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For Immediate Release
Friday August 02, 2013

CMS finalizes FY 2014 policy and payment changes for inpatient stays in acute-care and long-term care hospitals

OVERVIEW:  On August 2, 2013 the Centers for Medicare & Medicaid Services (CMS) issued a final rule [CMS-1599-F] updating fiscal year (FY) 2014 Medicare payment policies and rates under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital Prospective Payment System (LTCH PPS). 

The final rule, which applies to approximately 3,400 acute care hospitals and approximately 440 LTCHs, will generally be effective for discharges occurring on or after October 1, 2013.  Under the rule, operating rates for inpatient stays in general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program will be increased by 0.7 percent. Those that do not successfully participate in the Hospital IQR Program will receive a 2.0 percentage point reduction in the increase.  Beginning with fiscal year 2015, hospitals that do not participate will lose one-quarter of the percentage increase in their payment updates. Total IPPS payments (capital and operating payments) are projected to increase by $1.2 billion.  Based on the changes being made in the final rule, Medicare payments to LTCHs in FY 2014 are projected to increase by approximately $72 million or 1.3 percent as compared to FY 2013 Medicare payments. 

This fact sheet discusses major payment provisions of this final rule.  A separate fact sheet related to quality is available at:

BACKGROUND.  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. Under these two payment systems, CMS largely sets payment rates prospectively for inpatient stays based on the patient’s diagnosis and severity of illness.   A hospital receives a single payment for the case based on the payment classification—MS-DRGs under the IPPS and MS-LTC-DRGs under the LTCH PPS—assigned at discharge. 

Medicare law requires CMS to update payment rates for IPPS hospitals annually to account for changes in the costs of goods and services used by these hospitals in treating Medicare patients and for other factors.  This is known as the hospital “market basket.”  LTCHs are updated by a separate market basket based on LTCH-specific goods and services. 


Changes to Payment Rates under IPPS.  The final rule will increase IPPS operating payment rates by 0.7 percent.  This reflects the hospital market basket of 2.5 percent adjusted by negative 0.5 percentage point for multi-factor productivity and an additional adjustment of  negative 0.3 percentage point; the rate is further decreased by 0.8  percent for a documentation and coding recoupment adjustment required by the American Taxpayer Relief Act of 2012 and by a 0.2 percent  adjustment to offset the effect of the policy on inpatient admission and medical review criteria for hospital inpatient services (see below). 

Quality-Related Provisions.  The rule lays out the framework for the new Hospital-Acquired Condition Reduction Program, which will begin in FY 2015.  The rule updates the measures and financial incentives in the Hospital Value-Based Purchasing (VBP) and Readmissions Reduction programs.  It will also revise measures for the Hospital Inpatient Quality Reporting, Inpatient Psychiatric Facility Quality Reporting, Long-Term Care Hospital (LTCH) Quality Reporting and PPS-Exempt Cancer Hospital Quality Reporting programs.

Admission and Medical Review Criteria for Inpatient Services.  The final rule modifies and clarifies CMS’s longstanding policy on how Medicare contractors review inpatient hospital admissions for payment purposes.  Under this final rule, in addition to services designated as inpatient-only, surgical procedures, diagnostic tests and other treatments are generally appropriate for inpatient hospital admission and payment under Medicare Part A when the physician (1) expects the beneficiary to require a stay that crosses at least two midnights and (2) admits the beneficiary to the hospital based upon that expectation. This policy responds to both hospital calls for more guidance about when a beneficiary is appropriately treated—and paid by Medicare—as an inpatient, and beneficiaries’ concerns about increasingly long stays as outpatients due to hospitals’ uncertainties about payment.

The final rule specifies that the timeframe used in determining the expectation of a stay surpassing two midnights begins when the beneficiary starts receiving services in the hospital. This includes outpatient observation services or services in an emergency department, operating room or other treatment area. While the final rule emphasizes that the time a beneficiary spends as an outpatient before the formal inpatient admission order is not inpatient time, the physician—and the Medicare review contractor—may consider this period when determining if it is reasonable and generally appropriate to expect the patient to stay in the hospital at least two midnights as part of an admission decision.  Documentation in the medical record must support a reasonable expectation of the need for the beneficiary to require a medically necessary stay lasting at least two midnights.  If the inpatient admission lasts fewer than two midnights due to an unforeseen circumstance this also must be clearly documented in the medical record. 

Part B Inpatient Billing in Hospitals.  The rule also finalizes provisions from a separate March 13, 2013 proposed rule that allows payment to hospitals for additional inpatient services under Medicare Part B for hospital inpatient admissions denied as not medically necessary under Part A.  A hospital also can bill and be paid for these inpatient services under Part B if—after the patient has been discharged—it determines through self-audit (utilization review) that the patient should have not been admitted as an inpatient.   

Under this final rule, the timely filing deadline for these Part B claims is one year from the date of service. However, the final rule provides that hospitals will be permitted to follow the Part B billing timeframes established in a CMS Administrator Ruling—also issued March 13—if (1) the Part A inpatient claim denial was one to which the Ruling originally applied, or (2) the Part A inpatient claim has a date of admission before October 1, 2013 but is denied after September 30, 2013 on the grounds that while the medical care was reasonable and necessary, the inpatient admission was not.

