IPPS, LTCH Proposed Payment Changes–Quality Programs and Recent Laws

Acute care hospitals that participate in the Hospital Inpatient Quality Reporting Program and have demonstrated meaningful use of electronic health records would see their Medicare payments increase 1.3 percent in fiscal year (FY) 2015, under a Proposed rule issued on April 30, 2014. Payments to long-term care hospitals (LTCHs) would increase by about 0.8 percent under CMS’ proposal. About 3,400 hospitals and 435 LTCHs receive Medicare payments under these two prospective payment systems (PPS). The Proposed rule will be published in the Federal Register on May 15, 2014.

The Proposed rule also implements or revises regulations relating to various sections of the Affordable Care Act (ACA) (P.L. 111-148), the American Taxpayer Relief Act of 2012 (ATRA) (P.L. 112-240), and the Protecting Access to Medicare Act of 2014 (P.L. 113-93).

CMS sets payment rates for hospitals and LTCHs for inpatient stays based on a patient’s diagnosis and severity of illness. The payment rates are based on an annual market basket update that is then adjusted for various factors, explained below. Because of these adjustments, CMS projects that total IPPS payments will decrease by $241 million in FY 2015, while payments to LTCHs will increase by $44 million.

IPPS Payment and Adjustments

For hospitals, the FY 2015 market basket update is 2.7 percent. This is reduced by (1) 0.4 percentage points related to multi-factor productivity (based on average changes in economy-wide productivity over a 10-year period); (2) 0.2 percentage points (a productivity adjustment mandated by ACA sec. 3401); and (3) 0.8 percentage points (the documentation and coding recoupment adjusted mandated by ATRA). Overall payments to hospitals under IPPS will be further reduced because of the hospital readmissions reduction program, the hospital acquired condition program, Medicare disproportionate share hospital (DSH) adjustments, the expiration of certain temporary payment increases to hospitals, and other proposed IPPS changes.

Quality Measures

The Proposed rule includes several adjustments relating to various hospital quality programs, including—

Hospital Value-Based Purchasing Program—For FY 2015, CMS is increasing the portion of Medicare payments available to fund value-based incentive payments to 1.5 percent of the base operating diagnosis related group (DRG) payment amounts to all participating hospitals.

Hospital Readmissions Reduction Program—The maximum reduction in payments will increase from 2 to 3 percent. For FY 2015, CMS proposes to assess hospitals’ readmissions penalties using five readmissions measures endorsed by the National Quality Forum (NQF). CMS estimates that Medicare hospital readmissions declined by 150,000 from January 2012 through December 2013.

Hospital-Acquired Condition (HAC) Reduction Program—Beginning in FY 2015, hospitals scoring in the top quartile for the rate of HACs (i.e., those with the poorest performance) will have their Medicare inpatient payments reduced by 1 percent.

Further quality changes are highlighted in a CMS fact sheet.

Two-Midnight Rule

CMS recognizes in the Proposed rule that hospitals continue to have concerns about implementation of the “two-midnight rule,” the benchmark for determining the appropriateness of an inpatient hospital admission versus treatment on an outpatient basis. CMS notes that “there could be additional rare and unusual circumstances that have not been identified that justify inpatient admission and Part A payment absent an expectation of care spanning at least 2 midnights” and is inviting feedback from providers, which can be sent to CMS via written correspondence or emailed to SuggestedExceptions@cms.hhs.gov, with “Suggested Exceptions to the 2-Midnight Benchmark” in the subject line.

Disproportionate Share Hospitals

Under ACA sec. 1104, hospitals’ Medicare DSH payments were reduced to reflect lower uncompensated care costs relative to increases in the number of insured. Starting in FY 2014, hospitals receive 25 percent of the amount they previously would have received under the former formula for Medicare DSH; the remaining 75 percent would be distributed to hospitals based on each hospital’s share of uncompensated care costs relative to all hospitals that receive DSH payments. CMS proposes to use the Office of the Actuary’s estimate of payments that would otherwise be made for Medicare DSH in FY 2015, adjusted by the change in the percentage of individuals that are uninsured as estimated by the Congressional Budget Office and a statutory factor to determine the amount available for uncompensated care payments.

Updated Labor Markets

CMS is proposing to use the most recent labor market area delineations based on the 2010 Census and issued by the Office of Management and Budget (OMB). Recognizing that using updated data might impact a hospital’s designation as “urban” or “rural,” CMS is proposing that “hospitals currently located in an urban county that would become rural under the new OMB delineations would be assigned the urban wage index value of the labor market area in which they are physically located for FY 2014 for 3 years beginning in FY 2015.”

