MEDICARE PART A. James F. Flynn, Esq. Bricker & Eckler, LLP 100 South Third Street Columbus, Ohio (614)

MEDICARE PART A James F. Flynn, Esq. Bricker & Eckler, LLP 100 South Third Street Columbus, Ohio 43215 (614) 227-8855 JFLYNN@BRICKER.COM A. KEY PART A TERMS TO KNOW 1. Medicare Administrative Contractor or MAC (formerly known as Fiscal Intermediary ). Medicare reimbursement of Part A services has historically and primarily been handled by private insurance companies under contract with CMS. Historically, these companies were referred to as fiscal intermediaries. Beginning in 2006, CMS began transitioning the role and title of fiscal intermediaries (sometimes referred to as FI or just intermediary ) to the more global term for all contractors (including carriers and Durable Medical Equipment Regional Carriers, or DMERCs), called Medicare Administrative Contractors ( MACs ). The transition has been slow to take hold. Throughout this outline, the term MAC is used, although in all cases prior to 2006 such term would describe the fiscal intermediary. 2. Providers. As stated in the Introduction to Medicare outline, the terms provider and supplier have special meanings within the Medicare program. Medicare Part A has generally been limited to the specific list of providers used in the definition of that term: a hospital, a critical access hospital ( CAH ), a skilled nursing facility ( SNF ), a comprehensive outpatient rehabilitation facility ( CORF ), a home health agency ( HHA ) and a hospice program. 1 3. Prospective Payment System ( PPS ). Prospective payment systems figure prominently in Part A reimbursement. Generally, a prospective payment system is a method of reimbursement in which Medicare payment is made based on a predetermined, fixed amount. The payment amount for a particular service is derived based on the classification system of that service (for example, diagnosisrelated groups ( DRGs ) for inpatient hospital services). 2 4. PPACA (ACA) and Health Care Reform. What is commonly referred to as health care reform is contained in two separate legislative enactments that became law within a week of each other. The first is the Patient Protection and Affordable Care Act ( PPACA, or sometimes referred to as just ACA ), 1 42 U.S.C.A. 1395x(u). 2 CMS Glossary at http://www.cms.hhs.gov/apps/glossary/. 1

enacted on March 23, 2010 (H.R. 3590, Pub. L. 111-148). The second is the Health Care and Education Reconciliation Act of 2010 ( HCERA ), enacted on March 30, 2010 (H.R. 4872, Pub. L. 111-152). PPACA and HCERA (collectively referenced herein as PPACA ) impact Medicare reimbursement, while not directly changing the Medicare reimbursement systems. Prior to PPACA, the three most significant and relatively recent legislative acts relating to Medicare are also referenced in this outline: the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ( MMA ), enacted on December 8, 2003 (Public Law 108-173), the Deficit Reduction Act of 2005 ( DRA ), enacted on February 8, 2006 (Public Law 109-171), and the Medicare Improvements for Patients and Providers Act of 2008 ( MIPA ), enacted on July 18, 2008 (Public Law 110-275). B. OVERVIEW FIVE COMPONENTS OF REIMBURSEMENT Medicare reimbursement principles are relatively complex because they encompass more than just payment for medical items and services. The key to understanding how Medicare reimburses providers, physicians and suppliers involves a thorough understanding of the basic components that comprise the Medicare reimbursement system. REIMBURSEMENT THE FIVE COMPONENTS ELIGIBILITY COVERAGE CERTIFICATION PAYMENT ASSIGNMENT/ REASSIGNMENT Is the individual eligible for Medicare benefits? Is the item or service covered by Medicare? Is the provider of the item or service permitted to participate in the Medicare program? (i.e., certified as a Medicare provider) How does Medicare pay for the item or service? Who is entitled to receive the Medicare payment? C. ELIGIBILITY The first component in analyzing the potential reimbursement issues associated with a proposed Medicare service or supply is to determine whether the individual is eligible for Medicare benefits, and if so, when the effective date of Medicare eligibility began. Eligibility criteria are discussed above in the Introduction to Medicare section of the outline. 2

