Fact sheet



OVERVIEW:  On April 24, 2012, the Centers for Medicare & Medicaid Services (CMS) issued a proposed rule that would update Medicare payment policies and rates for inpatient stays in acute care hospitals under the Inpatient Prospective Payment System (IPPS) and hospitals paid under the Long-term Care Hospitals (LTCH) Prospective Payment System (PPS) in fiscal year (FY) 2013.  The proposed rule also proposes the payment update that would be used to calculate FY 2013 target amounts for certain hospitals excluded from the IPPS, such as cancer and children’s hospitals, and religious nonmedical health care institutions.

The proposed rule, which would apply to approximately 3,400 acute care hospitals and approximately 440 LTCHs, would generally be effective for discharges occurring on or after October 1, 2012.  Under the proposed rule, payment rates for inpatient stays in general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program would be increased by 2.3 percent.  Those that do not successfully participate in the IQR Program would receive a 2.0 percentage point reduction or a payment rate update of 0.3 percent.  CMS projects that the rate increase, together with other policies in the proposed rule and projected utilization of inpatient services, would increase Medicare’s operating payments to acute care hospitals by approximately $904 million, or 0.9 percent, in FY 2013.  However, after taking into account the expiration of certain statutory provisions that provided special temporary increases in payments to hospitals and other proposed changes the IPPS payment policy, CMS projects that total Medicare spending on inpatient hospital services will increase by about $175 million in FY 2013.

Medicare payments to LTCHs in FY 2013 are projected to increase by approximately $100 million or 1.9 percent as compared to FY 2012 Medicare payments.  In addition, CMS projects that LTCHs will not experience a decrease in Medicare payments for FY 2013 of approximately $170 million as a result of the proposed 1-year extension of the moratorium on the application of the “25 percent threshold” payment adjustment policy.

This fact sheet discusses major payment provisions of the proposed rule.  A separate fact sheet on proposals relating to quality issues is available on the CMS Web page at:


BACKGROUND:  By law, CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS and long-term care hospitals under the LTCH PPS. These prospective payment systems set rates prospectively 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 for the case based on the payment classification – MS-DRGs under the IPPS and MS-LTC-DRGs under the LTCH PPS ‑ assigned at discharge.  Medicare law requires CMS to update the payment rates for IPPS hospitals annually to account for changes in the costs of goods and services used by these hospitals in treating Medicare patients (known as the hospital “market basket”), as well as for other factors.  The law exempts critical access hospitals (CAHs), children’s hospitals, certain cancer hospitals, and certain other facilities from payment under the IPPS. 

Until FY 2008, discharges from acute care hospitals were classified into one of 538 CMS-diagnosis-related groups (DRGs).  In FY 2008, CMS replaced the 538 DRGs with 745 MS-DRGs that provide higher payment for more severely ill or injured patients and lower payment for all other cases.  Since FY 2008, CMS has modified these MS-DRGs through notice and comment rulemaking, bringing the total number of MS-DRGs to 751.

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, the LTCH PPS adopted MS-LTC-DRGs in FY 2008.


Proposed Changes to Payment Rates under the IPPS:  The proposed rule would increase IPPS operating payment rates by 2.3 percent.  This reflects a projected update of 3.0 percent for the hospital market basket adjusted by a multi-factor productivity adjustment of -0.8 percentage point and an additional -0.1 percentage point in accordance with the Affordable Care Act; and increased by a 0.2 percent for documentation and coding. 

Proposals to Continue Implementing the Affordable Care Act: 

Hospital Readmissions Reduction Program: Section 1886(q) of the Social Security Act, as added by section 3025 of the Affordable Care Act establishes the Hospital Readmissions Reduction Program, which requires CMS to reduce payments to certain hospitals with excess readmissions, effective for discharges beginning on or after October 1, 2012. 

In the FY 2012 IPPS Final Rule, CMS began implementation of the Readmissions Reduction Program and finalized the following policies:

  • The use of three 30-day readmission measures—Acute Myocardial Infarction (AMI), Heart Failure (HF) and Pneumonia (PN), endorsed by the National Quality Forum for FY 2013 and FY 2014;
  • The definition of “readmission” as generally referring to an admission to an acute-care hospital paid under the IPPS within 30 days of a discharge from the same or another acute-care hospital (subject to technical issues addressed in the proposed rule);
  • The calculation of a hospital’s excess readmission ratio for AMI, HF and PN, which is a measure of a hospital’s readmission performance compared to the national average for the hospital’s set of patients with that applicable condition; and
  • A policy to use three years of discharge data and a minimum of 25 cases to calculate a hospital’s excess readmission ratio for each applicable condition.   Therefore, for FY 2013, the excess readmission ratio will be based on discharges occurring during the 3-year period of July 1, 2008 to June 30, 2011.

In the FY 2013 IPPS Proposed Rule, CMS is proposing a methodology to calculate the readmissions adjustment factor which is the higher of a ratio of a hospital’s aggregate dollars for excess readmissions to their aggregate dollars for all discharges, or 0.99 (i.e., a 1.0 percent reduction) for FY 2013. CMS proposes to apply the readmission adjustment factor to a hospital’s base operating DRG payment amount and estimates that the Hospital Readmissions Reduction Program will result in a 0.3 percent, or approximately $300 million, decrease in overall payments to hospitals.

