CMS Posts Fact Sheet on Hospital Inpatient Prospective Payment System and Long Term Acute Care Hospital Proposed Rule Issued

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Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Proposed Rule Issues for Fiscal Year (FY) 2017*


Date: 2016-04-18

Title: Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Proposed Rule Issues for Fiscal Year (FY) 2017


*Content by the Centers for Medicare & Medcaid Services.

On April 18, 2016 the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule to update fiscal year (FY) 2017 Medicare payment policies and rates under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital (LTCH) Prospective Payment System (PPS). The proposed rule, which would apply to approximately 3,330 acute care hospitals and approximately 430 LTCHs, would affect discharges occurring on or after October 1, 2016.

The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area.

The proposed rule proposes policies that continue a commitment to increasingly shift Medicare payments from volume to value. The Administration has set measurable goals and a timeline to move the Medicare program, and the health care system at large, toward paying providers based on the quality, rather than the quantity of care they give patients. The proposed rule includes policies that advance that vision and is one of several proposed rules that reflect a broader Administration-wide strategy to create a health care system that results in better care, smarter spending, and healthier people.

This fact sheet discusses major provisions of the proposed rule.


CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS and long-term care hospitals under the LTCH PPS. Under these two payment systems, CMS generally sets payment rates prospectively for inpatient stays based on the patient’s diagnosis and severity of illness. A hospital receives a single payment for the case based on the payment classification – MS-DRGs under the IPPS and MS-LTC-DRGs under the LTCH PPS – assigned at discharge.

By law, CMS is required to update payment rates for IPPS hospitals annually, and to account for changes in the costs of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. This is known as the hospital “market basket.” Payment rates to LTCHs are typically updated annually according to a separate market basket based on LTCH-specific goods and services.

Changes and Updates in FY 2017 Policies

Proposed Changes to Payment Rates under IPPS

The proposed increase in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users is 0.9 percent. This reflects the projected hospital market basket update of 2.8 percent adjusted by -0.5 percentage point for multi-factor productivity and an additional adjustment of -0.75 percentage point in accordance with the Affordable Care Act. This also reflects a proposed 1.5 percentage point reduction for documentation and coding required by the American Taxpayer Relief Act of 2012 and a proposed increase of approximately 0.8 percentage points to remove the adjustment to offset the estimated costs of the Two Midnight policy and address its effects in FYs 2014, 2015, and 2016.

Hospitals that do not successfully participate in the Hospital IQR Program and do not submit the required quality data will be subject to a one-fourth reduction of the market basket update. Also, the law requires that any hospital that is not a meaningful EHR user will be subject to a three-fourthsreduction of the market basket update in FY 2017.

CMS projects that the rate increase, together with other proposed changes to IPPS payment policies, will increase IPPS operating payments by approximately 0.7 percent and that changes in uncompensated care payments will decrease IPPS operating payments by an additional 0.3 percent.  Other additional payment adjustments will include continued penalties for excess readmissions, a continued 1 percent penalty for hospitals in the worst performing quartile under the Hospital Acquired Condition Reduction Program, and continued bonuses and penalties for hospital-value based purchasing.  In sum, CMS projects that total Medicare spending on inpatient hospital services, including capital, will increase by about $539 million in FY 2017.

This projected increase in spending includes an estimated $350,000 increase in FY 2017 payments to hospitals located in Puerto Rico under the proposal to make IPPS payments for capital-related costs based solely on the national capital Federal rate (rather than the current blend of the national capital Federal rate and Puerto Rico-specific capital rate), consistent with the recent statutory change in the payment methodology for operating IPPS payments to those hospitals.

IPPS Rate Adjustments for Documentation and Coding and Two Midnight Policy 

In the FY 2017 IPPS proposed rule, CMS is proposing two adjustments in addition to its annual rate update for inpatient hospital payments.

First, CMS is proposing the last year of recoupment adjustments required by the American Taxpayer Relief Act of 2012 (ATRA). Section 631 of ATRA requires CMS to recover $11 billion by FY 2017 to fully recoup documentation and coding overpayments related to the transition to the MS-DRGs that began in FY 2008. For FYs 2014, 2015, and 2016, CMS implemented a series of cumulative -0.8 percent adjustments.  For FY 2017, CMS calculates that $5.08 billion of the $11 billion requirement remains to be addressed.  Therefore, CMS is proposing a final -1.5 percent adjustment to complete the statutorily-specified recoupment.

