Fact sheet






The Centers for Medicare & Medicaid Services (CMS) on July 31, 2008, issued a final rule that will change Medicare payment rates and policies for inpatient hospital services furnished by acute care hospitals to people with Medicare in FY 2009.  The changes will apply to more than 3,500 hospitals paid under the Inpatient Prospective Payment System (IPPS) effective for discharges on or after October 1, 2008 through September 30, 2009.  The rule also finalizes additional changes to the Medicare Severity Long-Term Care Diagnosis Related Groups (MS-LTC-DRGs) that serve as the basis for payment for services to people with Medicare in long-term care hospitals.  Medicare payments to acute care hospitals are estimated to increase by nearly $4.75 billion between FY 2008 and FY 2009.


The provisions of the final rule addressing improvements to the hospital quality initiatives and physician self-referral provisions are discussed in separate fact sheets that are available on the CMS website at:




The Medicare law requires CMS to pay acute care hospitals for inpatient stays under the IPPS that establishes prospectively set rates based on the patient’s diagnosis.  Under the IPPS, the hospital receives a single payment rate for the case, based on the Medicare Severity Diagnosis Related Group (MS-DRG) assigned at discharge.  This payment is considered full payment for all costs incurred by the hospital in treating the patient, other than physician services which are paid separately to the physician under Medicare’s Physician Fee Schedule.


The Medicare law requires CMS to adjust the payment to each hospital for an assigned MS-DRG, based on a number of factors including geographic wage differentials, the proportion of low-income patients treated by the hospital, and whether the hospital is a teaching hospital.  Finally, the IPPS payment will be increased for cases in which the costs of treatment exceed the payment for the MS-DRG by a specified dollar threshold.  This threshold is calculated annually at an amount that is projected to keep total outlier payments at no more than 5.1 percent of total estimated payments under the IPPS. 




IPPS Reform:


CMS began a 3-year reform of the IPPS in FY 2007.  The reforms fall into two major categories:


Changing from Charges to Costs:  Medicare began to change one component of its payment rate from hospital charges to costs over a 3-year transition period beginning in FY 2007.  The changes will result in Medicare paying more for some cases and less for others and do not produce any budget savings.  However, by paying based on costs instead of charges, Medicare’s payments will more accurately reflect the costs of treating Medicare beneficiaries and reduce incentives to select some patients over others.  In this final rule, CMS completes the transition so that its payment rates are 100 percent cost-based.  In addition, CMS is making changes to hospital cost reports that will allow Medicare to distinguish between high and low cost supplies and devices and to further refine and improve our cost-based payments.  The changes to the cost report will also improve Medicare’s payment for outpatient services.


Better Recognizing Severity of Illness:  In FY 2008, Medicare adopted the new MS-DRGs that better account for patient severity of illness by expanding the number of payment groups from 538 to 745.  Medicare adopted this system over a two-year transition.  The FY 2009 IPPS rule announces the completion of the transition to the MS-DRGs.  In addition, Medicare is making a number of modest changes to the MS-DRGs that further improve its recognition of severity of illness based on public comments. 


Market Basket Update and Budget Neutrality:


The final rule updates IPPS rates by a market basket of 3.6 percent for inflation (1.6 percent for hospitals that do not submit quality data).  However, CMS estimates that the new MS-DRGs will result in improvements in coding and documentation that increase spending without a real change in patient severity of illness.  CMS estimates that Medicare spending for inpatient hospital services in FY 2009 will increase 1.8 percent as a result of changes in coding and documentation.  However, rather than reducing IPPS rates by 1.8 percent in FY 2009 for budget neutrality, the law requires CMS to reduce the IPPS rates by 0.9 percent for FY 2009.  If based on a retrospective review of FY 2008 and FY 2009 claims, CMS determines that improvements in documentation and coding from adopting the MS-DRGs led to an increase in total Medicare spending for inpatient hospital services, the law requires CMS to apply further adjustments to Medicare’s IPPS rates in FY 2010 and later years to recoup this increased spending.


Wage Index Reform: 


The Tax Relief and Health Care Act of 2007 required the Secretary to study reforms of the IPPS wage index and make a proposal or proposals in the FY 2009 IPPS rule.  The law required that the Secretary consider a wage index reform proposal from the Medicare Payment Advisory Commission (MedPAC).   CMS contracted with Acumen to assist with studying reforms to the IPPS wage index.  Some of the reforms suggested by MedPAC would require a change in law before they could be adopted.  The IPPS final rule provides an objective analysis of how payments would change were the MedPAC ideas to be adopted.  In addition, the FY 2009 final rule adopts the following policies:


Rural Floor and Imputed Rural Floor Budget Neutrality:  The law requires that an urban hospital cannot have a wage index that is lower than that received by rural hospitals within the same state.  By regulation, CMS created an “imputed” floor for all-urban states.  The rural and imputed floors are applied in a budget neutral manner.  CMS is phasing-in the application of the rural and imputed rural floor budget neutrality adjustments on a state-by-state basis, rather than on a national basis, beginning with the FY 2009 wage index.  For FY 2009, 20 percent of the budget neutrality adjustment will be calculated on a state-by-state basis, while 80 percent will continue to be calculated on a national basis.  In FY 2010, 50 percent of the adjustment will be state-by-state and 50 percent national, and in FY 2011, all of the calculation will be made on a state-by state basis.