Hospital Value-Based Purchasing (VBP) Program:   The proposed rule includes proposals that address operational details relating to payment rates to hospitals in FY 2013 (the first year that the program’s payment implications will go into effect), as well as additional proposed measures and policies that would affect payment rates to hospitals in FY 2015 and FY 2016.

Proposed Documentation and Coding Adjustments:

The proposed rule would complete all documentation and coding adjustments for FY 2008 and FY 2009 as required by the TMA, Abstinence Education, and QI Programs Extension Act of 2007, while continuing to ensure that the new coding system introduced in 2008 is budget neutral.

Below is a summary of documentation and coding and adjustments that will affect the FY 2013 IPPS update:

  • Remaining FY 2008 and FY 2009 Prospective Documentation and Coding Adjustment     1.9 percent
  • Restoration of One-Time 2012 Recoupment Adjustment     +2.9 percent
  • Additional FY 2010 Prospective Documentation and Coding Adjustment  -0.8 percent
  • Total   0.2 percent

Other Proposals Included in the IPPS Proposed Rule:

Proposed changes to MS-DRG Classifications:  CMS is proposing a MS-DRG modification involving cases with both influenza and more severe types of pneumonia.  The proposal would move cases with principal diagnosis code 487.0 (Influenza with pneumonia) and an additional code for a more severe type of influenza from MS-DRGs 177-179 (Respiratory infections & inflammations w MCC, w CC, w/o CC/MCC) to MS-DRGs 193 – 195 (Simple pneumonia and Pleurisy w MCC, w CC, w/o CC/MCC).

Proposed inclusion of Labor and Delivery Beds in the Available Bed Count for the Disproportionate Share Hospital (DSH) Adjustment and Indirect Medical Education (IME) Adjustment:  CMS is proposing to include labor and delivery days in the count of available beds for purposes of both the Medicare DSH and IME adjustments.  This proposal would align with the CMS policy, adopted in FY 2010, to include labor and delivery days in the patient count for the Medicare DSH adjustment. 

Postponement of “Services under Arrangement” Requirements:   Under Medicare law, routine services, such as intensive care and general room and board, must be furnished directly by the hospital to its Medicare beneficiaries and cannot be provided under arrangement by another entity.  In the FY 2012 IPPS/LTCH final rule CMS clarified this policy.  Some hospitals have stated they need additional time to restructure existing arrangements and establish necessary operational protocols to comply with the policy clarification included in the FY 2012 IPPS/LTCH final rule.  Therefore, CMS is proposing to postpone the effective date of the policy that limits “services under arrangement” to diagnostic and therapeutic services.  This policy would now be effective for hospital cost reports beginning on or after FY 2014.

Graduate Medical Education (GME):  CMS is including several proposals and clarifications of existing policy regarding GME in this proposed rule.  CMS is proposing a change to the regulations regarding the timeframe for new teaching hospitals to establish their caps for new programs from 3 years to 5 years.  CMS is also proposing policies regarding the 5-year period following the implementation of reductions and increases to hospitals’ full-time equivalent (FTE) resident caps under section 5503 of the Affordable Care Act.  CMS is also proposing changes and clarifications of existing policy related to the application of section 5506 of the Affordable Care Act, which preserves resident cap positions from closed hospitals.  In addition, CMS is proposing to clarify that timely filing rules for claims submission apply to no-pay claims submitted by hospitals to receive indirect medical education, direct medical education and nursing and allied health education payments for Medicare Advantage beneficiaries.  CMS is also proposing to apply the timely filing requirements to the submission of no-pay bills for purposes of calculation the DSH adjustment.

Proposals Relating to Quality Improvement

  • Proposed additions to the list of Hospital Acquired Conditions (HACs):  CMS is proposing to add two categories of conditions to the list of HACs in FY 2013.  The two proposed additional HACs are Surgical Site Infection Following Cardiac Implantable Electronic Device (CIED) and Iatrogenic Pneumothorax with Venous Catheterization. 
  • Hospital Inpatient Quality Reporting (IQR) Program:  The proposed rule would continue to strengthen and streamline the IQR Program by proposing to add new measures and also to retire certain measures from the program for which reporting rates are approaching optimal performance.  The proposed rule would also modify and streamline the validation process for the IQR program.

Expiring Provisions of the Affordable Care Act

Medicare-Dependent Hospital (MDH) Program: Section 3124 of the Affordable Care Act extended the MDH program from the end of FY 2011 (that is, for discharges occurring before October 1, 2011) to the end of FY 2012.  The MDH program will expire at the end of FY 2012 (that is, with discharges occurring after September 30, 2012). Accordingly, beginning in FY 2013, hospitals that currently benefit from the MDH program will instead be paid based on the Federal rate under the IPPS.

