Press Releases



The Centers for Medicare & Medicaid Services (CMS) is working to ensure continued and even greater quality of care in America's acute care hospitals.  Under a proposed rule issued today by CMS, acute care hospitals that submit data on 10 quality measures established by the Secretary are projected to receive a 3.2 percent increase in their payment rates for inpatient services in fiscal year 2006.


Only those hospitals that are participating in Medicare’s quality reporting initiative will receive the full 3.2 percent increase. As required by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act or MMA), hospitals that do not submit quality information will receive an update that is 0.4 percentage points lower, or 2.8 percent.


The Hospital Inpatient Prospective Payment System (IPPS) proposed rule strengthens the voluntary quality reporting program mandated by Congress in the MMA.   In addition to the annual update, the proposed changes for 2006 include a number of requirements to strengthen and improve the accuracy of the data reported.  In order to receive the full payment for FY 2006, hospitals must correctly abstract and report clinical data.  In addition, hospitals must have two consecutive quarters of publishable data.


In FY 2005, 98 percent of the nearly 4,000 acute care hospitals in the country agreed to provide the quality data.  The comparative information is now available at  Already 3,717 hospitals have signed up to submit quality data for FY 2006.


“We’re pleased with the strong initial response to tying payment levels to reporting on quality of care,” said CMS Administrator Mark B. McClellan, M.D., Ph.D.  “We’re particularly pleased that many hospitals have gone beyond the minimum quality reporting requirements, and we expect to build on this success in the coming year.”


Additional quality measures that are now in the planning stage include information on how hospitals are reducing rates of hospital-related infections.   Already many hospitals are voluntarily reporting up to 17 measures of care for three common, serious health conditions ‑ heart attack, heart failure and pneumonia ‑ even though only ten measures are required to qualify for the full update.


CMS projects that the combined impact of the inflation update and other proposed changes will yield an average 2.5 percent increase in payments for operating costs for urban hospitals in fiscal year 2006, while rural hospitals will see an average increase of 2.6 percent.  Compared to fiscal year 2005, total Medicare payments to acute care hospitals under the IPPS in FY 2006 are projected to increase by $2.4 billion.


CMS is proposing to revise several of the existing DRGs to improve the accuracy of payment.  The presence of a principal diagnosis of curvature of the spine or malignancy has a significant impact on resource use for spinal fusion patients.  Accordingly, CMS is proposing to split the spinal fusion DRGs to allow higher payment for spinal fusion cases based on the presence of such conditions as scoliosis, malignant neoplasm of the vertebra, or pathologic fracture.


CMS is also proposing to refine the DRGs associated with insertion of coronary artery stents by replacing DRGs 516 and 526 with four new DRGs, defined based on the presence or absence of a secondary diagnosis on the list of comorbidities and complications.  Those DRGs with secondary diagnoses would be assigned higher weights and be paid at a higher amount than those without.


In addition, CMS is proposing to create a separate DRG for revisions of hip and knee replacements.  This proposal is based on data showing that revisions are significantly more costly than the original replacements of these joints.


The proposed rule would also expand the number of DRGs that are subject to the postacute care transfer policy.   The Medicare statute authorizes CMS, under certain circumstances, to treat a discharge to a postacute care provider as a transfer, which may result in a decreased payment to the hospital under the IPPS.  According to the statute, DRGs that have a high volume of discharges to postacute care facilities and a disproportionate use of postacute care services are appropriate for consideration for the postacute care transfer policy.  The purpose of this policy is to protect Medicare from paying for the same care twice: once as part of the hospital’s payment for the DRG, and then as a separate payment to the postacute facility.  Currently, thirty DRGs are subject to the postacute care transfer policy. 


In developing this proposed rule, CMS considered subjecting all DRGs to the postacute care transfer policy.  However, CMS is now proposing to focus the postacute care transfer policies on DRGs meeting all of the following criteria:


  • The DRG has at least 2,000 postacute care transfer cases.
  • At least 20 percent of the cases in the DRG are discharged to postacute care.
  • Out of the cases discharged to postacute care, at least 10 percent occur before the average length of stay.
  • The DRG has an average length of stay of at least 3.0 days.
  • If the DRG is one of a paired set of DRGs based on the presence or absence of a comorbidity or complication, both paired DRGs are included if either meets the above criteria.


Under these proposed criteria, CMS projects that 223 DRGs, or less than 50 percent of all DRGs, would be subject to the postacute care transfer policy.


“We are proposing to expand the postacute care transfer policies to less than half of DRGs, because this is the approach that makes clinical sense and is fair to hospitals, fair to beneficiaries, and fair to the taxpayer,” said Dr. McClellan.  “It will make our payments more appropriate for beneficiaries who are transferred relatively quickly to postacute care settings.”


If the proposed expansion of the postacute care transfer policy is adopted in the IPPS Final Rule for FY 2006, CMS also plans to instruct the fiscal intermediaries that process hospital claims to modify existing program safeguards to identify and adjust payments for claims subject to the expanded postacute care transfer policy, effective October 1, 2005.  These safeguards were first implemented on January 1, 2004, to assure accurate payments for discharges subject to the postacute care transfer policy.


The proposed rule would also revise the share of Medicare's inpatient hospital payments that are attributable to hospital labor costs.   This portion of Medicare’s rates is adjusted to reflect area differences in the wage rates paid by hospitals to their employees.  For hospitals that have labor costs that are greater than the national average, the proposed rule would reduce from 71.1 to 69.7 percent the portion of the Medicare rates that is adjusted for area differences in wages.  The result would be a very small reduction in the rates paid to these hospitals. For all other hospitals, the statute requires the labor-related portion of Medicare's inpatient hospital rates to equal 62 percent. The rule does not propose any change to this figure. Any savings associated with the proposed change in the labor-related portion of Medicare's rates will be returned to all hospitals nationally through a higher base rate of payment.


The proposed rule will appear in the May 5 Federal Register.  Comments will be accepted until June 24, 2005, and a final rule will be published by August 1, 2005.  The new policies and payment rates will become effective October 1, 2005.


Note: For more information, visit the CMS Website at