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For Immediate Release
Monday, August 01, 2011

OVERVIEW:   On Aug. 1, 2011, the Centers for Medicare & Medicaid Services (CMS) issued a final rule that updates Medicare payment policies and rates for inpatient stays in acute care hospitals under the Inpatient Prospective Payment System (IPPS) in Fiscal Year (FY) 2012. The final rule also updates payment policies and rates for hospitals paid under the Long-term Care Hospitals (LTCH) Prospective Payment System (PPS).  The rule also finalizes the payment update that is used to calculate FY 2012 target amounts for certain hospitals excluded from the IPPS, such as cancer and children’s hospitals, and religious nonmedical health care institutions.

The final rule, which would apply to approximately 3,400 acute care hospitals and approximately 420 LTCHs, will generally be effective for discharges occurring on or after Oct. 1, 2011.   Under the final rule, general acute care hospitals will receive a 1.0 percent payment rate update relative to FY 2011 for inpatient stays paid under the IPPS.  As required by the Medicare law, hospitals that do not successfully report quality data under the Inpatient Quality Reporting Program (IQR) will receive a 2.0 percentage point reduction or a payment rate update of -1.0 percent.  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.   Medicare payments to LTCHs in FY 2012 are projected to increase by $126 million or 2.5 percent.

This fact sheet discusses major provisions of the final rule other than provisions related to Medicare’s hospital quality initiatives or the determination of the FY2012 documentation and coding adjustment.   These issues are addressed in separate fact sheets which are available on the CMS Web page at:  


BACKGROUND:   By law, CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS and long-term care hospitals under the LTCH PPS. These prospective payment systems set rates prospectively based on the patient’s diagnosis and the severity of the patient’s medical condition.  Under the IPPS and the LTCH PPS, a hospital receives a single payment for the case based on the payment classification – MS-DRGs under the IPPS and LTC-MS-DRGs under the LTCH PPS ‑ assigned at discharge.  The Medicare law requires CMS to update the payment rates for both types of hospitals annually to account for changes in the costs of goods and services used by these hospitals in treating Medicare patients, as well as for other factors.  The law exempts critical access hospitals (CAHs), children’s hospitals, certain cancer hospitals, and certain other facilities from payment under the IPPS. 


Until FY 2008, discharges from acute care hospitals were classified into one of 538 CMS-diagnosis-related groups (DRGs).   In FY 2008, CMS replaced the 538 DRGs with 745 MS-DRGs that provide higher payment for more severely ill or injured patients and lower payment for all other cases.  Since FY 2008, CMS has modified these MS-DRGs through notice and comment rulemaking.  For FY 2012, Medicare is adopting additional MS-DRGs, bringing the total to 751.


The LTCH PPS was implemented in FY 2003.   Medicare payments under the LTCH PPS utilize the same DRG system as the IPPS, but payment weights associated with the LTCH patient classifications are calculated based on treatment costs at LTCHs.  In conjunction with the IPPS, the LTCH PPS adopted MS-LTC-DRGs in FY 2008.



Changes to Payment Rates under the IPPS:   The final rule will update IPPS payment rates by 1.0 percent.  This reflects an update of 1.9 percent (based on an update of 3.0 percent for inflation in hospital costs (the market basket) reduced by a multi-factor productivity adjustment of -1.0 percent and an additional -0.1 percent in accordance with the Affordable Care Act); increased by 1.1 percent in light of the decision in the case Cape Cod Hospital v. Sebelius; and reduced by a -2.0 percent prospective documentation and coding adjustment.  The documentation and coding adjustment is discussed in a separate fact sheet also issued today.


Provisions to Continue Implementing the Affordable Care Act: 


  • Hospital quality initiatives – The final rule includes a number of provisions to improve the quality of care furnished by a hospital.  Specifically, CMS is adopting certain policies related to the upcoming Hospital Readmissions Reduction Program, the Hospital IQR Program, and the Hospital Inpatient Value-Based Purchasing (VBP) Program.  Moreinformation about these provisions is included in a separate fact sheet on hospital quality initiatives also issued today.


