Fact Sheets


For Immediate Release: Monday, August 01, 2011
Contact: CMS Media Relations


OVERVIEW:   On Aug. 1, 2011, the Centers for Medicare & Medicaid Services (CMS) issued a final rule that updates Medicare policies and payment rates for inpatient services furnished by both acute care hospitals and long-term care hospitals in fiscal year (FY) 2012.  The rule also finalizes the payment update that is used to calculate FY 2012 target amounts for certain hospitals – such as cancer and children’s hospitals and religious nonmedical health care institutions.  Under the final rule, most general acute care hospitals will receive an increase in payment rates of 1.0 percent, compared to the payment decrease of 0.5 percent that was estimated in the proposed rule. 

The difference between the proposed and final payment rate updates is largely due to the adoption of a higher market basket in the final rule than was projected in the proposed rule based on more recent data (3.0 percent vs. 2.8 percent), a lower multifactor productivity adjustment based on more recent data (1.0 percent vs. 1.2 percent), and the adoption of a prospective documentation and coding adjustment of -2.0 percent rather than the -3.15 percent adjustment in the proposed rule.  CMS projects that the rate increase, together with other policies in the final rule and projected utilization of inpatient services, will increase Medicare’s operating payments to acute care hospitals by $1.13 billion, or 1.1 percent, in FY 2012 compared with FY 2011.  As required by the Medicare law, hospitals that do not successfully participate in the Hospital Inpatient Quality Reporting Program will receive a 2 percentage point reduction from the market basket, yielding a final payment update of -1.0 percent.


The -2.0 percent prospective documentation and coding adjustment is intended to counteract increased aggregate inpatient hospital payments in FY 2012 due to changes in hospital coding practices under the new Medicare Severity-Diagnosis Related Groups (MS-DRGs) that do not reflect actual increases in patients’ severity of illness.


BACKGROUND:   Since FY 1983, Medicare Part A has paid acute care hospitals for inpatient stays under the Inpatient Prospective Payment System (IPPS), which provides for a single prospectively-determined payment for each case based on the patient’s diagnosis, or, in a few instances, the technology used in treating the patient.  In FY 2003, Medicare began paying LTCHs under the LTCH PPS, which used the same patient classifications as the IPPS, but weighted them differently to reflect the different resources and higher treatment costs typically associated with long-term care hospital stays.


Under both the IPPS and the LTCH PPS, the payment amount is based on the average costs incurred by the hospital in treating a patient with a specific diagnosis.  In rare cases, where the costs of treatment greatly exceed Medicare’s payment rate, the hospital may be entitled to an additional payment, called an outlier payment.


From FY 1983 through FY 2007, payments to acute care hospitals were made using the Diagnosis Related Group (DRG) classifications, but over time, CMS came to believe that the classification structure needed greater specificity to ensure that hospitals were paid more for more severely ill patients who are more costly to treat relative to less severely ill patients with the same principal diagnosis.  In FY 2008, CMS replaced the 538 DRGs with 745 new Medicare Severity DRGs (MS-DRGs) that reflected not just the patient’s diagnosis, but also the severity of the patient’s illness.  Due to minor changes since FY 2008, the number of MS-DRGs will be 751 in FY 2012.


BUDGET NEUTRALITY AND THE NEW CLASSIFICATIONS:   As explained in the final IPPS rule for FY 2008, CMS anticipated that the transition to MS-DRGs would lead to documentation and coding practices that resulted in higher payments, without any underlying increase in patient severity. In anticipation of this effect, CMS planned to make adjustments to inpatient rates by -1.2 percent in FY 2009 and -1.8 percent in FY 2009 and 2010.  These adjustments were intended to maintain budget neutrality, as required under the Medicare statute.  As explained in the FY 2008 and FY 2009 IPPS final rules, CMS also planned to revise the FY 2010 adjustment if a review of actual data for FY 2008 indicated that the effect of documentation and coding differed from the documentation and coding adjustments applied in FY 2008 and FY 2009. 