D. COVERAGE WHAT DOES PART A COVER? Generally, Medicare Part A covers inpatient hospitalization as well as rehabilitation and long-term care hospital coverage. Part A beneficiaries also may receive hospice care, SNF services and care that is provided by a home health aide, or that is furnished by a home health agency on a part-time basis in the beneficiary s home. 3 PPACA did not materially change the scope of Part A coverage. 1. Hospital Services Inpatient hospital coverage includes the cost of a semi-private room, meals, general nursing services, operating and recovery room, intensive care, inpatient prescription drugs, laboratory tests, X-rays, psychiatric hospital, inpatient rehabilitation and long term care hospitalization when medically necessary, as well as all other medically necessary services and supplies provided in the hospital. Part A coverage is available for each day of inpatient hospital care up to a maximum of ninety days per spell of illness. However, the amount payable for inpatient hospital services is reduced by a higher deductible and a coinsurance charge for the 61 st through 90 th day of hospitalization. Each Medicare beneficiary also has a lifetime reserve of 60 additional days; again, however, the amount of coverage is further reduced by an increase in the coinsurance charge for the 91 st through the 150 th day of hospitalization. 4 2. Extended Care Services in a Skilled Nursing Facility ( SNF ) Medicare-covered extended care services in a SNF are similar to those for inpatient hospital care, but also include certain rehabilitation services and appliances. 5 Part A coverage is available for each day of extended care or SNF services up to a maximum of 100 days per spell of illness and is subject to a coinsurance charge. 6 Medicare covers SNF services if a beneficiary has been an inpatient of a hospital for at least three consecutive calendar days (often referred to as the qualifying hospital stay ) and is transferred to a participating SNF within thirty days after discharge from the hospital. 7 Such services also must be certified (and subsequently recertified) as medically necessary by a physician, a clinical nurse or a nurse practitioner. 8 3 Certain medical supplies and durable medical equipment also may be covered under Medicare Part A. 42 U.S.C.A. 1395x(m). 4 42 U.S.C.A. 1395e(a)(1), 1395e(a)(3); Chapter 3, Medicare Benefit Policy Manual (Pub. 100-02). 5 42 U.S.C.A. 1395i-3(a) ; Chapter 8, Medicare Benefit Policy Manual (Pub. 100-02). 6 42 U.S.C.A. 1395e(a)(3); Chapter 3, Medicare Benefit Policy Manual (Pub. 100-02). 7 42 C.F.R. 409.30; Chapter 8, Medicare Benefit Policy Manual (Pub. 100-02). 8 42 C.F.R. 424.10 (general certification) and 42 C.F.R. 424.20 (SNF certification). As a general rule, Medicare will not cover items or services which are not deemed to be reasonable and necessary for the diagnosis or treatment of an illness or injury (see 42 U.S.C.A. 1395y(a)(1)); however, to avoid potential overutilization in the delivery of certain services and equipment, Medicare may require a physician s certification to explain why the service or equipment is necessary. 3

3. Home Health Care Services Medicare provides coverage for certain part-time or intermittent medical, nursing and therapy services furnished to individuals in their homes by home health agencies ( HHAs ). 9 Medicare covers home health care services that are furnished in the beneficiary s home (defined as any place in which a beneficiary resides that is not a hospital, SNF or nursing facility), or in an outpatient setting, which may include a hospital, SNF or rehabilitation center. In order to qualify for home health care, a Medicare beneficiary must be confined to the home, under the care of a physician, receiving services under a plan of care established and periodically reviewed by a physician, be in need of skilled nursing care on an intermittent basis, or physical therapy or speech-language pathology or have a continuing need for occupational therapy. HHA-covered services do not include drugs, biologicals, housekeeping or transportation services. 10 Historically, HHA services were covered entirely under Medicare Part A for an unlimited number of visits. However, for beneficiaries enrolled in Part A and Part B, the Balanced Budget Act of 1997 modified the scope of the home health benefit for these beneficiaries and partially transferred Medicare payment for HHA services from Part A to Part B, as follows: Beneficiaries Enrolled in Both Part A and Part B. Post-institutional HHA services for individuals enrolled in Part A and Part B are covered under Part A. A post-institutional service follows a beneficiary s stay in a hospital or SNF for three or more days. Post-institutional HHA services furnished during a home health spell of illness are covered under Part A for up to 100 visits if the first visit is rendered within 14 days of discharge from a hospital or SNF. 11 Part B covers HHA services in instances where the consecutive day stay or the 14-day initiation of care requirement is not met. Part B also covers the balance of the home health spell of illness once a beneficiary exhausts 100 visits of post-institutional HHA services. Beneficiaries Enrolled in Part A Only or Part B Only. All HHA services are covered under Part A for beneficiaries enrolled in Part A only. Similarly, Part B covers all of the HHA services for beneficiaries enrolled only in Part B. 9 42 C.F.R. 409.44-.45. The courts have interpreted intermittent to mean six or fewer days of the week and part-time to mean less than eight hours per day. Duggan v. Bowen, 691 F. Supp. 1487 (D.D.C. 1988) and Visiting Nurses Ass n. v. Thompson, 378 F.Supp. 2d 75 (E.D. NY 2004). However, Medicare generally will not pay for home health care that exceeds 28 hours per week without special documentation and/or medical justification. Home Health Agency (Paper) Manual (CMS Pub. 11) 206.7; Chapter 7, Medicare Benefit Policy Manual (Pub. 100-02), 50.7. 10 42 U.S.C.A. 1395x(m), 1395f(a)(2)(C); 1395n(a)(2)(A); 42 C.F.R. 409.42,.47,.49. 11 42 U.S.C.A. 1395x(tt)(1). 4