Second, CMS is proposing to take action regarding the -0.2 percent adjustment it implemented in the FY 2014 IPPS/LTCH PPS final rule to account for an estimated increase in Medicare expenditures due to the Two Midnight Policy.  Specifically, in the FY 2014 IPPS/LTCH PPS final rule, CMS estimated that this policy would increase expenditures and accordingly made an adjustment of -0.2 percent to the payment rates.  CMS believes the assumptions underlying the -0.2 percent adjustment were reasonable at the time they were made.  Additionally, CMS does not generally believe it is appropriate in a prospective payment system to retrospectively adjust rates.  However, in light of recent review and the unique circumstances surrounding this adjustment, for FY 2017, CMS is proposing to permanently remove this adjustment and also its effects for FYs 2014, 2015, and 2016 by adjusting the FY 2017 payment rates.  The impact of this proposal is to increase FY 2017 payments by approximately 0.8 percent.

Medicare Uncompensated Care Payments

CMS distributes a prospectively determined amount to disproportionate share hospitals based on their relative share of uncompensated care nationally.  As required by the Affordable Care Act, this amount is equal to an estimate of 75 percent of what otherwise would have been paid as Medicare disproportionate share hospital payments, adjusted for decreases in the rate of uninsured individuals and other factors. In this rule, subject to additional data updates, CMS is proposing to distribute roughly $6.0 billion in uncompensated care payments in FY 2017, a decrease of $400 million from the FY 2016 amount.

For FY 2017, CMS proposes to continue to distribute these funds using a methodology based on insured low income days, which include inpatient days for patients eligible for Medicaid and inpatient days for patients entitled to Medicare and Supplemental Security Income (SSI), and proposes two changes to this methodology.  First, CMS proposes to use data from three cost reporting periods instead of one cost reporting period to limit major fluctuations in uncompensated care payments from year-to-year. Second, CMS proposes to apply a proxy to estimate Medicare SSI inpatient days for Puerto Rico hospitals since residents of Puerto Rico are not eligible for SSI benefits.

For FY 2018, CMS proposes to begin incorporating uncompensated care cost data from Worksheet S-10 of the Medicare Cost report in the methodology for distributing these funds.  Specifically, CMS proposes to define uncompensated care costs as the costs of charity care and non-Medicare bad debt and to incorporate Worksheet S-10 data over a three-year period, where insured low income day data will be averaged with uncompensated care cost data.  For FY 2018, CMS proposes to use Worksheet S-10 data from FY 2014 cost reports in combination with insured low income days from the two preceding periods for determining the distribution of uncompensated care payments.  To the extent that hospitals have either not submitted a Worksheet S-10 with their FY 2014 cost report, or find errors on a submitted Worksheet S-10, we encourage hospitals and Medicare Administrative Contractors (MACs) to work together to complete and/or revise their FY 2014 Worksheet S-10 as soon as possible.

Hospital Acquired Conditions (HAC) Reduction Program

The HAC Reduction Program creates an incentive for hospitals to reduce the incidence of hospital-acquired conditions by requiring the Secretary to make an adjustment to payments to hospitals that are in the worst performing quarterile for prevalence of hospital-acquired conditions. In the FY 2017 IPPS/LTCH PPS Proposed Rule, CMS is proposing to make five changes to existing HAC Reduction Program policies:

    1. Establish NHSN CDC HAI data submission requirements for newly opened hospitals;
    2. Clarify data requirements for Domain 1 scoring;
    3. Establish performance periods for the FY 2018 and FY 2019 HAC Reduction Programs;
    4. Adopt the refined PSI 90: Patient Safety for Selected Indicators Composite Measure (NQF # 0531); and
    5. Change the Program scoring methodology from the current decile-based scoring to a continuous scoring methodology.

Hospital Readmissions Reduction Program (HRRP)

The HRRP requires a reduction to a hospital’s base operating DRG payment to account for excess readmissions associated with selected applicable conditions. For FY 2017 and subsequent years, the reduction is based on a hospital’s risk-adjusted readmission rate during a three-year period for acute myocardial infarction (AMI), heart failure (HF), pneumonia, chronic obstructive pulmonary disease (COPD), total hip arthroplasty/total knee arthroplasty (THA/TKA), and, effective for FY 2017 (pursuant to previous rulemaking) coronary artery bypass graft (CABG). To align with other quality reporting programs and allow the posting of data as soon as possible, CMS is proposing to update the public reporting policy so that excess readmission rates will be posted to the Hospital Compare website as soon as feasible following the hospitals’ preview period. CMS is not proposing any changes to the HRRP measures in the FY 2017 IPPS rule.

