Fact sheet



OVERVIEW:   On July 31, 2009, the Centers for Medicare & Medicaid Services issued a final rule that would change payment rates and policies for inpatient services in acute care hospitals under the Inpatient Prospective Payment System (IPPS) for fiscal year (FY) 2010, beginning October 1, 2009.  The final rule also includes payment and policy changes for inpatient stays in long-term care hospitals (LTCHs) under the LTCH Prospective Payment System (LTCH PPS).  LTCHs are paid at higher payment rates than IPPS hospitals because they typically treat patients requiring long-stay hospital-level care.  To qualify for payment under the LTCH PPS, the hospital’s average length of stay, taking into account all patients, must be greater than 25 days.


The final rule, which would apply to more than 3,500 acute care hospitals and approximately 400 LTCHs, would generally be effective for discharges on or after October 1, 2009.  Under the rule, Medicare payments to acute care hospitals for inpatient services occurring in FY 2010 are projected to increase by $1.9 billion, while payments to LTCHs in RY 2010 are projected to increase by $153 million.


The provisions of the final rule addressing improvements to the hospital quality initiatives, as well as a payment adjustment required by the TMA [Transitional Medical Assistance], Abstinence Education and QI Programs Extension Act are discussed in separate fact sheets that are available on the CMS website at:





BACKGROUND:   By law, CMS pays acute care hospitals for inpatient stays under the IPPS and long-term care hospitals under the LTCH PPS.  These prospective payment systems establish prospectively set rates based on the patient’s diagnosis and the severity of the patient’s medical condition.   Under the IPPS and the LTCH PPS, a hospital receives a single payment rate for the case based on the payment classification assigned at discharge.  Until FY 2008, discharges from acute care hospitals were classified into one of 538 CMS-diagnosis-related groups (DRGs). 


In FY 2008, Medicare replaced the 538 DRGs with 745 Medicare-severity DRGs (MS-DRGs) which provide higher payment for more severely ill or injured patients and lower payment for all other cases.  In FY 2009, Medicare created an additional MS-DRG bringing the total to 746.


The LTCH PPS was implemented in FY 2003.  Medicare payments under the LTCH PPS utilize the same DRG system as the IPPS, but payment weights associated with the LTCH patient classifications are calculated based on treatment costs at LTCHs.  In conjunction with the IPPS, in FY 2008, the LTCH PPS adopted Medicare severity Long-Term Care DRGs (MS-LTC-DRGs).



FINAL IPPS CHANGES FOR FY 2010:   Among the key changes in the IPPS for FY 2010 are the following:


Documentation and Coding:   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.  Consistent with Medicare statute, CMS originally adopted adjustments to inpatient rates to address expected increases in spending due to documentation and coding associated with the payment classification system.  Congress later reduced those amounts but required CMS to both adjust rates going forward if documentation and coding increased spending more than anticipated and also to recoup any excess spending for FY 2008 and FY 2009.  CMS proposed to adjust FY 2010 rates by 1.9 percent so the FY 2008 increase in spending from documentation and coding is not carried forward.  However, based on public comments, CMS decided not to make that adjustment in FY 2010 without knowing whether FY 2009 spending from documentation and coding is more or less than earlier projected.  CMS did not propose any adjustment to FY 2010 rates to recoup excess FY 2008 spending.


Capital IPPS Teaching Adjustment:   In the final IPPS rule for 2008, CMS announced that it was maintaining the capital IPPS teaching adjustment for FY 2008, but would reduce it by 50 percent in FY 2009 and eliminate it entirely beginning in FY 2010.  The American Recovery and Reinvestment Act of 2009, enacted on February 17, 2009, restored the full capital IPPS teaching adjustment in FY 2009, but did not affect the scheduled phase-out of the capital IPPS teaching adjustment for FY 2010 and subsequent fiscal years.  In the FY 2010 final rule, CMS considered public comments on this issue and to restore the full capital IPPS teaching adjustment for FY 2010.



