMS in the Final Rule include: (1) a full market basket payment increase for hospitals that report quality data, and a lesser increase for hospitals that do not; (2) long term care hospital reform; (3) assistance for critical access hospitals; (4) provisions affecting hospitals that receive graduate medical education and indirect medical education payments; (5) revised hospital wage indices based on new Metropolitan Statistical Area definitions; and (6) increased payments for new technologies. These policy and reimbursement changes are discussed in detail below.

The Final Rule provides detail on the payment incentive for hospitals that report quality data. Specifically, MMA states that hospitals that submit data on ten specified quality measures related to three medical conditions (i.e., heart attack, heart failure and pneumonia) qualify for the full 3.3 percent market basket increase to their Medicare inpatient hospital payment rates for FY 2005. Hospitals that choose not to report will receive the market basket increase less .4 percent, or an increase of only 2.9 for the same period. The quality data reporting program will be in place for three years, and will sunset at the end of fiscal year 2007.

Many hospitals have already begun to report the required quality data measures, and CMS anticipates that a total of 4,500 hospitals will participate this year, either under the MMA.s program or the already existing voluntary reporting initiative. Quality data submissions are governed by a checklist found on the QualityNet Exchange website (http://www.qnetexchange.org). Initial registration forms were required by August 1, 2004 in order to qualify for the full 2005 payment increase. Data reported through this website will be sent to the Quality Improvement Organization (.QIO.) clinical warehouse, and from there to CMS.

The Final Rule also responds to several comments about the planned chart-audit validation process that will be used to verify quality data. Generally, CMS requires hospitals to submit data that is .timely, accurate, and complete . in order to receive the higher payments. To verify that this standard is met, CMS will direct the Clinical Data Abstraction Contractors (.CDAC.) to request paper charts from hospitals for purposes of comparing the data reported to data maintained by the program through other sources.

Hospitals that achieve an 80 percent, or greater, consistency between their originally submitted data and the reabstracted data will be determined to be in compliance with the standard.

While hospitals commented that the compliance threshold should be reduced, CMS did not agree. However, CMS will provide hospitals with an audit grace period for FY 2005 while the quality reporting system is being implemented and fine-tuned. Thus, the 80 percent standard will only be applied in FYs 2006 and 2007.

The Final Rule affords hospitals an appeal process to obtain review of validation results by the local QIO. If the QIO and the hospital are in agreement, then a report will be filed with the CDAC indicating that their agreement is controlling. However, hospitals will not be able to supplement previously submitted medical records during the appeal process. Currently. only hospital staff are allowed to access their hospital.s data in the reporting system; parent companies of hospitals will not have access to their various hospitals. data. However, CMS indicates that a favorable resolution is likely in the fall of 2004, which will permit a system headquarters access to its various hospitals. data, so that its national quality assurance department may assist its hospitals with the program.

The Final Rule makes a significant change to Medicare.s payment rules for long term acute care hospitals (.LTCHs.) that operate as hospitalswithin- hospitals. While CMS considered making broader changes to the regulation governing hospitals-withinhospitals, the Final Rule focuses, instead, on limiting payments to LTCHs for patients referred by the host hospital.

A key element of the hospitalwithin- a-hospital analysis is whether the two hospitals maintain the requisite separateness and control. In addition to separate governing bodies and officers, Medicare requires the two hospitals to maintain separate basic hospital functions. This requirement may be satisfied in three ways: (1) the hospitals may use employees or maintain staffing contracts that are independent of each other; (2) for the six months prior to the requested certification date, the cost of the services that one hospital obtains from the other hospital (or from a third entity that controls both hospitals) cannot exceed 15 percent of that hospital.s total inpatient operating costs; or (3) for the same six month period, the hospital has an inpatient population of whom at least 75 percent were referred to that hospital by a source other than the host hospital (or from a third entity that controls both hospitals).

In recent years, CMS has become increasingly concerned about creative corporate structures that have allowed hospitals to satisfy the second method for compliance. Since compliance with only one standard is required, hospitals that meet the 15 percent standard are not prohibited from accepting greater than 25 percent of their patients from the host hospital. Under this scenario, CMS is concerned that the host hospital referral stream is not constrained in any way. As a result, CMS fears that .co-location and patient-shifting can serve to undermine the basic premise of IPPS DRG classification system and generate inappropriate Medicare payments. . While this concern would apply to multiple payment systems, CMS. chief concern is with patient-shifting that it perceives occurs between acute care hospitals and LTCHs due to the financial incentive to transfer lengthy stay inpatients out of the host hospital as soon as possible.

