Fact sheet



OVERVIEW:   On May 1, the Centers for Medicare & Medicaid Services issued a proposed 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 proposed rule also includes proposals for payment and policy changes for inpatient stays in long-term care hospitals (LTCHs) under the LTCH Prospective Payment System (LTCH PPS).  Hospitals that are paid at the higher LTCH PPS payment rates 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 proposed 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 proposed rule, Medicare payments to acute care hospitals for inpatient services in FY 2010 are projected to be $117.4 billion, while payments to LTCHs in RY 2010 are projected to be $4.9 billion.


The provisions of the final rule addressing improvements to the hospital quality initiatives, as well as a payment adjustment required by the TMA, 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 diagnosis-related groups (DRGs) and payments were calculated based on the average costs of treating a patient with a given diagnosis.  In FY 2008, Medicare replaced the 538 DRGs with 745 Medicare-severity DRGs (MS-DRGs) which provide more appropriate payment by identifying more severely ill or injured patients and allowing hospitals to receive more payment for their care.  In FY 2009, Medicare created an additional MS-DRG bringing the total to 746.


When the IPPS was first implemented, LTCHs were exempted by the Medicare law from payment under the new system because payment rates for the types of patients treated in general acute care hospitals typically would not be adequate to pay for the greater resources needed to treat LTCH patients.  Therefore, LTCHs continued to be paid based on costs until the LTCH PPS was implemented in FY 2002.  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 RY 2008, the LTCH PPS adopted Medicare severity Long-Term Care DRGs (MS-LTC-DRGs).


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


             Market Basket Update:  As required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), CMS is proposing to rebase and revise 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 will use data from FY 2006.  Among the proposed changes are the addition of three new expense categories and the revision of several price proxies.


          Using the rebased and revised market basket, CMS is projecting 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.  The market basket will be updated in the final rule based on more recent data.


             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 also projects that the number of cases qualifying for outlier payments in 2010 will increase.  Therefore, CMS is proposing to raise the outlier threshold in FY 2010 to $24,240 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 proposing to update the labor related share to reflect that labor costs represent a lower share of total costs in FY 2006 than it did in FY 2002.  Therefore, we are proposing to set the labor related share at 67.1 percent for FY 2010, compared with 69.7 percent in FY 2009.  Labor costs appear to represent a lower share of total hospital costs in part because of more recent survey data from hospitals regarding their use of non-medical professional services and in part because there was considerable growth in hospital network consolidation of administrative functions in home offices not located in the same local labor market as the individual hospitals.  This has reduced the geographic variation in labor costs.


             Proposed MS-DRG Reassignment for Certain Orthopedic Procedures:  CMS is proposing to reassign 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.  The proposed removal of these cases from their current MS-DRGs and assignment 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 proposing any policy changes related to MS-DRG Relative Weights.  CMS discusses options for improving the standardization process, and solicits 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 proposed rule discusses the status of the transitions of the following two regulatory changes we 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 adopted the policy to adjust the reclassification average hourly wage standard, comparing a reclassifying hospital’s (or county hospital groups) average hourly wage relative to the average hourly wage of the area to which it seeks reclassification.  CMS provided for a phase-in of the adjustment over 2 years.  For applications for reclassification for the first transitional year, 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 discusses the following applications for new technology add-on payments in FY 2010:


  • Auto Laser Interstitial Thermal Therapy (AutoLITT™) System (Monteris): The AutoLITT is a MRI-guided interstitial laser treatment for intracranial tumors using MRI guidance coupled with a side-firing laser tip that the manufacturer says targets laser energy to destroy the tumor with minimal damage to surrounding brain tissue.  The technology is currently being used in clinical trials, and the manufacturer expects FDA approval in early 2009.


  • CLOLAR (clofarabine) injection (Genzyme Oncology): CLOLAR is a chemotherapy drug that is administered intravenously and was initially approved for the treatment of acute lymphoblastic leukemia (ALL) in children.  It has since been found to have clinical benefits in treating acute myeloid leukemia in adults over the age of 70.  CLOLAR received an initial FDA approval for the treatment of ALL in December 2004, and is expecting FDA approval for the new indication in early 2009.


  • Downstream® System   (TherOx):The TherOx Downstream® System uses SuperSaturatedOxygen Therapy (SSO2) to attempt to reduce the size of myocardial infarctions by perfusing the affected heart muscle with blood that has been super-saturated with oxygen.   The desired effect of SSO2 Therapy is to reduce infarct size and thus preserve heart function. The applicant expects FDA approval in the second quarter of 2009.