Long-Term Care Hospitals

LTCHs would see Medicare payments increase by 0.8 percent (about $44 million) in FY 2015 under the Proposed rule. Sec. 1206 of the Bipartisan Budget Act of 2013 (P.L. 113-67) established a new framework for the application of patient criteria for LTCHs starting in FY 2016; in the Proposed rule CMS solicits feedback on policies relating to establishing the relative payment weights and high-cost outliers so that the agency may evaluate various options in preparation for developing proposals to implement the statutory changes beginning in FY 2016.

CMS also proposes to implement sec. 1206(b)(1) of P.L. 113-67, which provides for the retroactive reinstatement and extension, for an additional four years, of the statutory moratorium on the full implementation of the 25-percent threshold policy. Under this policy, if an LTCH admits more than 25 percent of its patients from a single acute care hospital, Medicare will make payments comparable to IPPS hospitals for patients above that threshold. CMS also proposes to implement the moratoria included in P.L. 113-67 on new LTCHs, LTCH satellites, and new beds in existing LTCHs and satellites from April 1, 2014, to September 30, 2017. The Proposed rule outlines three exceptions to the moratorium on new LTCHs and satellites; there is no exception to the moratorium on new beds in existing facilities.

CMS also is proposing to expand the interrupted stay policy, which addressed circumstances under which a person would be discharged from an LTCH and admitted to another facility, then directly readmitted to the LTCH within a certain period. The threshold is expanded to 30 days, which matches the 30-day window for hospitals that is applied under the Hospital Readmissions Reduction Program.


AHA Lawsuits Challenge Two-Midnight Rule, 0.2 Percent Cut, Other IPPS Changes

The American Hospital Association (AHA), together with several hospitals and hospital organizations, has filed two lawsuits in the United States District Court for the District of Columbia asking that four components of the August 19, 2013, Inpatient Prospective Payment System (IPPS) Final rule be declared invalid. One complaint challenges: (1) the two-midnight rule; (2) the requirement that claims for outpatient services filed after the denial of a claim for inpatient services be submitted within one year of the date that services ended; and (3) the requirement that a physician order use the words “inpatient services” as a condition of payment for a stay. The second complaint claims that the 0.2 percent cut in the rate for inpatient services is invalid.


The AHA is joined in both lawsuits by Banner Health, based in Phoenix, Arizona; Mt. Sinai Medical Center in New York City; Einstein Healthcare Network in Philadelphia, Pennsylvania, Wake Forest Baptist Medical Center in Winston-Salem, North Carolina, and hospital organizations in New York, New Jersey, and Pennsylvania. Each of the hospitals claims to have lost thousands of dollars as a result of the 0.2 percent rate cut and even larger sums due to the two-midnight rule.

The Rate Reduction

The complaint alleges that the reduction is invalid for several reasons. First, CMS did not include the reduction in an actual regulation, but only described it in the preamble to the Final rule. Second, the factual premises on which the rule was based are based on assumptions that are demonstrably wrong. Allegedly, CMS stated that it expected that the two-midnight rule, if applied to the fiscal year (FY) 2011 discharges, would result in 400,000 cases switching from outpatient to inpatient and 360,000 from inpatient to outpatient. But the Final rule stated that CMS considered only surgical discharges, excluding diagnosis related groups (DRGs) involving medical services only. The AHA notes that length of stay is easier to predict in surgical cases, and the exclusion of medical discharges distorts CMS’ analysis. Third, the Proposed rule did not describe the changes in policy with enough clarity or specificity to allow effective notice and comment.

The Two-Midnight Rule

The AHA and its co-plaintiffs contend that the two-midnight rule departs abruptly from long-standing policy defining inpatient services and describing the physicians’ role in determining whether a patient should be admitted. Under the prior policy, the AHA alleges, a physician could admit a patient if his or her condition and the anticipated services were likely to result in a stay of at least 24 hours. If a stay must cross two midnights to qualify for inpatient status, a patient admitted early in the morning might not qualify as an inpatient until nearly 48 hours had passed. The complaint alleges that the rule replaces the many medical factors the physician might consider with a single requirement based on time, so that even services provided in an intensive care unit might not qualify for inpatient reimbursement.