In the May 2004 proposed rule, CMS identified a number of changes it was considering to the hospital-withina- hospital regulation to address this patient-shifting concern. The more stringent proposals included capping the number of patient referrals from the host hospital and prohibiting common ownership of the two hospitals. In the Final Rule, however, CMS decided to address the issue through a change in the Medicare payment rules for LTCHs. As a result, the threeprong test referenced above remains as the governing regulatory standard for assessing separate basic hospital functions under the hospital-within-a-hospital rule. However, LTCHs that operate as a hospital-within-a-hospital are no longer required to meet the separate basic hospital function test. Instead, CMS has promulgated a payment regulation that imposes rules designed to mitigate existing payment incentives for shifting patients to LTCHs that operate within another hospital.

Under the new payment rule, Medicare will continue the LTCH PPS payments for those patients referred to the LTCH from sources other than the host hospital. For referrals from the host hospital, the LTCH will be paid under the LTCH PPS without adjustment, as long as the percentage of referrals from the host hospital does not exceed 25 percent. If the host hospital referrals exceed 25 percent, the LTCH will be paid at the lower of the LTCH PPS or IPPS payment rates for those cases that exceed the 25 percent barrier. The Final Rule also provides special treatment for rural providers by setting the host hospital referral threshold (that triggers the alternate payment methodology) at 50 percent. However, the impact of this new payment policy will be mitigated through a four year transition period.

The Final Rule implements provisions of the MMA specific to critical access hospitals (.CAHs.). Critical access hospitals are rural hospitals or facilities that meet certain statutory requirements and are paid for inpatient and outpatient services on a reasonable cost basis. CAHs will realize a slight increase in reimbursement from the current payment of reasonable costs, to payment of 101 percent of reasonable costs, for services furnished during cost reporting periods beginning on or after January 1, 2004. Reimbursement for on-call emergency room services at CAHs is expanded to include reimbursement for services furnished by physicians, physician assistants, nurse practitioners, and clinical nurse specialists, effective for services furnished on or after January 1, 2005. In addition, effective with payments made on or after July 1, 2004, CAHs are eligible for periodic interim payments.

Physicians and other health care providers are no longer required to reassign their billing rights to a CAH. However, the CAH will receive payment based on 115 percent of the Medicare Physician Fee Schedule for these providers. services if they reassign their billing rights to the CAH.

A CAH will have more flexibility as to the use of its beds. MMA eliminated the restriction that no more than 15 out of the maximum 25 beds can be used for acute care. Under the Final Rule, CAHs can designate up to 25 beds as either acute care beds or beds that may be used as either acute or post-acute care (so called .swing beds.). CAHs can also set aside units of up to ten beds each, to be used exclusively for inpatient rehabilitation services and psychiatric services. These units will not count toward CAH.s 25-bed maximum and, effective for cost reporting periods beginning on or after October 1, 2004, will be paid as if they were distinct units in acute care hospitals. These units, however, will have to meet acute care hospital standards.

The Final Rule adopts several changes to the rules regarding Graduate Medical Education (.GME.) and Indirect Medical Education (.IME.) payments.

Residents Training in Nonhospital Settings. The Final Rule implements several changes that affect the ability of hospitals to include residents training in nonhospital settings in the hospital.s resident count for GME and IME purposes. Since 1987, hospitals have been allowed to count the time residents spend training in sites that are not part of the hospital (referred to as .nonhospital. or .nonprovider sites.) under certain conditions for GME. Since 1997, hospitals have also been allowed to count the time residents spend training in nonhospital sites for IME purposes. Under existing regulations, the hospital is entitled to include such time in its resident count if it incurs all, or substantially all, of the costs of the training program in the nonhospital setting, and there is a written agreement between the hospital and the nonhospital to this effect. The regulations further specify that the written agreement must indicate the amount of compensation the hospital is providing to the nonhospital for its supervisory teaching activities. CMS. policy has required that the written agreement be in place prior to the time that the hospital begins to count residents training at the nonhospital.

In the preamble to the Final Rule, CMS recognized that written agreements between hospitals and nonhospitals may not have been the most efficient way to determine whether hospitals will actually incur all, or substantially all, of the costs of the training programs in nonhospital settings. Accordingly, CMS in the Final Rule added an additional way for hospitals to demonstrate their compliance with this requirement.

