Skip to Main Content

Fiscal Year 2015 Policy and Payment Changes for Inpatient Stays in Acute-Care Hospitals and Long-Term Care Hospitals

Fiscal Year 2015 Policy and Payment Changes for Inpatient Stays in Acute-Care Hospitals and Long-Term Care Hospitals
For Immediate Release
Monday, August 4, 2014

Fiscal Year 2015 Policy and Payment Changes for Inpatient Stays in Acute-Care Hospitals and Long-Term Care Hospitals

OVERVIEW:  On August 1, 2014 the Centers for Medicare & Medicaid Services (CMS) issued a final rule that will update fiscal year (FY) 2015 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 435 LTCHs, will generally be effective for discharges occurring on or after October 1, 2014.  Under the final rule, the operating payment rates for inpatient stays in general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users will be increased by 1.4 percent. (The market basket update is 2.9 percent (up from the projected 2.7 percent that was included in the proposed rule) for FY 2015, but is reduced as described in detail below.)  Beginning with FY 2015, those hospitals that do not successfully participate in the Hospital IQR Program and do not submit the required quality data will be subject to a one-fourth reduction of the market basket update (previously these hospitals received a 2 percentage point reduction). Also, the law requires that the update for any hospital that is not a meaningful EHR user will be reduced by one-quarter of the market basket update in FY 2015, one-half of the market basket update in FY 2016, and three-fourths of the market basket update in FY 2017 and later years.  Total IPPS payments are projected to decrease by $756 million.  Medicare payments to LTCHs in FY 2015 are projected to increase by approximately 1.1 percent.  

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 generally 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.

Under Medicare law, CMS is required to update payment rates for IPPS hospitals annually, and 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.  This is known as the hospital “market basket.”  LTCHs are paid according to 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 1.4 percent.  This reflects the projected hospital market basket update of 2.9 percent adjusted by -0.5 percentage point for multi-factor productivity and an additional adjustment of -0.2 percentage point in accordance with the Affordable Care Act; like last year, 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. CMS projects that the rate increase, together with reductions under the Hospital Readmissions Reduction Program, changes to Medicare disproportionate share hospital payments, the expiration of certain statutory provisions that provided special temporary increases in payments to hospitals, and other changes to IPPS payment policies will decrease IPPS operating payments by approximately 0.6 percent. CMS projects that total Medicare spending on inpatient hospital services will decrease by about $756 million in FY 2015.

Documentation and Coding Adjustment.  Section 631 of the American Taxpayer Relief Act of 2012 requires CMS to recover $11 billion by 2017 to fully recoup documentation and coding overpayments related to the transition to the MS-DRGs that began in FY 2008.  For FY 2015, CMS will continue the approach begun in FY 2014 by making another -0.8 percent adjustment to continue the recovery process.  A positive adjustment will be made to remove these one-time recoupment adjustments once the recovery is complete.

Hospital-Acquired Condition Reduction Program.  Section 3008 of the ACA established the Hospital Acquired Condition (HAC) Reduction Program.  Beginning in FY 2015, the applicable hospitals in the top quartile for the rate of HACs (i.e., those with the poorest performance) will have their Medicare IPPS payments reduced by 1 percent.  

Other Affordable Care Act Quality-Related Provisions. The final rule updates the measures and financial incentives in the Hospital Value-Based Purchasing (VBP) and Readmissions Reduction programs. It also revises measures for the Hospital Inpatient Quality Reporting, Long-Term Care Hospital (LTCH) Quality Reporting and PPS-Exempt Cancer Hospital Quality Reporting Programs.

For more information on these and other proposed quality-related provisions, please see the quality fact sheet at:

Updated Labor Market Areas.   The law requires that Medicare adjust its inpatient hospital payment for area differences in the cost of labor—an adjustment known as the wage index.  CMS is revising the labor market areas used for the wage index based on the most recent core-based statistical area delineations issued by the Office of Management and Budget (OMB) based on 2010 Census data.

In order to mitigate potential negative payment impacts due to the adoption of the new OMB delineations, CMS is adopting a one-year transition during FY2015 that will be based on a 50/50 blend of the former wage index and the new wage index. The new wage index will take effect in full in FY 2016.  This will be for all hospitals that would have experienced a decrease in their wage index exclusively due to the implementation of the new OMB delineations, and a three-year transition for the relatively few hospitals currently located in an urban county that would have become rural under the new OMB delineations.