  • Payments for hospitals in counties with lowest per beneficiary spending - Section 1109 of the Affordable Care Act provides for additional payments in FY 2011 and FY 2012 totaling $400 million for qualifying hospitals that are in located in counties that rank in the lowest quartile nationally (risk-adjusted for age, sex and race) for Medicare spending per enrollee.  In the FY 2011 IPPS Final Rule, CMS finalized a policy to distribute $150 million to qualifying hospitals in FY 2011 and $250 million in FY 2012 through an annual one-time payment made by Medicare contractors.  The final rule provides for CMS to distribute the remaining $250 million to qualifying hospitals in FY 2012.  The list of qualifying hospitals and their share of these payments can be found on the CMS website.


  • Low-volume hospital payment adjustment (Section 3125 as amended by Section 10314 of the Affordable Care Act) - Sections 3125 and 10314 of the Affordable Care Act amended the low-volume hospital payment adjustment by allowing hospitals, for FYs 2011 and 2012, to qualify for this adjustment if they are located more than 15 (rather than 25) miles from another hospital and have less than 1,600 (as opposed to 800) annual discharges of individuals entitled to benefits under Medicare Part A.   In the FY 2011 IPPS final rule, CMS used FY 2009 MedPAR data (the most current data then available) to determine the FY 2011 low-volume payment adjustment.  CMS is basing the FY 2012 low-volume payment adjustment on FY 2010 MedPAR data, the most recent data currently available. 


Hospital Wage Index Provisions:  


  • Cape Cod Adjustment ‑ CMS is increasing IPPS payment rates by 1.1 percent for FY 2012 in light of the January 14, 2011, decision in the case, Cape Cod Hospital vs. Sebelius involving the calculation of budget neutrality for the rural floor. 


  • Pension Costs for Medicare Wage Index – As a result of amendments made by the Pension Protection Act of 2006 to the Employee Retirement and Income Security Act (ERISA) of 1974, CMS is revising how hospitals report pension contributions for the purpose of the Medicare wage index.  The final rule provides for CMS to use a rolling three-year average of the annual funds that a hospital contributed to its pension plan when calculating the Medicare wage index. The three-year average controls for potential large annual fluctuations in a hospital’s allowable pension cost.  As discussed further below, CMS is also revising its policy for reporting the maximum annual allowable pension costs for purposes of cost finding.



  • Imputed Floor: Under the Balanced Budget Act of 1997, the wage index for a hospital in an urban area of a state cannot be less than the area wage index determined for the state’s rural area.  In FY 2005, CMS adopted an “imputed” floor policy establishing for three years a wage index floor for those states that did not have rural hospitals and later extended the “imputed” floor through FY 2011.  Although CMS proposed to allow the imputed floor to expire, in response to comments, CMS is again extending the imputed floor for two years-- through FY 2013.



Changes to MS-DRG Classifications:    CMS is finalizing the following four changes to the MS-DRG classifications:


  • Excisional debridement - The current classification of excisional debridement as an operating room procedure results in a classification of these stays to a surgical MS-DRG.  However, CMS believes these cases use significantly fewer resources than other surgical cases in their MS-DRG assignment, resulting in payment approximately 40 percent above costs.  CMS is therefore removing these cases from their current MS-DRG and assigning them to three new MS-DRGs that would still be classified as operating room procedures but would provide for a lower payment that is better aligned with costs.


  • Autologous bone marrow transplant – Autologous bone marrow transplants are currently assigned to MS-DRG 015, with no “severity” adjustment to account for complications or comorbidities.  CMS is creating two new MS-DRGs, one for autologous bone marrow transplants with complications or comorbidities (CC), and one for these transplants in the absence of any CC.


  • Rechargeable dual array deep brain stimulation system – CMS is moving the codes for rechargeable dual array deep brain stimulation to MS-DRGs 023 – 024 (Craniotomy with Major device implant/acute complex CNS PDX with complications or comorbidities (MS-DRG 023) and without complications or comorbidities (MS-DRG-024)).  Similar devices are already in this set of MS-DRGs.


