Fact Sheets

FINAL INPATIENT PPS RULE INCREASES ACCESS TO HIGH QUALITY HOSPITAL CARE THROUGH FINANCIAL RELIEF TO HOSPITALS

Today’s Action 

The Centers for Medicare and Medicaid Services (CMS) today issued the FY 2005 hospital inpatient prospective payment system (PPS) regulation, which provides for greater access to high-quality care in our nation’s hospitals.   The final rule increases payments to acute care hospitals, provides financial relief to rural hospitals, and, for the first time in the history of the Medicare program, creates a link between the quality of services to Medicare beneficiaries and payment for those services. 

Under the final rule, the combined impact of the inflation update and other proposed changes will yield an average 5.7 percent increase in payments for urban hospitals in fiscal year 2005, while rural hospitals will see an average increase of 6.2 percent.  In FY 2005, Medicare payments to approximately 3,900 acute care hospitals under the hospital inpatient PPS are projected to be $105 billion, up from a projected $100 billion in fiscal year 2004.

Background 

The final rule implements major payment and policy changes for acute care hospitals resulting from the comprehensive Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), which was signed into law on December 8, 2003. 

Hospitals reporting specific quality data will receive an inflation update equal to the hospital market basket percentage increase, which is 3.3 percent. This is the first time that hospital payment rate increases have been related to performance, in this case by providing incentives for giving information to patients and health professionals related to quality of care.   As of July 15, the vast majority of hospitals have registered to provide CMS with the data, and thus are eligible to receive the full market basket update.

Critical Access Hospital Improvements

The FY 2005 hospital inpatient PPS final rule implements and codifies MMA provisions that help critical access hospitals (CAHs) serve rural beneficiaries.  The final rule revises Medicare regulations to allow CAHs to designate up to 25 beds for either acute or post-acute care, and also updates Medicare regulations to allow CAHs to set aside units of up to ten beds each to be used exclusively for inpatient rehabilitation and psychiatric services.  These units, which would not count toward the CAH’s 25-bed maximum, will be paid as if they were distinct parts of acute care hospitals.  Additionally, the final rule reflects an increased payment from 100 percent to 101 percent of reasonable costs for both inpatient and outpatient services rendered by critical access hospitals. 

The final rule released today also implements additional MMA provisions to extend cost-based reimbursement for additional on-call emergency care providers and to allow CAHs to receive periodic interim payments every 2 weeks, as is currently the case for eligible hospitals, skilled nursing facilities, and hospices. 

Relief for Rural Hospitals

The FY 2005 hospital inpatient PPS final rule also implements several MMA provisions that provide relief to rural hospitals.  Specifically, the final rule revises Medicare regulations to incorporate the permanent single base payment—or standardized amount—for hospitals, resulting in increased payments for hospitals located in rural and small urban areas.  The rule also increases disproportionate share hospital payments to hospitals located in rural and small urban areas.

A hospital’s labor-related share to which the wage index is applied will be decreased from 71.1 percent to 62 percent of the standardized amount when such a change will result in higher total payments to the hospital.  This change helps rural hospitals that may otherwise be adversely affected because their local wage levels are low.

CMS also will make an additional payment to low-volume acute care hospitals that are located more than 25 road miles from another acute care hospital.  Under the final rule, CMS will provide a 25 percent payment adjustment to eligible hospitals.

Additionally, the rule establishes a five-year demonstration project to test a separate payment system for inpatient hospital services provided by rural community hospitals.  Participating hospitals will be paid on a reasonable cost basis for the first year of the demonstration.

Lower Outlier Threshold

The final rule sets the outlier threshold at $25,800, a decrease both from $31,000 in FY 2004 and from the $35,085 originally included in the FY 2005 hospital inpatient PPS proposed rule.   Reducing the outlier threshold will make it significantly easier for hospitals to qualify for outlier payments for high cost patients.  

Updated Labor Market Areas

To more appropriately reflect current commuting patterns and population trends, the rule updates the labor market areas for hospitals, basing the new labor market areas on the revised definitions of Metropolitan Statistical Areas (MSA) produced by the Office of Management and Budget using 2000 Census data. 

Hospitals in counties that were previously urban and are now considered rural may be negatively affected by the new MSA definitions.   Therefore such hospitals will automatically be reassigned back to the labor market area to which they were previously assigned for 3 years beginning in FY 2005.  Moreover, the final rule provides a two-year transition for all hospitals that will see a decrease in their wage index due to these changes.  More than 40 percent of rural hospitals will benefit from this transition. 

Increase in Out-Commuting Wage Index

The rule provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county with a higher wage index.   There are 404 hospitals in 226 counties that qualify to receive this out-commuting payment adjustment. 

Enhancements in Diagnosis-Related Groups (DRGs)

The final rule makes several changes to the diagnosis related groups (DRGs) that serve as the basis for payment inpatient PPS, including increasing payment to hospitals for treating burn patients who have respiratory failure and require the long-term use of mechanical ventilation. 

The rule also reassigns heart assist devices, including left ventricular assist devices or LVADs, to the DRG for heart transplants.   These devices were originally approved only as a “bridge” therapy, but are now approved as a “destination” therapy for patients requiring permanent mechanical cardiac support.  This reassignment will increase payments for the heart assist system and is not expected to reduce payments for transplants.  

Additionally, the rule creates a new DRG for certain craniotomy procedures, including those that involve the implantation of a chemotherapeutic agent such as Gliadel®.   The payment weight for this new DRG better reflects the costs associated with these procedures.  

Better Support for New Technologies

The rule reduces the cost threshold to qualify for new technology add-on payments.  It also expands the public’s opportunity to provide input in the process.  And it provides an add-on payment for two new medical technologies in FY 2005: an implantable neurostimulator for deep brain stimulation used for treating patients with Parkinson's and a technology that combines resynchronization therapy with defibrillation for patients with heart failure.  We are also continuing add-on payments for bone morphogenetic protein used to promote bone growth during a spinal fusion.

Better Support for Graduate Medical Education

The rule makes several important changes regarding reimbursements to teaching hospitals for direct and indirect medical education costs.   Specifically, the rule redistributes unused residency slots among teaching hospitals to better reflect changes in the location of residency training.  Hospitals located in rural areas are given first priority.

The rule also adopts changes to CMS payment policy regarding residents pursuing specialty residencies.   Hospitals will now receive full payment for up to four years of specialty training when a resident matches simultaneously to a generalized, preliminary year of training and a subsequent specialty training program. 

Additionally, the final rule eliminates the requirement that a hospital have a written agreement with a non-hospital site if the hospital wants to count the time a resident spends in the non-hospital site in its IME and direct GME full-time equivalent (FTE) accounting.