             Market Basket Update:  As required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), CMS rebased and revised the structure of both the operating and capital market baskets for the IPPS FY 2010 update.  The current market basket is based on FY 2002 data; the rebased market basket uses data from FY 2006.  In rebasing the market basket, CMS has added three new expense categories and revised several price proxies.


Using the rebased and revised market basket produces an operating market basket update of 2.1 percent for FY 2010.  As required by the Deficit Reduction Act of 2005 (DRA), hospitals that do not participate successfully in the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program would receive the market basket update less 2.0 percentage points, or 0.1 percent based on this projection.


             Outlier Threshold:  CMS is projecting that the total outlier payments in FY 2009 will be 5.4 percent of total payments under the IPPS, 0.3 percentage points higher than the target rate of 5.1 percent.  Based on current data, CMS is raising the outlier threshold in FY 2010 to $23,140 to keep outlier payments equal to 5.1 percent of total payments under the IPPS.  If CMS were instead to raise the target percent or lower the threshold, CMS would have to reduce the base payments for the MS-DRGs in order to offset the increase in outlier payments.


             Labor Related Share:  CMS is updating the labor related share to reflect that wage and wage-related costs represent a lower share of total costs in FY 2006-based market basket than they did in the FY 2002-based market basket, in part because survey data from hospitals indicate that a smaller proportion of fees paid for non-medical professional services are paid to firms located in the individual hospital’s local labor market, and in part because hospital network consolidation of administrative functions in home offices has reduced the geographic variation in labor costs.  CMS had proposed to reduce the labor related share in FY 2010 to 67.1 percent from 69.7 percent in FY 2009, but, based upon a revised methodology for allocating costs, CMS has calculated a 68.8 percent labor-related share for FY 2010.


             MS-DRG Reassignment for Certain Orthopedic Procedures:  CMS is finalizing the reassignment of cases involving patients who have received hip or knee joint replacements, but have contracted an infection that requires the removal of the prosthesis and inpatient hospitalization while the infection is treated and a new prosthesis implanted.  Removing these cases from their current MS-DRGs and assigning them to higher paying MS-DRGs will improve the accuracy of payment for the MS-DRGs to which the cases are currently assigned while providing more appropriate payment for these more complex stays.


             MS-DRG Relative Weights:  CMS is not making any policy changes related to MS-DRG Relative Weights.  CMS discusses options for improving the standardization process, and summarizes public comments as to how the standardization process can be improved to more precisely remove cost differences across hospitals, thereby improving the accuracy of the relative weights in future fiscal years.


Wage Index: The final rule discusses the status of the transitions of the following two regulatory changes CMS adopted in the FY 2009 final rule:


  • Application of Within-State Budget Neutrality for the Rural and Imputed Floors: In the FY 2009 final rule, CMS adopted a policy to apply a budget neutrality adjustment to the rural and imputed floors on a within state, rather than national basis.  This policy is currently being phased-in over a 3-year period.  In FY 2009, hospitals received a blended wage index that was 20 percent of a wage index with the State level adjustment and 80 percent of a wage index with the national adjustment.  In FY 2010, the blended wage index will reflect 50 percent of the State level adjustment and 50 percent of the national adjustment.  In FY 2011, the adjustment will be fully transitioned and reflect 100 percent of the State level adjustment. 


  • Geographic Reclassification Average Hourly Wage Criteria:    In the FY 2009 final rule, CMS adjusted the reclassification average hourly wage standard that is used to determine whether the average hourly wage of a hospital or county hospital group seeking reclassification is sufficiently close to the average hourly wage of the area to which the hospital or county hospital group seeks reclassification.  CMS provided for a phase-in of the adjustment over 2 years.  For applications for reclassification for FY 2010, the average hourly wage standards were set at 86 percent for urban hospitals and group reclassifications and 84 percent for rural hospitals.  For applications for reclassification for FY 2011 (for which the application deadline is September 1, 2009) and for subsequent fiscal years, the average hourly wage standards will be 88 percent for urban and group reclassifications and 86 percent for rural hospitals. 