  • Thoracic aneurysm repair – CMS is moving two codes that either repair a thoracic aneurysm or place a stent from MS-DRG 237 – 238 (Major cardiovascular procedures with major CC (MCC) or thoracic aortic aneurysm repair and without MCC to the higher paying MS-DRGs 219 – 221 (Cardiac valve and other major cardiothoracic procedure without cardiac catheterization with MCC or CC, and without CC).


New Technology Add-On Payments For 2012:   To remove barriers to access for costly new technologies that are not yet fully reflected in the current MS-DRG payment rates, the Medicare

law provides for temporary add-on payments for inpatient stays that involve the use of certain approved new technologies. CMS is not approving any applications for new technology add-on payments this year because the agency found that the applicants did not meet the statutory newness, cost, and substantial clinical improvement criteria.   However, CMS is extending through FY 2012, the new technology add-on payment for the AutoLITT™, an MRI guided treatment for the removal of brain tumors.  


Other Provisions Included In The IPPS Final Rule: 


  • Payment for Hospital Acquired Conditions – As further discussed in the Quality Fact Sheet, CMS did not finalize its proposal to add one category of conditions ‑ Acute Renal Failure after Contrast Administration (also known as contrast-induced acute kidney injury, or CI-AKI) ‑ to the list of hospital-acquired conditions (HACs) for purposes of the HACs payment policy. 


  • Three Day/One Day Payment Window – CMS is clarifying that the 3-day payment window (1-day payment window for LTCHs and certain other non-IPPS hospitals) applies to both preadmission diagnostic and non-diagnostic services furnished to a patient at physicians’ practices that are wholly owned or wholly operated by the admitting hospital.  CMS addressed the payment window policy’s affect on physician billing in the Medicare Physician Fee Schedule proposed rule for calendar year (CY) 2012.


  • Clarification of Add-on Payment to Hospitals Treating Patients with End-Stage Renal Disease - Medicare regulations provide for an add-on payment to IPPS hospitals that provide inpatient dialysis treatment to a high proportion of beneficiaries with end-stage renal disease (ESRD) whose principal reason for being in the hospital is not dialysis.  The final rule clarifies that discharges of all patients entitled to Medicare Part A, including Medicare Advantage patients, are included in determining whether the hospital qualifies for the add-on payment. 


  • Excluding Hospice Discharges from the Disproportionate Share Hospital (DSH) Adjustment and Indirect Medical Education (IME) Adjustment – Medicare beneficiaries can receive inpatient hospice care in a hospital under certain circumstances, such as hospitalization for pain control and symptom management and respite care needed to provide temporary relief to family members or other caretakers.  The final rule excludes from the Medicare DSH adjustment patient days and bed days for inpatient hospice services because these patients are not receiving acute care services payable under the IPPS.  For the same reason, the final rule excludes such bed days from the calculation of available bed days for the indirect medical education adjustment.


  • Changes to “Under Arrangements” Requirements – The Medicare law permits hospitals to bill and be paid for certain services that are provided to its inpatients under arrangements with an outside entity.  The final rule limits the services that can be provided under arrangement with an outside entity to therapeutic and diagnostic services.  “Routine services,” such as room and board, nursing services, and ICU services can be furnished by another entity but only if they are provided in the hospital where the patient is an inpatient.


  • Clarifying Payment Policy for Replacement of Recalled Devices – CMS reduces payment under both the IPPS and the Outpatient Prospective Payment System (OPPS) for replacing an implanted device that has been recalled if the hospital receives a credit from the device manufacturer equal to 50 percent or more of the cost of the device.  The final rule clarifies that, as in the OPPS “partial credit” policy, the relevant device cost is the cost of the replacement device, not the cost of the original device. 