The 100-visit limit does not apply to beneficiaries who are enrolled either in Part A or in Part B, but not both. 4. Hospice Services Hospice care is a benefit under Part A provided to individuals who make an affirmative election to receive this benefit. To be eligible to elect for hospice care, an individual must be certified as terminally ill i.e., the medical prognosis is that the individual s life expectancy is six months or less if the illness runs its normal course. Such care includes pain relief, supportive medical and social services, physical therapy, nursing services and symptom management. Beneficiaries must elect to receive hospice care in periods. There are two 90- day hospice benefit periods, followed by an unlimited number of 60-day periods. At the beginning of each subsequent 60-day period, the appropriate medical professional must recertify that the beneficiary is terminally ill. 12 Beginning January 1, 2011, a hospice physician or hospice nurse practitioner must have a face-to-face encounter with each hospice patient whose total stay is anticipated to go into the third benefit period. 13 By electing to receive hospice care, beneficiaries waive their right (with certain exceptions) to receive Medicare benefits other than the hospice benefits. 5. Coverage Determinations National coverage determinations or NCDs are determinations made by CMS with respect to whether or not a particular item or service is covered nationally by Medicare but does not include a determination of what code, if any, is assigned to a particular covered item or service. 14 Once published in a CMS program instruction, an NCD is binding on all MACs, QIOs and MA organizations as well as ALJs during the claims appeal process. The Medicare coverage database also includes several other types of national coverage policy-related documents, including national coverage analyses (NCAs), coding analyses for labs (CALs), Medicare Evidence Development & Coverage Advisory Committee (MEDCAC) proceedings, and Medicare coverage guidance documents. 15 Local medical review policies ( LMRPs ) or local coverage determinations ( LCDs ) are contractor-specific policies that offer coverage and coding guidance 12 42 U.S.C.A. 1395x(dd)(1); 42 C.F.R. 418.20-.30. 13 76 Fed. Reg. 47331 (Aug. 4, 2011). 14 42 U.S.C.A. 1395ff(f)(1)(B). 15 See http://www.cms.hhs.gov/mcd/overview.asp. 5

for providers, physicians and suppliers in the MAC s specific geographic area. 16 ALJs may consider, but are not bound by, LMRPs. Both NCDs and LCDs are posted to a CMS website that is updated monthly. 17 The Benefits Improvement and Protection Act of 2000 (BIPA), as amended by the MMA, made significant changes with respect to the timing and circumstances under which coverage determinations may be challenged and appealed. 18 E. CERTIFICATION HOW DOES A PROVIDER PARTICIPATE IN THE MEDICARE PROGRAM? Another component in analyzing the potential reimbursement issues associated with a proposed Medicare item or service is determining whether the provider of a service or supply is certified to participate in the Medicare program. The Secretary of HHS uses conditions of participation ( CoPs ) to establish a provider s eligibility for participation in the Medicare program. 19 The CoPs are detailed facility and operational standards and requirements to which providers must adhere in order to receive reimbursement from Medicare. Compliance with the CoPs is determined by the state department of health or similar agency that acts on behalf of HHS to survey, inspect and certify providers for program participation under an agreement with HHS. Certain providers may be deemed to have satisfied the CoPs without a state survey if they have received full accreditation from The Joint Commission (formerly known as the Joint Commission on Accreditation of Healthcare Organizations, or JCAHO), the American Osteopathic Association ( AOA ) or similar private accrediting entity that surveys and inspects healthcare facilities. 20 In 2008, CMS announced the addition of another accrediting body for hospitals (the first such addition in 40 years) Det Norske Veritas Healthcare, Inc. ( DNV Healthcare ). DNV Healthcare s accreditation program is known as National Integrated Accreditation for Healthcare Organizations ( NIAHO ) and is the first hospital accreditation program in the United States that integrates the internationally recognized ISO 9001 Quality Management System with the Medicare Conditions of Participation. 21 The process to request participation in the Medicare program is called enrollment. To become enrolled, a provider must complete a CMS Form 855, depending on whether the provider is a Part A provider (CMS 855A), Part B supplier (CMS 855B), an individual health care practitioner (CMS 855I), a DMEPOS supplier (CMS 855S) or an individual reassigning their right to payment (CMS 855R). PPACA enacted new requirements for screening and monitoring potential Medicare participants for fraud, waste and abuse 16 42 U.S.C.A. 1395ff(f)(2)(B). 17 Ctrs. for Medicare & Medicaid Servs., Medicare Coverage Database at http://www.cms.hhs.gov/mcd/search.asp. 18 BIPA 521, 522; 42 C.F.R. pt. 426; MMA 731. For background regarding previous existing statutes, regulations and policies regarding coverage determinations see 67 Fed. Reg. 54,534 (proposed Aug. 22, 2002). 19 42 C.F.R. Parts 482-498. 20 42 U.S.C.A. 1395bb; 42 C.F.R. 488.5, 488.6. 21 73 Fed. Reg. 56588 (Sept. 29, 2008). 6