New Medical Services and Technology:   In order for technology to qualify for an additional payment beyond the payment for the associated MS-DRG, the applicant must demonstrate that the medical service or technology:


1)     is new – that is, generally, that it has been available on the open market for no more that 2-3 years prior to the year for which the additional payment is sought;

2)     is high cost relative to other cases in the relevant MS-DRG(s); and

3)     offers substantial clinical improvement over existing services or technologies for the Medicare patient population.


The proposed rule discussed five applications for new technology add-on payments in FY 2010.   Three of the five applications, Auto Laser Interstitial Thermal Therapy (AutoLITT™) System   


   (Monteris), CLOLAR (clofarabine) injection (Genzyme Oncology), and Downstream® System   (TherOx), withdrew their applications during the public comment period. 


  • LipiScan™ Coronary Imaging System (InfraReDx Inc.): The LipiScan™ uses Intravascular near infrared spectroscopy (INIRS) during coronary angiography to take images of lesions within coronary arteries in order to detect the lipid content within coronary artery plaques, which is believed to correlate with the probability of plaque rupture as well as with the rate of progression of atherosclerosis.  The most common use of INIRS has been for selection of the length of artery to be stented in PCI.  LipiScan received FDA approval for a prior indication in June 2006; it received FDA approval for another indication on April 25, 2008.  In the final rule, CMS determined that LipiScan™ did not represent a substantial clinical improvement relative to existing technologies because there was not sufficient evidence available to demonstrate how the use of the device affects or improves medical management of patients and therefore is not approving LipiScan™ for new technology add-on payments for FY 2010.


  • Spiration® IBV® Valve System (Spiration, Inc.): The Spiration IBV Valve is approved for treating persistent air leaks following three types of lung surgery and the manufacturer currently is working on a clinical trial in patients with chronic obstructive pulmonary disorder (“COPD”).   CMS approved this application for new technology add-on payments for FY 2010 because it represented a new treatment option for patients with prolonged air leaks following the lung surgeries mentioned above and may prevent some patients from having to undergo another invasive lung surgery to resolve the air leak.

CMS is approving this technology for new technology add-on payments for FY 2010 for a maximum add-on payment of $3,437.50 per case.   The add-on payments for this technology are limited to the treatment of patients for whom the technology is indicated under the HDE approval. 


             Medicare Disproportionate Share Hospital (DSH):  CMS is finalizing three changes to its Medicare disproportionate share hospital adjustment policies, as follows:


·       Labor and Delivery Patient Days:   CMS will count in the Medicare DSH calculation patient days associated with beds for labor and delivery (L&D) services even when the patient did not occupy a routine bed prior to occupying an ancillary bed because L&D beds are inpatient beds and the patient days spent in L&D beds are generally payable under the IPPS. 


·       Observation Beds and Inpatient Days:   CMS will exclude all patient days and beds associated with observation services from the DSH calculation because a patient who is receiving observation services is considered an outpatient, not an inpatient. 



Observation beds would also not be counted for determining a hospital’s IME payments under this policy.


·       Aggregating Inpatient Days for DSH:   CMS will allow hospitals to accumulate the number of days in the numerator of the Medicaid fraction of the disproportionate patient percentage by date of discharge, date of admission or dates of service, but will preclude hospitals from “double-counting” days should they change their methodology.


             Graduate Medical Education (GME):  CMS is clarifying the definition of a new medical residency training program in the regulations.  The regulations currently specify that a new medical residency program is one that receives initial accreditation by the appropriate accrediting body or begins training residents on or after January 1, 1995.  The final rule clarifies that the accreditation must be truly “initial,” as opposed to a reaccreditation of a program that existed previously at the same or another hospital.  In determining that a program is truly new, CMS will use certain “supporting factors” (such as whether the program director, teaching staff, and residents are different).  CMS will also consider whether there previously was a program in the same specialty at a hospital that closed and, more generally, whether that program is part of the FTE caps of any existing hospital.  In addition, CMS is specifying that a new hospital that begins training residents for the first time after July 1 will be permitted to submit a Medicare GME affiliation agreement prior to the earlier of the end of its cost reporting period or the end of the academic year in order to participate in a Medicare GME affiliated group for the remainder of the academic year. 