Medicare Disproportionate Share Hospitals (DSH).  Section 3133 of the Affordable Care Act, as amended, requires that instead of the amount that would otherwise be paid as the DSH adjustment, hospitals will receive 25 percent of the amount determined under the current Medicare DSH payment methodology beginning in FY 2014.  The remaining 75 percent will be adjusted to reflect decreases in the rate of uninsured individuals nationally paid to hospitals that receive Medicare DSH payments based on each hospital’s share of uncompensated care relative to all hospitals that are estimated to receive DSH payments.  

CMS will make these new uncompensated care payments through the claims processing system, as commenters recommended, instead of biweekly payments and will take uncompensated care payments into consideration when determining payments to sole community hospitals. The final rule will determine the total amount of money available as uncompensated care payments based on a federal fiscal year determination of the uninsured. 

Documentation and Coding Adjustment.  Section 631 of the American Taxpayer Relief Act of 2012 requires CMS to recover $11 billion over the next four years to fully recoup documentation and coding overpayments for prior years. For FY 2014, CMS will apply a negative 0.8 percent recoupment adjustment as the first step in this recovery process. CMS expects to make additional adjustments in FYs 2015, 2016 and 2017 in order to recover the full $11 billion.

Direct Graduate Medical Education (DGME).  CMS will include inpatient labor and delivery days in the inpatient Medicare utilization calculation, effective for cost-reporting periods beginning on or after October 1, 2013.  In addition, for portions of cost reporting periods occurring on or after October 1, 2013, a hospital may not claim full-time equivalent residents training at a Critical Access Hospital (CAH) for Indirect Medical Education (IME) and/or direct GME purposes.  However, if a CAH itself incurs the costs of training the full-time equivalent residents when these residents rotate to the CAH, the CAH may receive payment based on 101 percent of its Medicare reasonable costs. 

Market Basket. As proposed, CMS will revise and rebase the hospital market basket for FY 2014.  The FY 2014 market basket will use FY 2010 data for the base-year cost weights in place of FY 2006 data.   

MS-DRG Relative Weight Refinement  As proposed, CMS is implementing the new cost centers for Implantable Devices, MRIs, CT scans and cardiac catheterization that were created in the FY 2009 and FY 2011 final rules.  This will increase the total number of cost-to-charge ratios used to calculate the FY 2014 relative weights from 15 to 19. 

Critical Access Hospitals Conditions of Participation. To ensure continued access to inpatient services, the FY 2014 IPPS rule clarifies that critical access hospitals are required to provide inpatient care on-site.   

Medicare-Dependent Hospital (MDH) Program. The American Taxpayer Relief Act extended the MDH program for one additional year, through FY 2013.  The final rule includes the expiration of the MDH payment designation for discharges occurring on or after October 1, 2013. 

Low-Volume Hospitals.  The temporary changes to low-volume hospital definition and payment adjustment methodology provided for by the Affordable Care Act and the American Tax Relief Act for FY 2011 through FY 2013 are expiring.  Consistent with the statute, in FY 2014 CMS will return to the low-volume hospital definition and payment adjustment methodology that was in place prior to FY 2011, before the temporary provisions took effect.


Changes to Payment Rates under the LTCH PPS.  Under the final rule, LTCH PPS payments will increase by 1.3 percent, approximately $72 million, in FY 2014.  This estimated increase is attributable to several factors, including the 1.7  percent update for LTCHs that submitted quality data (based on a market basket update of 2.5 percent reduced by a multi-factor productivity adjustment of 0.5 percentage point and an additional 0.3 percentage point reduction in accordance with the Affordable Care Act); the “one-time” budget neutrality adjustment to the standard federal rate of approximately negative 1.3 percent under the second year of a three-year phase-in; and projected increases in estimated high cost outlier payments as compared to FY 2013.

Twenty-Five Percent Patient Threshold Rule.  Under the 25-percent patient threshold payment adjustment policy, if an LTCH admits more than 25 percent of its patients from a single acute care hospital, Medicare will pay it at a rate comparable to IPPS hospitals for those patients above the 25-percent threshold.  A statutory moratorium on application of the 25-percent rule was in place from December, 2007 through December 2012.  CMS adopted a regulation to extend the moratorium for FY 2013 but will allow the policy to go into effect in FY 2014. 

Chronically Ill/Medically Complex Criteria. In the FY 2014 proposed rule, CMS included a discussion of recent research on the development of empirically-derived criteria for the identification of the chronically critically ill/medically complex (CCI/MC) population, presently treated in general acute-care hospitals and in LTCHs.  The CCI/MC population identified by the project has been shown to have intensive service needs, high costs and negative margins in IPPS hospitals.  Additionally, they typically have a predictable and consistent need for extended hospital-level care that can be met either from continued stays in the initial IPPS hospital in a step-down unit or from transfer to an LTCH. CMS expects to issue policy proposals to address the needs of the CCI/MC population in FY 2015. 

The final IPPS/LTCH PPS rule can be downloaded from the Federal Register at:  It will be published in the August 19, 2013 Federal Register.