  • 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.


  • 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”). The IBV Valve System received a Humanitarian Device Exemption (“HDE”) FDA approval on October 24, 2008, but cannot be sold on the market until it receives Institutional Review Board (“IRB”) approvals from the sites participating in its clinical trials.


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


  • Labor and Delivery Patient Days:   CMS is proposing to count in the Medicare DSH calculation patient days associated with beds for labor and delivery (L&D) days 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 is proposing to exclude all observation beds and patient days from the DSH calculation because a patient who is receiving observation services is considered an outpatient, not an inpatient. This proposal would be consistent with the fact that observation days are not deducted from a beneficiary’s inpatient hospital benefit. This proposed change would also apply to the available bed count used for IME payment purposes.


  • Aggregating Inpatient Days for DSH:   CMS is proposing to 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 is proposing to preclude hospitals from “double-counting” days should they change their methodology.


             Graduate Medical Education (GME) Proposal:  CMS is proposing to clarify the definition of a new medical residency training program in the regulations.  The regulations specify that a new medical residency program is one that receives initial accreditation for the first time, as opposed to a reaccreditation of a program that existed previously at the same or another hospital.    In addition, CMS is proposing to specify that a new hospital that begins training residents for the first time after July 1 would be permitted to submit a Medicare GME affiliation agreement prior to the end of its cost reporting period 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 proposing to amend 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.  In addition, CMS is proposing to specify that CMS will waive EMTALA sanctions for an inappropriate transfer and for the redirection or relocation of an individual to receive a medical screening examination at an alternate location only if the hospital does not discriminate based on the source of an individual’s payment or ability to pay.  Finally, CMS is proposing that a waiver of EMTALA sanctions may apply to a portion of an emergency area or a portion of an emergency period.


             Critical Access Hospital (CAH) Proposal: Consistent with section 148 of the Medicare Improvements for Patients and Providers Act, CMS is proposing that a CAH may receive reasonable cost-based payment for outpatient clinical diagnostic laboratory tests furnished to an individual receiving services directly from the CAH even if the individual is not physically present in the CAH at the time the laboratory specimen is collected.  CMS is proposing that in order for the individual to be determined to be receiving services directly from the CAH, the individual must either receive outpatient services in the CAH on the same day the specimen is collected or the specimen must be collected by an employee of the CAH. 


             American Recovery and Reinvestment Act of 2009 Implementation:  In the final IPPS rule for 2008, CMS announced that it was maintaining the capital IPPS teaching adjustment for FY 2008, but would begin phasing it out in FY 2009 by reducing it by 50 percent, and eliminate it entirely in FY 2010.  The American Recovery and Reinvestment Act of 2009 (ARRA), enacted on February 17, 2009, directed CMS not to apply the 50 percent adjustment in FY 2009, but specified that the ARRA provision would not affect the phase-out of the capital IPPS teaching adjustment for FY 2010 and subsequent fiscal years.  CMS is updating the regulations to reflect that ARRA requires the full capital IME adjustment be paid in FY 2009.  CMS is soliciting public comments on its implementation of the ARRA provision.




             LTCH PPS Market Basket:  CMS currently uses the rehabilitation, psychiatric, 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.  Currently, the RPL market basket is based on FY 2002 data for freestanding inpatient rehabilitation facilities (IRFs), freestanding inpatient psychiatric facilities (IPFs) and LTCHs.  At the time, there were too few LTCHs to generate data to develop a market basket specific to their patient populations, but with the rapidly increasing number of LTCHs since 2002, it may be possible in the future to create a market basket based solely on LTCH data.  CMS is proposing to continue using the FY 2002-based RPL market basket for RY 2010, but the proposed rule also discusses the prospect of developing separate market baskets in the future for LTCHs, IRFs, and IPFs. Using the FY 2002-based RPL market basket, CMS is projecting a market basket update of 2.4 percent for RY 2010.  This includes increases in both the operating section and the capital section of the FY 2002-based RPL market basket.  The market basket will be updated in the final rule based on more recent data.


             Outlier Threshold:   CMS is projecting that the total outlier payments in RY 2009 will be approximately 6.1 percent of total LTCH PPS payments, 1.9 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 proposing to decrease the LTCH outlier threshold in RY 2010 to $16,059.  This is the amount currently projected to keep LTCH outlier payments at 8 percent of total payments under the LTCH PPS in RY 2010. 


The proposed 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:




CMS will accept comments on the proposed rule until June 30, and will respond to them in a final rule to be issued by August 1, 2009.


For more information, please see:




# # #