Low-Volume Hospitals. Section 105 of the Protecting Access to Medicare Act of 2014 extended the temporary changes to the low-volume hospital payment adjustment for an additional year (through March 31, 2015).  In the FY 2015 IPPS/LTCH final rule, we are making conforming changes to the regulations.

Medicare Dependent Hospitals. Section 106 of the Protecting Access to Medicare Act of 2014 extended the Medicare Dependent Hospital program for an additional year (through March 31, 2015).  In the FY 2015 IPPS/LTCH final rule, we are making conforming changes to the regulations.

IPPS hospitals receive payment for their indirect medical education costs and direct GME costs based on the number of interns and residents they train.  The statute caps the number of residents a hospital may count for Medicare payment purposes but allows for special adjustments in specific situations.  

Rural Teaching Hospitals. Under existing regulations, a rural teaching hospital receives a permanent cap adjustment any time it starts training residents in a brand new program.  We adopted a policy that, effective October 1, 2014, a rural hospital that has been redesignated as urban (as a result of the implementation of new OMB delineations), can receive a permanent cap adjustment for a new program, if it received a letter of accreditation for the new program, and/or started training residents in the new program, prior to being redesignated as urban.  In addition, CMS finalized changes to the participation of redesignated hospitals in rural training tracks.

Change in the Effective Date of the FTE Cap, Rolling Average, and IRB Ratio Cap for New Programs. New teaching hospitals currently have a 5-year window to establish new residency programs, before the full-time equivalent (FTE) resident caps take effect.  FTE residents in new programs are also exempt from the application of the 3-year rolling average and the IME intern-and-resident-to-bed (IRB) ratio cap, based on the length of the particular new program.  We are simplifying and streamlining the timing of these policies by making the FTE resident caps, rolling average, and IRB ratio cap effective simultaneously.  In response to public comment, CMS is finalizing a modified version of its proposal so that these policies will be effective beginning with the applicable hospital’s cost reporting period that coincides with or follows the start of the 6th program year of the first new program started.


Hospital Price Transparency. One of the Affordable Care Act’s provision to improve the transparency of hospital charges requires that each hospital establish and make public a list of its standard charges for items and services. In this final rule, CMS reminds hospitals of their obligation to comply with the statutory requirements.  Our guidelines for implementing the provision are that hospitals either make public a list of their standard charges or their policies for allowing the public to view a list of those charges in response to an inquiry.  CMS continues to encourage hospitals to undertake efforts to engage in consumer friendly communication of their charges to help patients understand what their potential financial liability might be for services they obtain at the hospital, and to enable patients to compare charges for similar services across hospitals.  

Critical Access Hospitals (CAHs) Affected by OMB Redesignations. CAHs are small rural hospitals that are generally paid 101 percent of their reasonable costs.  In light of the recent change to the OMB metropolitan area delineations, some CAHs that were previously located in rural areas may now be located in urban areas effective October 1, 2014.  CMS finalized its proposal to provide affected CAHs with a two-year transition period that begins from the date the redesignation becomes effective.  During this transition period, the affected CAHs must reclassify as rural in order to retain their CAH status.  

Requirements for Physician Certification of Critical Access Hospital (CAH) Inpatient Services.  Current law requires that for payment of inpatient CAH services under Part A, a physician must certify that the individual may reasonably be expected to be discharged or transferred to a hospital within 96 hours of admission to a CAH.  Regulations adopted in FY 2014 require that the certification must be completed prior to discharge.  In order to provide CAHs with greater flexibility in meeting the statutory physician certification requirement, CMS finalized its proposal to amend the regulations for FY 2015 and subsequent years to allow CAHs until no later than 1 day before the date on which the claim for payment for the inpatient CAH service is submitted, to complete all certification requirements except the admission order.  The requirements for the admission order are unchanged from current policy.  

Alternative Payment Approaches for Short Hospital Stays.  Some members of the hospital community have expressed support for the general concept of an alternative payment methodology under the Medicare program for short inpatient hospital stays.  In the proposed rule, CMS sought comment on how such an alternative payment methodology might be designed and will consider the comments received in future rulemaking as we continue to work with stakeholders on this issue.  

Reimbursement Appeals Regulations.  CMS is implementing a technical correction to the Provider Reimbursement Review Board (PRRB) appeals regulations by eliminating the provider dissatisfaction requirement as a condition for PRRB jurisdiction for untimely contractor determinations.  