Low-Volume Hospital Payment Adjustment:  Sections 3125 and 10314 of the Affordable Care Act amended the low-volume hospital payment adjustment by temporarily revising the definition of a low-volume hospital and the methodology for calculating the low-volume hospital payment adjustment.  For FY 2011 and FY 2012, a hospital could be a low-volume hospital under these sections if it was more than 15 road miles from other IPPS hospitals and had fewer than 1,600 Medicare discharges.  Payment adjustments were made on a sliding scale with a higher adjustment for hospitals with fewer discharges and a lower adjustment for hospitals with higher discharges.

Effective for FY 2013 and forward, the low-volume hospital definition and payment adjustment methodology will return to the pre-Affordable Care Act definition and payment adjustment methodology.  That is, in order to qualify as a low-volume hospital, an IPPS hospital must be more than 25 road miles from other IPPS hospitals and have fewer than 200 total discharges (both Medicare and non-Medicare) during the fiscal year.  Hospitals that qualify for the low-volume hospital adjustment will receive a 25 percent adjustment as they did prior to the Affordable Care Act, rather than an adjustment based on a sliding scale.


Proposed Changes to Payment Rates under the LTCH PPS:  CMS projects that LTCH PPS payments would increase by 1.9 percent, or approximately $100 million, in FY 2013 as compared to FY 2012 under the proposed rule.  This estimated increase is attributable to several factors, including the proposed update of 2.1 percent (based on a proposed market basket update of 3.0 percent reduced by a multi-factor productivity adjustment of 0.8 percentage point and an additional 0.1 percentage point reduction in accordance with the Affordable Care Act), the proposed “one-time” adjustment of -0.98374 to the FY 2013 standard Federal rate (which is not applicable to payments for discharges occurring on or before December 28, 2012), and projected increases in estimated high cost outliers and decreases in short-stay outlier (SSO) payments due to a change in the SSO payment methodology effective for discharges occurring on or after December 29, 2012.

LTCH Quality Reporting Program proposals:  CMS is proposing the measures that will be used for LTCHs for the FY 2015 and FY 2016 payment determinations.  In addition, CMS is proposing five new quality measures for the FY 2016 payment determinations.

The LTCH Quality Reporting Program ties a portion of an LTCH's payment to its participation in the Program. LTCHs that do not comply with the new LTCH quality reporting program will see their yearly Federal update payments reduced by two percentage points beginning in FY 2014.

Expiration of moratoria established under the Medicare Statute:  In the Medicare, Medicaid and SCHIP Extension Act of 2007, Congress imposed a three-year moratorium on the effective date of certain LTCH PPS payment policies.  At the same time, Congress imposed a three-year moratorium on the development of new LTCHs and LTCH satellites and on increases in the number of LTCH beds in existing LTCHs and LTCH satellite facilities, unless and exception applied.  The payment policies subject to the moratorium included:

  • The inclusion of the “IPPS comparable per diem amount” option for very short stay cases in the short-stay outlier (SSO) payment formula;
  • The implementation of the “25 percent threshold” payment adjustment; and
  • The application of a one-time prospective adjustment to the standard Federal rate.

The Affordable Care Act extended the moratoria for two more years, with the moratoria expiring at various times during CY 2012.

With the expiration of the moratoria, CMS will apply the “IPPS-comparable per diem amount” option to payment determinations made under the SSO policy for discharges with a certain length of stay beginning on and after December 29, 2012.  However, CMS is proposing a 1-year extension of the existing moratorium on the implementation of the “25 percent threshold” payment policy, effective with cost reporting periods beginning on or after October 1, 2012 and before October 1, 2013.

CMS is also proposing to apply a one-time prospective adjustment to the standard Federal rate so that the effect of any significant difference between the data used in the original computations for budget neutrality for FY 2003 and more recent data to determine budget neutrality for FY 2003 is not perpetuated in the prospective payment system for future years.   CMS is therefore proposing a permanent 3.75 percent payment reduction to the standard Federal rate to be phased in over three years.  The proposed adjustment for FY 2013 would be about -1.3 percent.  The proposed adjustment would not apply to payments for discharges on or before December 28, 2012, consistent with the statute.

Development of the Long-Term Care Hospital-specific Market Basket- CMS is proposing to adopt a stand-alone LTCH-specific market basket based solely on Medicare cost report data submitted by LTCHs that would specifically reflect the cost structures of LTCHs.  This market basket would replace the Rehabilitation, Psychiatric, and Long-Term Care Hospital (RPL) market basket currently used under the LTCH PPS.


The Affordable Care Act included a number of provisions that would take steps to advance quality reporting in health care settings other than acute care hospitals and LTCHs, such as inpatient psychiatric facilities and cancer hospitals.  In addition, the Tax Relief and Health Care Act of 2007 authorized CMS to establish a quality reporting program for ambulatory surgical centers.  Proposals for implementing these statutory provisions are discussed in the separate fact sheet addressing quality issues.

CMS will accept comments on the proposed rule until June 25, 2012, and will respond to all comments in a final rule to be issued by August 1, 2012.  The proposed rule can be downloaded from the Federal Register at:


The proposed rule will appear in the May 11, 2012 Federal Register.

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