               Emergency Medical Treatment and Labor Act (EMTALA) Waiver Policy:   CMS is amending the EMTALA regulations regarding the waiver of EMTALA sanctions in an emergency area during an emergency period to make the regulations more consistent with section 1135 of the Social Security Act.  The final rule states that when authorized under section 1135, a waiver of EMTALA sanctions for an inappropriate transfer applies only if the transfer is necessitated by the circumstances of the declared emergency.  In addition, the final rule states that when authorized under section 1135, a waiver of EMTALA sanctions for an inappropriate transfer or for the redirection or relocation of an individual to receive a medical screening examination at an alternate location applies only if the hospital does not discriminate based on the source of an individual’s payment or ability to pay.  The final rule also provides that a waiver of EMTALA sanctions authorized under section 1135 may apply to a portion of an emergency area or a portion of an emergency period.


             Critical Access Hospital (CAH) Policies: CMS is finalizing four policies related to CAHs. 


·       Clinical Diagnostic Laboratory Test Payment:   Consistent with section 148 of the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), CMS is finalizing a policy to allow a CAH to receive reasonable cost-based payment for outpatient clinical diagnostic laboratory tests furnished to an individual that is not physically present in the CAH at the time the laboratory specimen is collected.  In order for the CAH to receive reasonable cost payment, the individual must either receive outpatient services in the CAH on the same day the specimen is collected or the specimen collection must be performed by an employee of the CAH.


·       Provider-Based Status for CAH-Affiliated Clinical Diagnostic Labs:   Because the provider-based status policy creates a payment incentive for a facility or organization to claim affiliation with a main provider, CMS is finalizing a policy that would apply provider-based status rules to facilities that only furnish clinical diagnostic laboratory tests to a CAH.  In response to public comment, these rules would apply to these facilities effective October 1, 2010. 


·       Method II Payment:   CMS is revising the regulations to be consistent with the law so that CAHs that select the optional method of reimbursement are paid at 100 percent of reasonable costs for outpatient services and not at 101 percent.


·       CAHs in Reclassified Areas:   Each year, as part of the annual update to the wage index, CMS announces changes made by OMB to Core-Based Statistical Areas.  In the FY 2010 proposed rule, CMS announced that OMB redesignated three areas from Micropolitan Statistical Areas to Metropolitan Statistical Areas.  As a result, CAHs located in these areas would be redesignated as urban and lose their CAH status.  CMS will amend the relevant regulations to give CAHs in these redesignated areas a two year period starting in FY 2010 to reclassify from urban to rural.





             LTCH PPS Market Basket:   CMS currently uses the rehabilitation, psychiatric, and long-term care (RPL) hospital market basket to update the prospective payment systems that have been developed specifically for each of these types of facilities, taking into account the mix of resources required to treat their specific patient populations.  CMS will continue to use the FY 2002-based RPL market basket for RY 2010 while it considers whether separate market baskets unique to each of these hospital types can be developed.  The final inflation update, including both the operating and capital sections of the FY 2002-based RPL market basked is 2.5 percent for RY 2010.


             Outlier Threshold:   CMS is projecting that the total outlier payments in RY 2009 will be approximately 6.8 percent of total LTCH PPS payments, 1.2 percentage points lower than the  target rate of 8 percent.   Based on current data, CMS also projects an increase in aggregate LTCH PPS payments in RY 2010 as compared to RY 2009.  Therefore, CMS is decreasing the LTCH outlier threshold in RY 2010 to $18,425 to keep projected LTCH outlier payments at 8 percent of total payments under the LTCH PPS. 


This final rule also summarizes public comments and finalizes revisions to the FY 2009 MS-LTC-DRG relative weights used under the LTCH PPS that were included in a June 3, 2009 interim final rule with comment period (IFC).   These revised weights are effective for LTCH PPS discharges occurring on after June 3, 2009 through September 30, 2009.


The final rule went on display today at the Office of the Federal Register’s Public Inspection Desk and will be available as a special filing at:




It will appear in the August 27, 2009, Federal Register.


For more information, please see:




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