Medicare Disproportionate Share Hospitals (DSH).  In accordance with the Affordable Care Act, beginning in FY 2014, hospitals receive 25 percent of the amount they previously would have received under the former statutory formula for Medicare DSH.  The remainder, equal to an estimate of 75 percent of what otherwise would have been paid as Medicare DSH, will be aggregated nationally and adjusted for decreases in the rate of uninsured individuals and a statutory factor of 0.2 percent and distributed to hospitals based on their relative share of the total amount of  uncompensated care.  In the FY 2015 rule, CMS will distribute $7.65 billion in uncompensated care payments, a decrease from the $8.56 billion estimate in the proposed rule.   This decrease is due to changes in the Office of the Actuary’s estimate of payments that would otherwise be made for Medicare DSH in FY 2015 (due to lower projected hospital inpatient spending) and also the change in the percentage of individuals that are uninsured as estimated by the CBO.  Additionally, CMS is adopting a process to identify hospitals that have merged such that data from all hospitals involved in the merger may be taken into consideration for purposes of determining the remaining provider’s uncompensated care payment. In response to public comment, CMS is also providing hospitals with 30 days from display of the final rule to submit corrections to our list of mergers.


Changes to Payment Rates under LTCH PPS. Under the final rule, LTCH PPS payments will increase by 1.1 percent, or approximately $62 million, for FY 2015.  This estimated increase is attributable to several factors, including the rate update of 2.2 percent (based on a market basket update of 2.9 percent adjusted by a multi-factor productivity adjustment of -0.5 percentage points and an additional adjustment of -0.2 percentage points); the “one-time” budget neutrality adjustment to standard Federal rate of approximately -1.3 percent under the last year of a three-year phase-in.   

Delay in Full Application of the 25 Percent Patient Threshold.  Under the 25-percent patient threshold policy, if an LTCH admits more than 25 percent of its patients from a single acute care hospital, Medicare will make payments at a rate comparable to IPPS hospitals for those patients above the 25-percent threshold.  The Pathway for SGR Reform Act of 2013 imposed a four year moratorium on the full application of the 25 percent patient threshold rule for most LTCHs, effective retroactive to the expiration of the previous statutory delay.  Certain “grandfathered” LTCHs are now permanently exempted from the policy by law.  

Moratoria on the Establishment of LTCHs and LTCH Satellite Facilities and on the Increase in Number of Beds in Existing LTCHs and  Satellite Facilities.  The Pathway for SGR Reform Act of 2013 as amended by  the Protecting Access to Medicare Act of 2014 imposed moratoria on new LTCHs, LTCH satellites, and an increase in beds in existing LTCHs and satellites from April 1, 2014 to September 30, 2017. There are three exceptions to the moratorium on new LTCHs and satellites (but not on the increase in beds) that are analogous to the original moratorium included in the Medicare, Medicaid and SCHIP Extension Act (MMSEA) of 2007.  CMS will implement the new moratoria in a similar manner as the exceptions to the original moratoria that were included in MMSEA.  

Termination of the 5 Percent Readmissions Policy and Continuation of the Current Interrupted Stay Policy.  CMS is finalizing its proposal to eliminate the “5 percent readmissions” policy under which readmissions from co-located providers in excess of 5 percent are paid a single LTCH payment rather than two payments (one for both the admission and readmission).   We believe this policy is not necessary as another policy—the interrupted stay policy discussed below—serves the same purpose.  Further, the new statutory revisions to the LTCH PPS, which will be implemented for FY 2016 (establishing clinical criteria for standard LTCH PPS payment) may obviate the need for the 5 percent policy.  

The interrupted stay policy also provides a single payment to the hospital when the patient is discharged and readmitted to an LTCH within 9 days from a general acute care hospital.  CMS proposed to increase the 9 day threshold to 30 days.  After considering the comments received, CMS is not adopting proposed revisions to the interrupted stay policy, but CMS may revisit this policy as it gains experience under the new statutory revisions to the LTCH PPS.  

LTCH Area Wage Adjustment Updates.  For FY 2015, consistent with our historical approach, we will update the LTCH PPS wage index and labor-related share based on the best available data.    We will adopt revisions to the LTCH PPS labor market areas based on the new OMB CBSA delineations developed from the 2010 census data, and a budget neutral transition methodology consistent with the approach finalized under the IPPS.  

The final rule will appear in the Federal Register soon and can be downloaded from the Federal Register at