May 30, 2003

TO: Packet Recipient

FROM: George Quinn, Senior Vice President, Finance
Brian Potter, Director, Finance and Information Services

SUBJECT: Inpatient PPS Proposed Rule

The Centers for Medicare & Medicaid Services (CMS) published in the May 19 Federal Register proposed changes to the hospital inpatient prospective payment system (PPS) for fiscal year (FY) 2004. The proposed rule includes changes to both the inpatient operating and the capital PPS, and for hospitals and hospital units excluded from inpatient PPS.

The rule provides for an inflationary increase for inpatient hospital services, policy changes related to post-acute care transfers, the wage index, diagnosis-related group (DRG) classifications and weights, payments to hospitals for the direct and indirect costs of graduate medical education (GME), disproportionate share hospital (DSH) payments, and payments to critical access hospitals (CAHs).

The proposal includes a 60-day comment period from May 9 when the rule was placed on display at the Federal Register and posted on CMS’ Web site. Comments are due July 8, 2003. The text of the proposed rule is available on the WHA web site at: www.wha.org/financeAndData/pdf/2004ppsproprule.pdf

Below is a summary of the proposed rule’s key provisions:

Current law requires that the FY 2004 inpatient PPS update equal the full market basket rate, which measures hospital inflation. The most recent forecast of the market basket rate increase for FY 2004 is 3.5 percent. Thus, the unadjusted update is 3.5 percent for all hospitals. The proposed operating standardized amounts are as follows:

The proposed capital standard federal payment rate for FY 2004 is $411.72.

However, once legislative and regulatory changes and other budget neutrality adjustments are considered, the adjusted update for all hospitals is 2.5 percent, as identified by CMS in its impact table.¹ Thus, the average percent increase in per-case payments from FY 2003 to FY 2004 will be closer to only 2.5 percent.

In a move that the WHA strongly opposes, CMS proposes to expand the post-acute care transfer policy to an additional 19 DRGs² - a move that would result in an estimated reduction of $160 million in Medicare payments for FY 2004 alone. This provision is not in the best interests of patients or caregivers. It undermines clinical decision-making and penalizes hospitals for providing efficient care, at the most appropriate time and in the most appropriate setting.

Beginning in FY 1999, Medicare patients in 10 DRGs³ who are discharged to a post-acute care facility – such as rehabilitation hospitals and units, long-term care hospitals and units, or skilled nursing facilities – or are discharged within three days to home health services are considered a transfer case if their acute care length of stay is at least one day less than the national average. These cases are paid a daily (per diem) rate, rather than a fixed DRG amount, up to the full PPS rate. Thus, if a patient has a shorter than average inpatient stay, even by just one day, the hospital is paid less than the full DRG rate.

In the preamble of last year’s FY 2003 inpatient PPS proposed rule, CMS explored the possibility of expanding the transfer provision to either an additional 13 DRGs or to all DRGs. The agency chose not to move forward with an expansion because it was unable to analyze and respond to the significant concerns raised in comment letters prior to issuing the final rule. However, in the FY 2003 final rule, CMS indicated that it would "conduct a comprehensive analysis of the policy" and specifically "examine the impact it has on the averaging aspects of the PPS." To date, CMS still has not conducted an impact analysis.

The FY 2004 proposed rule uses a new set of criteria resulting in a very different set of DRGs that would be subject to the transfer provision. Previously, CMS has ranked DRGs based on those with the highest cases of post-acute care transfers. This year, CMS is proposing to expand the policy to DRGs that meet the following criteria:

• The DRG must have at least 14,000 cases of post-acute care transfers.
• The DRG must have at least 10 percent of its post-acute care transfers occurring before the mean length of stay for the DRG.
• The DRG must have a length of stay of at least 3 days.
• The DRG must have experienced at least a 7 percent decrease in length of stay over the past five years (1998-2003).

The law clearly states that the Secretary is authorized, but not required, to expand the post-acute care transfer policy to additional DRGs after FY 2000. The agency chose not to expand this provision in 2001, 2002 or 2003 for sound policy reasons. WHA will strongly urge CMS to drop its proposal to extend the transfer provision to additional DRGs.

The wage index adjusts DRG payments to reflect the differences in labor costs across geographic areas. The proposed rule would base the FY 2004 wage index on data from hospital cost reporting periods beginning FY 2000 (October 1, 1999 to September 30, 2000). WHA strongly encourages hospitals to double-check CMS’ calculations to ensure that the data it proposes using are accurate. The deadline for requesting wage data corrections is June 6. Key aspects of CMS’ wage index adjustment are:

• Removal of Wage Cost for RHCs and FQHCs. The rule proposes to remove non-physician Part B wage costs and hours of Rural Health Clinics (RHC) and Federally Qualified Health Centers (FQHC) in calculating the FY 2004 hospital wage index because Medicare already pays for these costs outside of the inpatient PPS. CMS revised the cost report in 2000 to allow for the separate reporting of these costs.
• Paid Hours. While CMS has traditionally used paid hours rather than hours worked to calculate the wage index, it is proposing to exclude paid military leave and jury duty leave from the wage index calculation beginning in 2005. Unlike other paid leave categories in which workers are paid at their full hourly rates (i.e., sick, vacation), hospitals typically pay workers on military leave or jury duty only a fraction of their normal pay, resulting in a lower hospital average hourly wage and thus wage index. Additionally, CMS is soliciting public comments on whether paid lunch or meal break hours should be excluded from the wage index calculation, as inclusion of these hours may disadvantage hospitals who are required by union contacts to provide paid lunch hours.
• Exclusion of CAHs. The agency is requesting public comments on whether wage data from CAHs should be excluded from the wage index. Currently, the proposed FY 2004 wage index includes wage data for all facilities that were inpatient PPS hospitals in FY 2000 – even if these facilities subsequently converted to CAH status. While CMS states that including wage data for CAHs is appropriate to reflect the market area during the relevant past period, others have suggested that the data be removed, as these facilities are no longer operating under PPS.

CMS proposes to establish a fixed-loss cost outlier threshold equal to the PPS rate for the DRG (including indirect medical education (IME), DSH, and new technology payments) plus $50,645. This threshold represents a 50 percent increase from the FY 2003 payment threshold of $33,450. It is expected that this threshold of $50,645 will be significantly lowered in the inpatient PPS final rule after publication of an inpatient outlier final rule (expected in May 2003). In March, CMS released a proposed rule with substantial changes to outlier payment policy. These changes included use of more updated hospital data to calculate outlier payments, eliminating the use of statewide average cost-to-charge ratio floor, and retrospectively reconciling outlier payments upon final settlement of a hospital’s cost report.

Beginning in 2005, CMS proposes to make it easier for drugs, biologicals and devices to qualify for new technology add-on payments by relaxing the current cost threshold. Specifically, CMS is proposing to reduce the cost threshold from one standard deviation to 75 percent of one standard deviation beyond the geometric mean standardized charge for all cases in the DRG.

• Xigrisâ . The agency is proposing to continue to provide add-on payments in FY 2004 for the severe sepsis drug Xigrisâ , and thus proposes to carve out $50 million (down from $75 million in 2003) from the base inpatient PPS payment to fund this new technology.
• CMS received two new applications for new technology add-on payments, but the agency is proposing that neither qualify for add-on payments at this time. Bone morphogentic proteins (BMPs) for spinal fusions failed the cost criterion, although more data will be gathered and a decision will be made in the final rule. GLIADELâ Wafer for brain tumors failed to meet CMS’ criteria for "new" technology.

CMS proposes to "clarify" the available beds and patient days used in calculating IME and DSH payments. For IME, a lower number of beds results in a higher resident-to-bed ratio, and thus a higher IME payment. To qualify for DSH, hospitals must meet a disproportionate patient percentage threshold based on patient days (the complicated formula is based on the percent of patients receiving Medicaid and supplemental security income). Hospitals with 100 or more beds qualify for a higher DSH payment adjustment. In general, CMS is proposing that beds and patient days that are counted for IME and DSH be limited to those that would be directly included in determining the allowable costs of inpatient hospital care payable under the inpatient PPS on the Medicare cost report.

• Unoccupied Beds. Rather than establish a minimum standards occupancy rate as proposed in FY 2003, CMS proposes to determine whether beds in a unit are available based on whether the unit was used to provide patient care at any time during the preceding three months. Thus, if any of the beds in the unit were used to provide inpatient care in the preceding three months, then all of the beds in the unit are counted for the purposes of determining IME and DSH.
• Non-acute Care Beds. The proposed rule clarifies that non-acute care beds would be excluded from the calculation of IME and DSH. This would include psychiatric and rehabilitation units, bassinets in the newborn nursery and custodial care beds.
• Observation and Swing Beds. The proposed rule would clarify that swing-bed and observation bed days are excluded from the count of bed and patient days.
• Labor/Delivery, Recovery and Postpartum Beds. The proposed rule would clarify that hospitals must apportion the days and costs of a patient stay between the labor/delivery ancillary cost centers and the routine adult and pediatric cost centers on the basis of the percentage of time during the entire stay associated with these various services.
• Demonstration Project Days. The proposed rule would clarify that any hospital inpatient days attributed to a patient who is not eligible for Medicaid inpatient hospital benefits (either under the approved State plan or through a section 1115 waiver) must not be counted in the calculation of Medicaid days for the purposes of determining a hospital’s DSH percentage. This would include demonstration projects that provide family planning that does not include Medicaid coverage for inpatient services.
• Dual-eligible Patient Days. The rule proposes to change CMS policy for counting days for patients who are Medicare beneficiaries and who also are eligible for Medicaid. Currently, dual-eligible patient days are counted in the Medicare fraction and excluded from the Medicaid fraction, even if the patient no longer has Medicare Part A coverage. The rule proposes to begin counting in the Medicaid fraction of the DSH patient percentage the patient days of dual-eligible Medicare beneficiaries whose Medicare coverage has expired.
• Medicare+Choice (M+C) days. The rule proposes to clarify that once a beneficiary elects M+C coverage, the patient days attributable to the beneficiary should not be included in the Medicare fraction of the DSH patient percentage. However, these patient days should be included in the count of total patient days in the Medicaid fraction (the denominator), and the patient days for a M+C beneficiary who is also eligible for Medicaid would be included in the numerator of the Medicaid fraction.