  • Modifying Payment Policy for Ambulances Operated by Critical Access Hospitals – CMS is modifying its regulations to allow reasonable cost-based payment for ambulance services furnished by a CAH or by an entity owned and operated by the CAH as long as there is no other ambulance provider or supplier within a 35-mile drive of the CAH.  CMS is also amending its regulations to permit Medicare to pay an entity owned and operated by a CAH based on 101 percent of reasonable costs for its ambulance services even if the entity is further than a 35-mile drive from the CAH, as long as it is the closest provider or supplier of ambulance services to the CAH.


  • Pension Costs for Medicare Cost Finding – As indicated previously, CMS is revising the rules for determining pension costs for Medicare cost-finding and wage index purposes.  With respect to Medicare cost-finding, under the final rule, a provider’s pension cost equals the cash basis contribution deposits (made within the current cost reporting period and not reflected as a pension cost for a prior cost reporting period) plus any carry forward contributions, subject to a limit.  The limit is equal to 150 percent of the average pension contributions made during the highest three consecutive cost reporting periods out of the five most recent cost reporting periods (ending with the current cost reporting period).  The final policy also allows a provider with current period contributions and carry forward in excess of the limit to submit documentation showing that all or a portion of the excess contributions are reasonable and necessary and should therefore be reportable as current period pension cost. 


  • Hospital Inpatient Quality Reporting (IQR) Program – The final rule adds measures to be reported for purposes of the Hospital IQR Program (formerly called the Reporting



  • Hospital Quality Data for Annual Payment Update or RHQDAPU) for the FY 2014 and FY 2015 payment determinations.   More information about these changes is included in a separate fact sheet on hospital quality initiatives also issued today.


  • Finalizing Redistribution of Graduate Medical Education (GME) Caps ‑ In the CY 2011 Hospital Outpatient PPS final rule published in November 2010, CMS implemented section 5503 of the Affordable Care Act, which provides for reductions in the statutory full time equivalent (FTE) resident caps for purposes of determining Direct and Indirect GME payments under Medicare for certain hospitals, and authorizes a “redistribution” to hospitals of the estimated number of FTE resident slots resulting from the reductions.   Section 203 of the Medicare and Medicaid Extenders Act of 2010 further amended section 1886(h)(8) of the Act to provide for FTE resident cap reduction determinations based on the aggregate experience of hospitals that are part of a Medicare GME affiliated group. CMS issued an IFC on March 14, 2011 to implement section 203 and is finalizing the IFC in this final rule.


  • Expediting Medical Record Requests ‑ CMS also finalized its proposal to allow Quality Improvement Organizations to expedite medical record requests for cases involving “serious reportable events” or other circumstances that have been identified during the course of a QIO quality of care review.





New quality reporting program for LTCHs: CMS is establishing the framework for a new quality reporting program for LTCHs that will affect payment determinations beginning in FY 2014, as required by the Affordable Care Act.  More information about this program is included in the fact sheet on hospital quality initiatives.


Clarifying Average Length of Stay Requirements:   LTCHs are defined generally as hospitals that have an average length of stay (ALOS) greater than 25 days.  The final rule clarifies two existing policies related to the calculation of ALOS.  First, it clarifies that both traditional Medicare fee-for-service program stays and beneficiary days paid for under Medicare Advantage are included in the determination of whether an LTCH meets the greater than 25 days ALOS requirement.  Second, the final rule clarifies CMS policy regarding the evaluation of whether an LTCH (either an LTCH under-formation or an existing LTCH) meets the greater than 25 days ALOS requirement when a change of ownership occurs.  The policy generally precludes a hospital with less than a 25 day ALOS from gaining or retaining LTCH status through repeated changes of hospital ownership.



Extension of moratoria on establishing LTCHs or increasing number of beds:   The Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA) imposed a moratorium on the establishment or classification of new LTCHs and LTCH satellite facilities, as well as a moratorium on increasing the number of beds in existing LTCHs and LTCH satellite facilities subject to specific exceptions.  The Affordable Care Act extended both moratoria for an additional two-year period.  CMS is clarifying that the moratorium extends to bed increases in LTCHs and LTCH satellite facilities that were exempted from the original MMSEA moratorium, because, at that time, they had expansions already underway.



The final rule can be downloaded from the Federal Register at:


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



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