One-Year Limit

The AHA contends that the post-discharge review and denial of payment for inpatient services by recovery audit contractors (RACs), combined with the requirement that claims for outpatient services be submitted within one year of service deprives hospitals of the outpatient reimbursement because RAC reviews generally do not even begin until one year after services were furnished. The complaint notes that the agency has exercised its authority to make exceptions to the one-year deadline in other situations but refuses to do so here and that it could simply direct its administrative contractors to reprocess the rejected inpatient claims as outpatient services.

Finally, the hospitals claim that the physician order requirement is inconsistent with Soc. Sec. Act sec. 1814(a)(3) because the statute requires certification for hospital services to be provided over an extended period, not for all inpatient services.

Hospital Groups Challenge Two-Midnight Rule; Legislators Seek to Delay It

After this blog post appeared on January 28, CMS announced on January 31 that it was further delaying Recovery Auditor (RA) post-payment patient status reviews of inpatient hospital claims until October 1, 2014. Previously, RA reviews of claims relating to the “two-midnight” rule put in place October 1, 2013, had been delayed until March 31, 2014. As noted in this blog hospital groups and members of Congress have been seeking to delay or revise the two-midnight rule since it was first proposed in 2013.


The American Hospital Association, along with regional hospital associations and four hospital systems, have taken the first steps to challenge the two-midnight rule and other Medicare payment changes implemented on October 1, 2013 under the Inpatient Hospital Prospective Payment System (IPPS) update for fiscal year (FY) 2014. In addition, the House of Representatives is considering legislation that would delay implementation of the rule until October 1, 2014.


Final rule CMS-1599-F incorporated two changes to the IPPS for FY 2014 that affects reviews by Medicare contractors, when an inpatient admission is considered reasonable and necessary: (1) a two-midnight presumption, which directs Medicare review contractors not to select inpatient claims for review if the inpatient stay spanned two midnights from the time of admission, absent evidence of gaming or abuse; and (2) a two-midnight benchmark, which instructs admitting practitioners and Medicare review contractors that an inpatient admission is generally appropriate when the admitting practitioner has a reasonable and supportable expectation, documented in the medical record, that the patient would need to receive care at the hospital for a period spanning two midnights.

The two-midnight rule applies to acute care inpatient hospital facilities, long-term care hospitals (LTCHs), inpatient psychiatric facilities (IPFs), and critical access hospitals (CAHs). It does not apply to admissions to inpatient rehabilitation facilities.

According to CMS, “hospital inpatient admissions spanning 2 midnights in the hospital will generally qualify as appropriate for payment under Medicare Part A.” CMS estimated that IPPS expenditures would increase by approximately $220 million due to an expected net increase in inpatient encounters under this policy, so it imposed a 0.2 percent reduction in IPPS payments to offset this estimated $200 million in additional IPPS expenditures.

The hospital organizations, along with hospitals that are part of Banner Health (AZ), Einstein Healthcare Network (PA) and Wake Forest University Baptist Medical Center (NC) and The Mount Sinai Hospital (NY) filed an appeal with the Provider Reimbursement Review Board (PRRB) asking the Board to grant expedited judicial review for the hospitals’ claims that the rule’s 0.2% payment cut in FY 2014 for IPPS hospitals is unlawful. According to the filing, “the Providers seek judicial review of pure questions of law regarding the substantive and procedural validity of the 0.2% reduction. Because the [PRRB] lacks the power to grant the Providers’ requested relief, it should grant expedited judicial review.”

Delay in RAC reviews

In order to give hospitals time to adjust to the two-midnight guidelines, CMS also instructed Medicare Administrative Contractors (MACs) and Recovery Auditors (RAs) that, absent evidence of systematic gaming or abuse, they were not to review claims spanning two or more midnights after admission for a determination of whether the inpatient hospital admission and patient status was appropriate. In addition, CMS has prohibited RAs from conducting patient status reviews on inpatient claims with dates of admission between October 1, 2013 and March 31, 2014. CMS has noted that “physicians should generally admit as inpatients beneficiaries they expect will require 2 or more midnights of hospital services, and should treat most other beneficiaries on an outpatient basis.”

Admissions down due to change?

A December 2013 report on the hospital industry from Citi Research showed inpatient admissions to hospitals declined 4.5 percent in November 2013 compared to November 2012. Only 5 percent of hospitals that responded to the Citi survey reported year-over-year growth in overall admissions, the lowest percentage in 11 years of Citi Research tracking these numbers. Citi analysts attributed the slowdown in hospital admissions to the two midnight rule. CMS has not released any information yet as to whether the two-midnight rule has affected hospital admissions for medicare beneficiaries.