Notification Procedures for Outpatients Receiving Observation Services

Enacted August 6, 2015, the Notice of Observation Treatment and Implication for Care Eligibility Act (NOTICE Act) requires hospitals and Critical Access Hospitals (CAH) to provide notification to individuals receiving observation services as outpatients for more than 24 hours.

  • Hospitals and CAHs would be required to furnish a new CMS-developed standardized notice, the Medicare Outpatient Observation Notice (MOON), to a Medicare beneficiary or enrollee who has been receiving observation services as an outpatient for more than 24 hours. The notice must be provided no later than 36 hours after observation services are initiated;
  • The MOON will inform nearly one million beneficiaries annually of the reason the individual is an outpatient receiving observation services and the implications of observation services on cost sharing and post-hospitalization eligibility for Medicare coverage of skilled nursing facility (SNF) services; and
  • An oral explanation of the MOON must be provided, ideally in conjunction with the delivery of the notice, and a signature must be obtained from the individual, or an individual qualified to act on their behalf, to acknowledge receipt and understanding of the notice (or in cases of refusal of signature by such individual, signature by the staff member of the hospital or CAH providing the notice).

The standardized notice, MOON, is required to go through the Paperwork Reduction Act process, thus affording the public an opportunity to comment on the proposed MOON.

Electronic Health Record Incentive Programs and Quality Reporting

This proposed rule also includes the requirements for eligible hospitals and CAHs reporting clinical quality measures (CQMs) for the Medicare and Medicaid Electronic Health Record (EHR) Incentive Program. CMS is proposing modifications to some of the CQM reporting and submission requirements, including the proposed removal of certain CQMs to align with the Hospital IQR Program. No new CQMs are proposed.

Hospital Inpatient Quality Reporting (IQR) Program

The Hospital IQR Program is a pay-for-reporting program established by the Medicare Prescription Drug, Improvement, and Modernization Act. In the FY 2017 IPPS/LTCH PPS Proposed Rule, CMS is proposing to add a total of four new claims-based measures for the FY 2019 payment determination and subsequent years (three clinical episode-based payment measures, and one communication & coordination-of-care measure). CMS is also proposing to remove 15 measures for the FY 2019 payment determination and subsequent years.  Of these 15 measures, 13 are electronic clinical quality measures (eCQMs), two of which CMS is also proposing to remove in their chart-abstracted form, and two others are structural measures.  CMS is also proposing to refine two previously adopted measures beginning with the FY 2018 payment determination.  Furthermore, CMS is inviting public comment on potential new quality measures and other areas for future inclusion in the Hospital IQR Program.

In addition, CMS is proposing a number of changes in relation to eCQMs:

  1. To require hospitals to report four quarters of data for all eCQMs included in the Hospital IQR Program measure set for the FY 2019 payment determination and subsequent years in order to align with the Medicare and Medicaid EHR Incentive Programs;
  2. To require several related technical eCQM submissions requirements beginning with the FY 2019 payment determination; and
  3. To modify the current validation process to include the validation of eCQM data beginning in the spring of CY 2018 for the FY 2020 payment determination.

Lastly, CMS is proposing to update its Extraordinary Circumstances Extensions/Exemptions (ECE) policy by:

  1. Extending the ECE request deadline for non-eCQM circumstances from 30 to 90 calendar days following an extraordinary circumstance; and
  2. Establishing a separate submission deadline of April 1 following the end of the reporting calendar year for ECEs related to eCQMs.

Hospital Value-Based Purchasing (VBP) Program

Established by the Affordable Care Act, the Hospital VBP Program adjusts payments to hospitals for inpatient services based on their performance on an announced set of measures. In the proposed rule, CMS proposes to implement updates to the Hospital VBP Program and to expand the number of measures. Specifically, the rule proposes to expand the number of hospital units to which two National Healthcare Safety Network measures apply beginning with the FY 2019 program year. In addition, CMS proposes to expand the cohort used to calculate the 30-day pneumonia mortality measure beginning with the FY 2021 program year. CMS also proposes to add two condition-specific payment measures (one for acute myocardial infarction and one for heart failure) beginning with the FY 2021 program year and a 30-day mortality measure following CABG surgery beginning with the FY 2022 program year. The rule also proposes changes for determining the policy that governs whether a hospital will be excluded from the program if it is cited for deficiencies that pose immediate jeopardy to the health and safety of patients.

PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program

The PCHQR Program collects and publishes data on an announced set of quality measures. In the FY 2017 IPPS/LTCH PPS Proposed Rule, CMS proposes to collect one new measure under this program.  Specifically, CMS is proposing to add a measure of Admissions and Emergency Department Visits for Patients Receiving Outpatient Chemotherapy. In addition to this measure, CMS is proposing to expand the patient cohort of the previously finalized Radiation Dose Limits to Normal Tissues for Patients Receiving 3D Conformal Radiation Therapy. The new cohort will include breast and rectal cancer patients in addition to the previous cohort of lung and pancreatic cancer patients.

Inpatient Psychiatric Facility Quality Reporting Quality Reporting (IPFQR) Program

The IPFQR Program is a pay-for-reporting program established by the Affordable Care Act.  In the proposed rule, CMS is proposing two additional measures to the program. Specifically, CMS is proposing to add Thirty-day All-Cause Readmission Following Psychiatric Hospitalization in an IPF, which is a measure calculated from administrative claims data, and SUB-3:  Alcohol & Other Drug Use Disorder Treatment Provided or Offered at Discharge and the subset measure SUB-3a:  Alcohol & Other Drug Use Disorder Treatment at Discharge (NQF #1664):  This is a chart-abstracted measure that complements the previously adopted substance abuse measures in the IPFQR Program.

Long-Term Care Hospital Prospective Payment System Changes

Nationwide, most chronically ill patients are treated in acute care hospitals, but some are admitted to LTCHs. In this proposed rule, CMS is continuing to implement the changes required by The Pathway for SGR Reform Act of 2013 that establish two different types of LTCH PPS payment rates depending on whether the patient meets certain clinical criteria. As a result of the continuation of this phase in FY 2017, CMS projects that LTCH PPS payments would decrease by 6.9 percent, or approximately $355 million. Cases that qualify for the higher standard LTCH PPS payment rate under the revised system will see an increase in that payment rate of 0.3 percent in FY 2017. In addition, CMS is proposing to streamline its regulations regarding the 25 percent threshold policy, which is a payment adjustment made when the number of cases an LTCH admits from a single hospital exceeds a specified threshold (generally 25 percent).

Long Term Care Hospital Quality Reporting Program (LTCH QRP)

Beginning in FY 2014, the applicable annual update for any LTCH that did not submit the required data to CMS is reduced by two percentage points. The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act) requires the continued specification of quality measures for the LTCH QRP, as well as resource use and other measures.

In order to satisfy the requirements of the IMPACT Act, CMS is proposing one new assessment-based quality measure, and three claims-based measures for inclusion in the LTCH QRP:

  1. Discharge to Community – Post Acute Care (PAC) LTCH QRP(claims-based);
  2. Medicare Spending Per Beneficiary (MSPB) – PAC LTCH QRP (claims-based);
  3. Potentially Preventable 30 Day Post-Discharge Readmission Measure for LTCHs (claims-based); and
  4. Drug Regimen Review Conducted with Follow-Up for Identified Issues (assessment-based).

CMS is proposing to add four new measures to LTCH QRP public reporting by fall 2017 on a CMS website, such as Hospital Compare.  We are clarifying the previously finalized review and correction period for LTCH QRP public reporting in order to emphasize its alignment with the Hospital IQR Program’s policies and practices.

Interim Final Rule with Comment (IFC) 

Along with the FY 2017 IPPS/LTCH PPS proposed rule, CMS is issuing an IFC to implement section 231 of the Consolidated Appropriations Act, 2016 that establishes a temporary exception for certain wound care discharges from the site neutral payment rate (that is, the relatively lower payment rate for LTCH discharges that do not meet the statutory patient level criteria) for certain LTCHs.

CMS will accept comments on the proposed rule until June 16, 2016, and will respond to comments in a final rule to be issued by August 1, 2016. The proposed rule can be downloaded from the Federal Register at:

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