CMS Dollars Part I: IPPS Made Simple - Protecting Your Hospital Nest Egg

Hospital margins are narrower than ever, and hospitals dedicate many resources to understanding and capturing their reimbursement dollars. Medicare is the single largest purchaser of healthcare in the US – spending $610 billion in 2014, which is almost a quarter of all spending on medical goods and services. With inpatient hospital reimbursement being one of the largest pieces of the pie, accounting for 23% of all Medicare spending, sharing how Medicare regulations affect your hospital reimbursement with your staff is paramount in protecting your nest egg of reimbursement dollars.  This is the first in a series of blogs simplifying complex CMS reimbursement programs.

When talking about hospital reimbursement, we often have to pull out a white board to make lists and diagrams to follow the complex payment pieces.  The Inpatient Prospective Payment System (IPPS) is the first chapter in our “CMS Dollars” story. Put simply, the IPPS program is what determines CMS payment to hospitals. Hospital reimbursement includes:

  • An Adjusted Base Pay per patient (per discharge)
  • Add-on Payments 
  • Modifications to Adjusted Base Pay
  • Yearly Payment Adjustments  

Adjusted Base Pay

The adjusted base pay for a patient is determined by the cost of treating the patient and the market cost of running a hospital in a given location. 

In determining the cost of treating a patient’s clinical condition, as patients are discharged from the hospital their case is categorized into a diagnosis-related group (DRG). As most of us are familiar, DRGs are based on the patient’s clinical condition/procedure and severity of illness. Typically, there are 3 variations of a DRG for the same condition based on absence, presence, and severity of complications. 

Weighted DRG

Medicare assigns a “weight” to each DRG that factors in hospital Length of Stay (LOS), resources needed to treat a patient with the given condition severity, additional secondary diagnoses, and patient demographics. The “weighted DRG” is then multiplied by the hospital base pay to calculate the “adjusted base pay”.

Base Pay

The base pay for a given hospital is determined by its geographic location and how this location affects the cost of labor and cost of living. When hospital base pay is adjusted for the cost of its labor force, hospitals in more expensive labor markets receive a higher base pay. The second adjustment to base pay, which only applies to hospitals in Hawaii and Alaska, accounts for the higher cost of living in these two states.

Add-on Payments

Additional payments may be paid to hospitals for the following circumstances:

  • Disproportionate share hospital (DSH) payment: For hospitals treating a high percentage of low-income patients
  • Indirect medical education (IME) payment: For approved teaching hospitals teaching medical residents
  • High-cost outlier payment: Added for cases that are extraordinarily costly
  • New technology payment: Added for cases involving certain approved new technologies
  • Modifications to Adjusted Base Pay

A hospital's payment may also be modified based on different CMS programs. For example, a hospital may see a reduction in payments if their readmission rates are greater than the national average in the Hospital Readmission Reduction Program or if their patients experience more Hospital-Acquired Conditions. Programs such as Value-Based Purchasing may further increase or decrease hospital payments depending on how the hospital is scored in this program.  

Yearly Payment Adjustments

On an annual basis, CMS updates its payment rates. This yearly payment adjustment is known as the hospital “market basket” update. For 2017, the increase in the operating payment rates is 0.95%. CMS anticipates that the rate increase, together with other payment policy changes, will increase the market basket up to 1%. However, not all hospitals will see this increase in payment.

In a continuous effort to move hospitals toward meaningful use of EHR and participation in Inpatient Quality Reporting program (IQR), CMS will be withholding a portion or all of the payment increase from hospitals not participating in these two programs. 

  • Non-compliance with meaningful EHR use will cost hospitals ¾ of the payment adjustment
  • Noncompliance with IQR will result in the loss of ¼ of the payment adjustment
  • Non-compliance with both programs will result in no adjustment in 2017 payments

Although in 2016 one would expect all hospitals to be compliant with EHR meaningful use and IQR, this doesn’t seem to be the case for a small percentage of acute care hospitals. 
Current and expected penalties:

  • 178 hospitals - 2016 # hospitals penalized for EHR MU non-compliance
  • 55 hospitals - 2016 # hospitals penalized for IQR non-compliance
  • 179 hospitals 2017 # hospitals penalized for EHR MU non-compliance
  • 133 hospitals - 2017 # hospitals penalized for IQR non-compliance

The Bottom Line

For 2017, CMS projects that total Medicare spending on inpatient hospital services will increase by $746 million. The hospitals not participating in the programs above will be leaving a lot of money on the table as Medicare spending continues to grow.  Wading through the hundreds of pages of proposed and final CMS rules can be daunting, but the takeaway is that in 2017, with the market basket update alone, there is an opportunity for hospitals to earn up to 1% additional payment.  To put this in perspective, for a hospital who received $400 million in CMS payments, a 1% increase in payment ($4 million) would pay for a lot of quality and growth initiatives.  To claim these dollars, hospitals need to spread a protective wing over their yearly payment adjustment nest egg.