CMS proposes three changes in medical education payments to hospitals:

• Counting Residents. Currently, hospitals may count the time residents spend training in non-hospital sites if they meet certain conditions, including the requirement that hospitals incurring "all or substantially all" of the costs of training at the non-hospital site, and thus receive Medicare IME and direct GME payments. CMS is proposing to clarify Medicare principles on "redistribution of costs" and "community support" so as not to permit a shift in medical education costs from the community to the Medicare program. Thus, effective October 1, 2003, CMS is proposing that in order for a hospital to receive IME and direct GME payment, the hospital must have been continuously incurring the direct GME costs of a residents’ training in a particular program since the date the resident first began training in the program in order for the hospital to count the full-time equivalent residents.

• Nursing and Allied Health Education Activities. The rule proposes to clarify the distinction between continuing education activities (i.e., where a registered nurse receives training in a specialized skill or new technology) and approved educational programs (i.e., "value added" skills that enable a practitioner to work in a particular capacity upon completion of the program), to better distinguish those approved educational programs that are eligible for Medicare pass-through payment. Thus, Medicare would no longer pay for pharmacy or clinical pastoral education programs.
• Rural Track GME Training Programs. The proposed rule would revise current regulations to state that if an urban hospital rotates residents to a separately accredited rural track program in a rural area for more than 50 percent of the duration of the training program (down from two-thirds of the duration), then the urban hospital may receive an increase in its cap to reflect the time those residents train at the urban hospital. This would slightly increase Medicare payments for IME and direct GME.

CMS is required to annually reclassify diagnoses and procedures and recalibrate the DRG relative weights and rates. For FY 2004, CMS proposes to create additional DRGs that are split based on the presence or absence of complications or comorbidities (CCs); to create a new DRG for cases with ruptured brain aneurysms; and to create a new DRG for cases involving the implantation of a cardiac defibrillator where the patient experiences acute myocardial infarction, heart failure or shock.

The rule also proposes lengthy changes in the development of the proposed FY 2004 LTCH DRG classifications and relative weights.

Medicare regulations state that payment to a CAH for outpatient clinical diagnostic laboratory tests will be made on a reasonable cost basis only if the individual is an outpatient of the CAH at the time the specimens are collected, otherwise the CAH would be paid according to the lab fee schedule. This policy has created confusion as to how Medicare pays for laboratory services that a CAH furnishes to beneficiaries in certain settings such as rural health clinics (especially if they are provider based), skilled nursing facilities and a patient’s home. The rule proposes to "clarify" CMS’ policy to state that the patient must be "physically present in the CAH" at the time the specimen is collected for the CAH to receive cost-based reimbursement.

The proposed rule would update the qualifying criteria for new rural referral center (RRC) designation, if the hospital does not meet the bed size criterion of 275 or more beds. To qualify for RRC status in FY 2004, a hospital must have at least 5,000 discharges and a case-mix index that is at least 1.3374, or greater than the median case-mix value for urban hospitals in its census region. Because most regions have proposed median case-mix values that are less than 1.3374, please refer to the chart provided in the rule on page 27201 of the Federal Register for specific details.

New psychiatric hospitals or units, defined as those that first received payment after October 1, 1997, are subject to the following FY 2004 caps:

A proposed rule for new psychiatric hospitals and units is expected shortly.

Effective October 1, 2002, the payment limitation is no longer applicable to new LTCHs because they are paid on 100 percent of the LTCH PPS rates (they may not participate in the five-year transition from cost-based payment to PPS), or to new rehabilitation hospitals and units who are paid 100 percent of the inpatient rehabilitation hospitals PPS rate.

CMS estimates that implementing the various changes in the rule will result in the following percent change in payment per case for hospitals:

WHA will submit a comment letter to CMS on many of the proposed changes in the FY 2004 inpatient PPS rule. We urge you to do the same. All comments are due to CMS by July 8. You may mail written comments (an original and three copies) to the following address:

Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS –1470 – P
P.O. Box 8010
Baltimore, MD 21244-1850

^[1] Table I – Impact analysis of proposed changes for FY 2004, operating prospective payment system
^[2] Additional 19 DRGs proposed are:  DRGs 12, 24, 25, 89, 90, 121, 122, 130, 131, 239, 243, 277, 278, 296, 297, 320, 321, 462 and 468.
^[3] Current 10 DRGs are:  DRGs 14, 113, 209, 210, 211, 236, 263, 264, 429 and 483.