For portions of cost reporting periods occurring on or after October 1, 2004, a hospital must comply with one of the following in order to include residents training in a nonhospital setting in the hospital.s resident count for GME and IME purposes: (a) the hospital must pay all or substantially all of the costs of the training program in the nonhospital, attributable to training in a particular month by the end of the following third month; or (b) the hospital must enter into a written agreement with the nonhospital, in accordance with existing regulations concerning such agreements, and must pay all or substantially all of the costs within twelve months after the end of the cost reporting year.

Reductions of and Increases in Hospitals. FTE Resident Caps. In the preamble to the Final Rule, CMS noted that because a hospital.s GME and IME payments are based in large part on the number of full-time equivalent (.FTE.) residents, hospitals have an incentive to increase the number of residents. To eliminate this incentive, in 1996 Congress instituted a cap on the total number of allopathic and osteopathic residents a hospital is allowed to count for GME and IME purposes. This cap is based on the number of residents who were training in the hospital for the most recent cost reporting period ending on or before December 31, 1996. Dental and podiatric residents are not included in this cap. If a hospital exceeds its cap, it does not receive Medicare reimbursement for the extra residents.

In Section 422(a) of MMA Congress provided for reductions to certain hospitals. FTE resident caps based on unused FTE resident slots, and authorized CMS to redistribute to other hospitals the estimated number of FTE resident positions resulting from the reductions.

The Final Rule establishes the method for determining whether, and by what amount, a hospital.s FTE resident cap is subject to reduction. Generally, the calculation is based on a reference period in 2002. If the hospital has unused slots during that period it may be subject to a reduction. This reduction will become effective for portions of cost reporting periods beginning on or after July 1, 2005. Rural hospitals with less than 250 acute care inpatient beds are exempt from the reduction.

The Final Rule provides that a hospital may receive an increase in its otherwise applicable FTE resident cap if the hospital meets certain requirements and qualifying criteria, and submits an application for an increase. The criteria and the application process appear in the preamble to the Final Rule. To be considered for an increase, a hospital must demonstrate the likelihood that it will be able to fill the slots within the first three cost reporting periods beginning on or after July 1, 2005, by meeting at least one of three .demonstrated likelihood. criteria. The hospital.s application and supporting documentation must be received by CMS by December 1, 2004. A hospital may receive an increase in its otherwise applicable FTE resident cap up to an additional 25 FTEs.

Redesignation of GME Regulations. The Final Rule also includes a major redesignation of the contents of the GME regulation contained in 42 Code of Federal Regulations Section 413.86. The GME regulation is redesignated as individual sections at 42 Code of Federal Regulations Sections 413.75 through 413.83.

The Final Rule addresses the payment impact resulting from revisions of the Metropolitan Statistical Areas (.MSAs.), which are used to define hospital labor areas. (The wage index, a factor used to determine prospective payments to hospitals, is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located.) The new MSAs are based on 2000 census data and replace the current MSAs which reflect 1990 data.

Hospitals in areas that have been reclassified from urban to rural under the revisions will experience a decrease in their wage indices and the most negative payment impact. To soften this result, these hospitals will maintain their urban classification for three years, through 2007. For other hospitals that will experience a decrease in their wage indices, the Final Rule provides for a two-year phase-in of the new MSAs. A number of hospitals currently in rural areas will benefit by being reclassified into areas with higher payment rates, and will receive the full benefit of the increases in FY 2005.

To help ensure that Medicare beneficiaries obtain the benefit of the latest medical advances, the Final Rule implements section 503 of MMA which makes several changes to the current methodology for recognizing and paying for new technologies. The Final Rule lowers the threshold amount for determining eligibility for the new technology diagnosis related group (.DRG.) add-on payments. This change is designed to make such payments more readily available than under the current higher cost threshold. In addition, the Final Rule removes the requirement that new technology payments be budget neutral.

The Final Rule also recognizes two new technologies as eligible for add-on payments: (1) an implantable neurostimulator for deep brain stimulation used to treat patients with essential tremor and Parkinson.s disease; and (2) a device that provides cardiac resynchronization therapy with defibrillation (also known as biventricular pacing) used to treat congestive heart failure and ventricular arrhythmias that could result in sudden death.

If you would like more information regarding these regulations, please contact Jeff Micklos or Lena Robins in our Washington, DC office, Denise Rios Rodriguez, Jeff Bates or Mary Ellen Allen in our Los Angeles office, Fred Entin in our Chicago office, Maria Gonzalez Knavel in our Milwaukee office, Mike Scarano in our San Diego/Del Mar office, Diane Racicot in our San Diego office, Judith Waltz in our San Francisco office, or the member of the firm who normally handles your legal matters.

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