Legislation to delay two-midnight rule

In December, several congressmen sponsored the Two-Midnight Rule Delay Act of 2013 (HR 3698) which would delay enforcement of the two-midnight rule for admissions occurring before October 1, 2014.

The bill prohibits Medicare review contractors from denying a claim for inpatient hospital services furnished by a hospital (including a long-term care hospital or inpatient psychiatric facility), or inpatient critical access hospital services furnished by a critical access hospital, for discharges occurring before October 1, 2014: (1) for medical necessity due to the length of an inpatient stay in such hospital or due to a determination that the services could have been provided on an outpatient basis; or (2) for requirements for orders, certifications, or recertifications, and associated documentation relating to such matters.

The legislation also directs HHS to develop: (1) a Medicare hospital payment methodology for short inpatient hospital stays; (2) general equivalency maps to link the relevant International Statistical Classification of Diseases and Related Health Problems (ICD)-10 codes (used to report medical diagnoses and inpatient procedures) to relevant Current Procedural Terminology (CPT) codes, and the relevant CPT codes to relevant ICD-10 codes, in order to permit comparison of inpatient hospital services and hospital outpatient department services; and (3) a second crosswalk between Diagnosis-Related Group (DRG) codes for inpatient hospital services and Ambulatory Payment Class codes for outpatient hospital services.

CMS Extends RAC Prohibition of Reviews of Stays Longer than 2 Midnights

The prohibition of recovery audit contractors (RACs) conducting a post-payment patient status review of inpatient hospital claims for inpatient stays spanning more than two midnights has been extended for an additional six months, to September 30, 2014. The Final rule updating the Inpatient Prospective Payment System (IPPS) for fiscal year (FY) 2014 CMS stated that inpatient admissions would be presumed to be reasonable and necessary when the admitting physician anticipated that the beneficiary’s inpatient stay would span at least two midnights and the admitting physician documented the reason for that determination in the admittance order. Under this extension RACs and Medicare Administrative Contractors (MACs) are prohibited from conducting these reviews for inpatient claims with dates of admission between October 1, 2013, and October 1, 2014, and when the beneficiary was a hospital inpatient for a time period that included two midnights, unless there was evidence of fraud and abuse or delay in the provision of care in an attempt to qualify for the two midnight presumption.

Probe and Educate Reviews

MACs, however, will be able to continue to conduct “probe and educate” reviews for inpatient stays shorter than two midnights. Under the “probe and educate” process outlined in an earlier CMS release, MACs can select 10 claims for prepayment review for most hospitals and 25 claims for larger hospitals to determine if the inpatient stay of less than two midnights was reasonable and necessary. Claims found to be out of compliance for this time period will be denied, and the MAC is to follow-up with the hospital via letter or phone call to explain why the claim was denied. MACs were instructed that if the total time the beneficiary spent in the hospital receiving medically necessary care, including pre-admission outpatient time, was longer than two midnights, the presumption would be met that the inpatient stay was reasonable and necessary under the “probe and educate” policy. This “probe and educate policy” is to continue through September 30, 2014, as well.

RAC Reviews

Although RACs are prohibited from conducting post-payment or pre-payment reviews of inpatient status, they will be able to continue to review IPPS claims from hospitals for correct use of a billing code, the medical necessity of a surgical procedure, and inpatient status reviews with dates of admission prior to October 1, 2013, as well as inpatient status reviews of inpatient stays less than two midnights. RACs can review claims to determine if an overpayment or underpayment has been made. RACs are paid a contingent fee based on the amount of overpayments collected. In FY 2009 and FY 2010, CMS reports, contingent fees ranged from 9.0 percent to 12.5 percent of amount of overpayment collected.


CMS will be conducting a special open door forum on February 4, 2013, for hospitals, practitioners, and other interested parties to ask questions about physician orders, physician certification, inpatient admission orders and medical review criteria under these policies. A Medicare Learning Network (MLN) national provider call will be held on February 27, 2014, to address these issues as well.

CMS adopted the presumption that an inpatient stay expected to be longer than two midnights would be reasonable and necessary to address concerns that hospitals were holding beneficiaries in outpatient departments instead of admitting them as inpatient in fear that a RAC would find that the inpatient admittance was not reasonable or necessary and deny the claim. Beneficiaries were also complaining that these long stays in outpatient departments were resulting in large copayment as outpatient services are provided under Part B. The American Hospital Association and other organizations sought a ban on reviews of claims for stays longer than two midnights by RACs as they felt that the policy needed to be further clarified.