Fact sheet



OVERVIEW:   On May 1, 2009, the Centers for Medicare & Medicaid Services (CMS) announced a proposed rule that would change Medicare policies and payment rates for inpatient services furnished by both acute care hospitals and long-term care hospitals in fiscal year (FY) 2010.  CMS is proposing to update inpatient acute care hospital rates under the Inpatient Prospective Payment System (IPPS) by 2.1 percent for inflation, but to reduce payment rates by a documentation and coding adjustment of 1.9 percentage points.  Similarly, CMS is proposing to update payment rates to long-term care hospitals (LTCHs) under the LTCH Prospective Payment System (PPS) by 2.4 percent for inflation, but to reduce payments rates by a documentation and coding adjustment of 1.8 percentage points.


The documentation and coding adjustment ensures that Medicare spending for inpatient stays in these hospitals does not increase or decrease as a result of changes in hospitals’ coding practices following adoption of a new inpatient hospital patient classification system in FY 2008.  However, CMS is requesting public comment on whether to make a different adjustment than the one proposed.


BACKGROUND:   Since FY 1983, Medicare Part A has paid acute care hospitals for inpatient stays under the IPPS, which provides for a single prospectively-determined payment for each case based on the patient’s diagnosis, or, in a few instances, the technology used in treating the patient.  In FY 2002, Medicare began paying LTCHs under the LTCH PPS, which used the same patient classifications as the IPPS, but weighted them differently to reflect the different resources and higher treatment costs typically associated with long-term hospital stays.



Under both prospective payment systems, the payment amount is based on the average costs incurred by the hospital in treating a patient with a specific diagnosis.   In rare cases, where the costs of treatment greatly exceed Medicare’s payment rate, the hospital may be entitled to an additional payment, called an outlier payment.  Physician and non-physician practitioner services are billed separately to Medicare Part B and are paid under the Medicare Physician Fee Schedule. 


From FY 1983 through FY 2007, payments to acute care hospitals were made using the Diagnosis Related Group (DRG) classifications, but over time, CMS discovered that the classification structure needed greater specificity to ensure that hospitals were paid more for more severely ill patients who are more costly to treat relative to less severely ill patients with the same principal diagnosis.   In FY 2008, CMS replaced 538 DRGs with 745 new Medicare Severity DRGs (MS-DRGs) that reflected not just the diagnosis, but also the severity of the patient’s illness. 


BUDGET NEUTRALITY AND THE NEW CLASSIFICATIONS:   As explained in the final IPPS rule for FY 2008, CMS believes adoption of the new payment classifications should be budget neutral; that is, total Medicare payments to these hospitals should not increase or decrease solely due to changes in hospital documentation and coding practices, although total spending may change due to other factors.  Anticipating that hospitals would change documentation and coding practices to receive higher payments for patients, CMS planned to adjust inpatient rates by -1.2 percent in 2008 and ‑1.8 percent in FYs 2009 and 2010 to ensure budget neutrality.  The final IPPS rules for both FY 2008 and FY 2009 indicated that CMS planned to revise the FY 2010 adjustment, if a review of actual data for FY 2008 indicated changes in actual documentation and coding were different from the documentation and coding adjustments applied in FY 2008 and FY 2009. 


Hospitals believed that the adjustments CMS made in the FY 2008 IPPS final rule overestimated the impact of the documentation and coding effect.  In the TMA [Transitional Medical Assistance], Abstinence Education, and QI Programs Extension Act of 2007 (TMA), Congress required CMS to reduce the adjustments to -0.6 percent for FY 2008 and -0.9 percent for FY 2009.  The TMA did not address the projected adjustment of 1.8 percent for 2010, but required CMS to adjust payment rates over FY 2010, FY 2011, and FY 2012 to restore budget neutrality if a retrospective review of claims data from FY 2008 and FY 2009 found that changes in hospitals’ documentation and coding practices were different from the adjustments made by the TMA.


PROPOSED ADJUSTMENT FOR FY 2010:   CMS is now proposing to make an adjustment of 1.9 percentage points for FY 2010 because documentation and coding from hospital claims in FY 2008 were higher than earlier projections.  The 1.9 percentage point adjustment will ensure that the increase in spending in FY 2008 is not carried forward into future years.  However, CMS is not proposing to begin recovering the difference for the increase in spending that actually occurred in FY 2008 through adjustments to future rates until FY 2011 or FY 2012.


The Medicare Actuary estimates that additional documentation and coding increased spending by 2.5 percent in FY 2008 or 1.9 percentage points more than the amount removed from the rates.  Documentation and coding is estimated to increase FY 2009 spending by 2.3 percent or 1.4 percentage points more than the 0.9 percent adjustment made to FY 2009 rates.  Based on current estimates, the cumulative effect of the increased spending from FY 2008 and FY 2009, including interest on the overpayments, together with the projected 1.9 percent increase for FY 2010 is approximately -8.5 percent.  This is the amount that would have to be taken from payments through a budget neutrality adjustment between FY 2010 and FY 2012 for acute care hospitals paid under the IPPS.


To prevent a short-term disruption to hospital payments in FY 2010, CMS is proposing an adjustment of 1.9 percent and to make additional adjustments, based on actual data on FY 2009 spending, in future rulemaking.  Although CMS has the authority to make a much larger reduction to the FY 2010 rates, CMS believes it is prudent to phase-in additional adjustments carefully over time.  CMS is requesting public comment on whether the agency should apply a different documentation and coding adjustment than it is proposing for FY 2010.


CMS is also proposing to make adjustments to the hospital specific rates (HSP) for Medicare Dependent Hospitals and Sole Community Hospitals of -2.5 percent.  CMS is proposing to reduce the HSP by -2.5 percent, rather than by the 1.9 percentage points proposed for other IPPS rates, because the 0.6 percentage point reduction applied to IPPS rates for FY 2008 was not applied to the HSPs.


The proposed rule also updates FY 2010 LTCH payment policies and rates.  The proposed inflation rate for LTCHs is 2.4 percent for FY 2010.  CMS is proposing to apply an adjustment for increased spending that resulted from changes in documentation and coding that occurred during the last year under the old patient classification system (FY 2007) and the first year under the  under the MS-LTC-DRGs (FY 2008).  The proposed adjustment to the inflation update for LTCHs will be ‑0.5 percent for changes in documentation and coding during FY 2007.  In addition, we are proposing to adjust the LTCH update by the FY 2008 documentation and coding effect of 1.3 percent for a total of -1.8 percent.  These adjustments are specific to the increases that occurred in LTCHs.

The proposed rule was placed on display at the Federal Register today, and can be found under Special Filings at:


CMS will accept comments on the proposed rule until June 30, and will respond to comments in a final rule to be made publicly available no later August 1, 2009. 


For more information, please see:



# # #