Medicare Compliance & Reimbursement

Proposed rule is a mixed bag for facilities.

For only the third time in 21 years, hospitals will receive a full "market-basket" update under Medicare's inpatient prospective payment system (IPPS) in fiscal year 2005 -- but only if they submit quality information to CMS.

So says CMS'proposed IPPS rule for next year, reflecting the terms of last year's Medicare Modernization Act. The agency now estimates that the market-basket increase -- the projected rate of inflation in the goods and services used by hospitals -- will be 3.3 percent. Because of this and other reimbursement adjustments, CMS projects that the average IPPS payment will increase 4.7 percent for urban hospitals, 6.0 percent for rural hospitals and 4.9 percent for hospitals overall.

Facilities will lose 0.4 percentage points of their market-basket update if they don't report data on the 10 measures included in CMS'Hospital Quality Initiative.

CMS said it expected FY2005 IPPS payments to total $105 billion, increasing $5 billion over the 2004 total. This jump partly results from the full market-basket update and other payment enhancements, particularly for rural hospitals.

The news, however, isn't as good as it may seem at first. The American Hospital Association's Ashley Thompson said the new money is "mainly due to the implementation of our hard-fought provisions in the prescription drug bill last year," and she said AHA has "more mixed feelings" about some of CMS'regulatory decisions.

Thompson also raised questions about the way CMS is beginning to adjust the hospital wage index - a factor by which the agency adjusts IPPS payments to reflect differences in labor costs -- for "occupational mix." When Congress mandated the occupational mix adjustment in 2000, "the purpose of the legislation was really to increase the wage index of rural facilities," said Thompson, the AHA's senior associate director of policy.

Up to now, a hospital's wage index has been determined solely through reference to the "skill mix" of its own employees. The occupational mix adjustment entails determining a portion of a hospital's wage index through reference to a "national average skill mix," meaning that rural hospitals, which tend to employ a different skill mix of employees - licensed practical nurses rather than registered nurses, for example -- would tend to benefit from the adjustment, Thompson said.

However, the proposed rule indicates that one-third of all rural hospitals would experience a decline in their wage index from the occupational mix adjustment, while half of all urban hospitals would experience wage index increases, Thompson said.

Thompson also expressed disappointment that CMS was increasing the number of diagnostic related groups (DRGs) subject to its "transfer policy" from 29 to 31. She criticized CMS for increasing the "outlier threshold" - the amount by which costs in a particular case must exceed the DRG payment before the hospital receives additional reimbursement -- to $35,085 even though the pool of money set aside for outlier payments in 2004 was not exhausted using the lower threshold of $31,000.