CMS squeezes hospitals on pay

While hospitals are celebrating the Obama administration's surrender on the Medicare pay cut tied to the two-midnight rule, they're seething over a proposal to nearly double the expected payment reduction meant to recoup overpayments from incorrect coding.

Hospital lobbyists will now spend the coming months pressing the CMS to change course in the final fiscal 2017 rule for the inpatient prospective payment system. Because of a quirk in Medicare legislation passed last year, the deeper cut would leave hospitals permanently in the hole.

Under the inpatient PPS, hospital patients are assigned to one of hundreds of diagnosis-related group codes. In fiscal 2008, the CMS introduced Medicare Severity DRGs, or MS-DRGs, intended to compensate hospitals for more expensive care provided to sicker patients.

After the new codes were introduced, however, hospitals appeared to be abusing MS-DRGs to get higher payments. In the American Taxpayer Relief Act of 2012, Congress required the CMS to recoup $11 billion in alleged overpayments by the end of fiscal 2017.

The CMS complied by initiating an installment plan that its actuaries estimated would mitigate the blow in any one year. A 0.8% cut to inpatient rates was imposed in fiscal 2014, 2015 and 2016. Industry leaders said they were shocked last week to see it rise to 1.5% for fiscal 2017.

Making things worse, Congress tinkered last year with the way the rate would be restored once the government got all its money back.

The CMS had intended to make a positive adjustment in fiscal 2018 equal to the cumulative reductions.

But in the Medicare Access and CHIP Reauthorization Act, or MACRA—the legislation replacing Medicare's physician payment formula—Congress called for ticking the rate up by 0.5% a year through fiscal 2023. That was based on the assumption that the fiscal 2017 cut would be the same as it had been in the previous years.

“Congress was clear in its passage of physician payment reform last year that this cut should be 0.8%, but CMS ignored this directive and almost doubled the reduction,” Rick Pollack, CEO of the American Hospital Association, said in a statement. “This cut poses another challenge to hospitals' ability to care for their communities.”

The CMS explained in the proposed rule that its hands are tied by its previous marching orders from Congress. Changing economic and healthcare trends upended its earlier projections, the CMS said, so another 0.8% cut would have left the government $5 billion short of recouping the overpayments by the statutory deadline.

The hospital industry, though, isn't satisfied with that explanation. “This high uptick seems dramatic and excessive, and we will be carefully reviewing CMS' methodology for setting the adjustment to ensure there were no flaws in the calculation,” Blair Childs, a senior vice president for Premier, said in a statement.

Some industry stakeholders also complained that the higher cut effectively fines hospitals for successfully reducing their number of admissions under the Hospital Readmissions Reduction Program outlined in the Affordable Care Act. Part of the reason the CMS' estimates were off is that “the number of hospital discharges has decreased more than expected,” the agency said.

“Hospitals are being penalized by CMS for complying with their own programs,” said Brian Murphy, director of the Association of Clinical Documentation Improvement Specialists, which represents hospital coding staff.

Hospitals will still receive $539 million more under the inpatient PPS than they did in fiscal 2016 because of various changes outlined in the proposed rule, including the reversal of the 0.2% payment reduction under the two-midnight rule and a one-time increase to offset the two-midnight cut applied in fiscal 2014, 2015 and 2016.

The agency took the 0.2% bite out of inpatient rates because the policy—which instructed that hospital stays spanning more than two midnights should be billed as admissions rather than outpatient observation visits—was expected to generate an additional $220 million in annual costs to Medicare.

The industry, however, fiercely battled the pay cut and the policy itself, which the Obama administration delayed several times and ultimately modified to appease its critics. Last September, a federal judge partially sided with the AHA and dozens of hospitals, ordering HHS to re-open the policy to comments and further explain its methodology.

In the proposed rule posted last week, the CMS relented. The agency acknowledged that small differences in the policy's actual impact on inpatient and outpatient utilization “would have a disproportionate effect on the estimated net costs.” More recent estimates by its actuaries, the agency conceded, vary between a net savings and a net cost.