In the Transitional Medical Assistance, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), Congress required CMS to reduce the adjustments to -0.6 percent for FY 2008 and -0.9 percent for FY 2009.  However, in the event that actual overpayments exceeded these amounts, Congress granted CMS the authority to make additional retrospective adjustments to reconcile the difference in payment for these years.  Congress required that these recoupments be complete by FY 2012.  The Medicare Actuary determined that a total adjustment of -5.8 percent was required to recoup total excess spending due to documentation and coding in FY 2008 and FY 2009.  In FY 2011, CMS applied a retrospective adjustment of -2.9 percent to recoup one-half of this amount.

Further, the TMA required adjustments to IPPS rates going forward—called prospective adjustments—so that that the increase in payments from FY 2008 and FY 2009 are not permanently incorporated into future inpatient payment rates.   The Medicare Actuary estimates that the cumulative effect of documentation and coding increased spending by 5.4 percent.  CMS has already applied a -0.6 percent adjustment in FY 2008 and a -0.9 percent adjustment in FY 2009 (for a total -1.5 percent adjustment).   Therefore, a total prospective adjustment of -3.9 percent is required to ensure that future rates do not continue to incorporate past increases in payments due to documentation and coding. 

FINAL DOCUMENTATION AND CODING ADJUSTMENT FOR FY 2012:   The final rule for FY 2012 will complete the recoupment of the excess FY 2008 and FY 2009 spending.  As explained above, CMS applied an adjustment of -2.9 percent in FY 2011 to recoup one-half of the 5.8 percent increase in FY 2008 and 2009 aggregate payments due to changes in hospital coding practices that did not reflect increases in patients’ severity of illness.  Thus, in FY 2012, CMS is completing the recoupment adjustment by applying the remaining -2.9 percent adjustment, but is at the same time restoring the -2.9 percent adjustment finalized for FY 2011 (by adding 2.9 percent back on the rates).  Because these adjustments will, in effect, offset each other, there will be no year-to-year change in the standardized amount due to this recoupment adjustment. 


Additionally, CMS is adopting a prospective adjustment of -2.0 percent in FY 2012. This adjustment is to ensure that increases in hospital payments due to documentation and coding are not incorporated into payments made in FY 2012 and future years.  Although CMS has the authority to make the full prospective adjustment of -3.9 percent to the FY 2012 rates, CMS believes it is prudent to phase-in the prospective adjustment over time in order to mitigate the effects of significant downward adjustments on hospital payments in a single year. CMS intends to make an additional -1.9 percent adjustment in future years.


CMS is also adopting a prospective documentation and coding adjustment of ‑2.0 percent to the hospital specific rates for Medicare Dependent Hospitals and Sole Community Hospitals and -1.0 percent to the capital Federal rate applicable to all hospitals for FY 2012 to account for the estimated increase in payments that has occurred due to the adoption of the MS-DRGs.   With the application of these adjustments, a prospective adjustment of -0.5 percent for the hospital specific rates remains to be made in future years, while the prospective adjustments for the capital Federal rates will be complete.  Although CMS adjusted FY 2011 LTCH PPS rates to account for documentation and coding under the new LTCH MS-DRGs in 2008 and 2009, CMS is not adopting a documentation and coding adjustment for LTCHs in FY 2012 because an analysis of most recent available data does not indicate that further adjustment is warranted.


SUMMARY OF UPDATES AND ADJUSTMENTS IN IPPS FY 2012 FINAL RULE:   The 1.0 percent increase in the payment rates for IPPS hospitals reflects the following calculations:


FY 2012 inflation (market basket) update


Adjustments required by the Affordable Care Act, including the multifactor productivity adjustment


Adjustment in light of Cape Cod litigation


Documentation and coding adjustment


Net increase in payment rates



The final rule was placed on display at the Federal Register today, and can be found under Special Filings at:




It will appear in the Aug. 18, 2011 Federal Register.


For more information, please see:





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