Geographic Reclassification: Under current policy, a hospital or a group of hospitals can be reclassified to receive another area’s wage index.  CMS proposed to update the criteria used to determine whether a hospital or group of hospitals is eligible for geographic reclassification.  Under current policy, an individual hospital’s average hourly wage must be 84 percent (82 percent for rural areas) of the average hourly wage of hospitals in the requested area.  The final rule phases in this change, so that the criterion for new reclassifications for FY 2010 will be 86 percent (84 percent for rural areas) and the criterion for new reclassifications for FY 2011 will be 88 percent (86 percent for rural areas).


For both rural and urban county groups, the criterion is increased from 85 to 86 percent for new reclassifications for FY 2010 and the criterion for new reclassifications for FY 2011 will be 88 percent.


Other Policies: 


Add-on Payments for New Medical Services and Technology: The final rule assigns cases that use a total artificial heart to a higher-paying MS-DRG and approves them for new technology add-on payments in approved clinical trial settings.  As described in CMS’recent national coverage determination (Coverage with Evidence Development), a total artificial heart may be covered by Medicare for use in clinical trials that meet certain criteria.  This technology is used as a bridge-to-heart transplant device for transplant-eligible patients who have a diagnosis of end stage biventricular failure.  By assigning this technology to a higher paying MS-DRG and approving it for add-on payments within approved clinical trial settings, CMS hopes to reduce potential barriers to access to this technology, while facilitating the collection of outcomes data to better measure the clinical value of the associated procedure. 


Emergency Medical Treatment and Labor Act (EMTALA): The proposed rule indicated that a hospital with specialized capabilities would have an EMTALA obligation to accept and treat an individual that first presented at another hospital’s emergency department with an emergency medical condition (EMC) remains unstable upon admission and requires transfer for specialized care that is not available at the admitting hospital.  After carefully considering all of the public comments on this issue, the final rule states that if an individual, with an unstable emergency medical condition, presents to a participating hospital and is admitted, the admitting hospital has satisfied its EMTALA obligation towards that individual.  Furthermore, if the patient is subsequently transferred to a hospital with capabilities for specialized care, that hospital does not have an EMTALA obligation to accept the individual.CMS also encourages the public to make CMS aware if the policy results in unintended consequences, such harmful refusals by hospitals with specialized capabilities to accept the transfer inpatients whose emergency medical condition remains unstabilized.  


Medicare Advantage Encounter Data:  The final rule amends the current Medicare Advantage regulation to allow CMS to collect encounter-level data from MA organizations for services furnished to their enrollees.  This encounter-level data may be used for certain purposes including: risk adjustment, calculation of the Medicare DSH percentage and Medicare coverage tracking. This provision will also allow CMS to improve the accuracy of its MA risk adjustment models.


Capital IPPS Teaching Adjustments:  Based on an analysis of teaching hospital capital margins, we finalized a policy in the FY 2008 IPPS final rule to phase-out the capital IPPS teaching adjustment to give teaching hospitals an opportunity to plan and make adjustments to the change.



Beginning in FY 2009, capital Indirect Graduate Medical Education (IME) payments will be half of the amount provided for under the current formula.  Beginning in FY 2010 and after, hospitals will no longer receive a teaching adjustment under the capital IPPS.  We formally adopted the phase-out of the capital IPPS teaching adjustment in the FY 2008 IPPS final rule with comment period.  In addition to accepting public comments for 90 days after the publication of the FY 2008 final rule, we also provided additional opportunity for public comment during the FY 2009 IPPS proposed rule.  In this final rule we have responded to the many comments that we received.


Medicare Improvements for Patients and Providers Act of 2008 Implementation:


The final rule implements the following IPPS provisions in the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), enacted July 15, 2008:


Rebasing Sole Community Hospital Payment (SCH) Rates: For cost reporting periods beginning on or after January 1, 2009, section 122 of MIPPA requires CMS to rebase the payment rates for a SCH based on its 2006 hospital-specific rate if doing so results in a higher payment to the SCH than payment based on the Federal rate or the hospital-specific rates from 1982, 1987 or 1996.


Section 508 Geographic Reclassifications and Special Exceptions:  Section 124 of MIPPA extended Section 508 reclassifications and special exceptions for an additional Federal fiscal year, through September 30, 2009.  Because the legislation was enacted so close to the August 1 deadline for publishing the IPPS FY 2009 final rule, CMS will announce the extension of section 508 reclassifications in the final rule, but will publish a separate Federal Register notice prior to October 1, 2008 announcing the final IPPS rates and geographic reclassifications for FY 2009.


The final rule will appear in the August 19 Federal Register and will generally be effective for discharges on or after October 1, 2008.


For more information, see:



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