activities. Section 6401(a) of PPACA required the Secretary to establish procedures under which screening is conducted to providers and suppliers under Medicare, Medicaid and the Children s Health Insurance Program ( CHIP ). 22 Screening must include a licensure check, and may include criminal background checks, fingerprinting, site visits, database checks and other procedures. To pay for this activity, PPACA required the Secretary to impose a fee on each institutional provider of medical or other items or services or supplier. PPACA also provided oversight enforcement procedures, including the right to suspend payments pending an investigation of credible allegations of fraud and abuse and the right to terminate participation. PPACA required the Secretary to propose rules implementing the enrollment and participant screening and oversight procedures. On February 2, 2011, CMS issued final regulations implementing new requirements regarding enrollment screening, an enrollment application fee, payment suspension, temporary moratoria on enrollment, compliance programs and provider and supplier termination. 23 The screening procedures apply to all newly enrolling providers and suppliers effective as of March 23, 2011 as well as to currently-enrolled providers and suppliers whose revalidation is scheduled between March 25, 2011 and March 23, 2012. For all other currently-enrolled providers and suppliers, the new procedures became effective as of March 23, 2012. 24 Successfully-enrolled providers enter into a written agreement with the Secretary of HHS (the provider agreement ) wherein they agree to comply with all of the Medicare program s requirements. 25 The provider agreement is automatically renewed each year and may be terminated by the Secretary of HHS for substantial noncompliance. The Secretary of HHS also may completely exclude providers from Medicare participation for certain offenses such as patient abuse and neglect, submission of false claims, program fraud and financial misconduct. Each provider is identified by an identification number issued by HHS, commonly referred to as the provider number. A provider number is specifically linked to an entity s tax identification number and a provider number may only be used for that entity. The provider number must appear on every claim that is submitted to the Medicare program for payment. Any correspondence from the provider to the Medicare program also must contain this number. Effective May 23, 2008, CMS required every provider to obtain and use a new identifier called the National Provider Identifier (or NPI ). NPIs are unique identification numbers that are required to be used for all covered health care providers and all health plans, including Medicare, but also including all other payors and programs. Unlike the prior version of provider numbers that were specific to Medicare, NPIs were established to 22 Section 6401(a); 42 U.S.C.A. 1395cc(j). 23 76 Fed. Reg. 5682 (Feb. 2, 2011). 24 76 Fed. Reg. at 5891 (Feb. 2, 2011). 25 The basic terms of the provider agreement are contained in 42 U.S.C.A. 1395cc; 42 C.F.R. 489.10,.12,.53. 7

create uniformity across all payor types, including Medicare and Medicaid and third party payors. F. PAYMENT HOW DOES MEDICARE PAY PROVIDERS FOR PART A SERVICES? Since the inception of the Medicare program in 1965, payment to providers of services to Medicare beneficiaries has roughly been in two phases and is arguably entering into a third phase. From 1965 to 1983, providers were reimbursed for their services on a cost basis i.e., providers reported to the Medicare program how much it cost them to provide the services and the Medicare program reimbursed the provider for its costs. Recognizing that cost-based reimbursement provided little to no incentive on providers for being costeffective, the Medicare program entered a second phase of reimbursement in 1983 with the development of a prospective payment system ( PPS ) for inpatient hospital services. Generally, a prospective payment system is a method of reimbursement in which Medicare payment is made based on a predetermined, fixed amount. The payment amount for a particular service is derived based on the classification system of that service (for example, diagnosis-related groups ( DRGs ) for inpatient hospital services). 26 While PPS reimbursement is still in effect and covers most of the reimbursement to providers, a third phase of reimbursement methodology is developing payment based on performance. This outline will describe in detail PPS payment while introducing concepts being developed around payments based on performance. The majority of hospitals are paid by Medicare under the inpatient PPS methodology originally developed in 1983 and continually refined from year to year. Largely following the model used for inpatient hospital reimbursement, PPS methodologies have since been developed for each of the other major parts of Part A coverage as follows: Skilled Nursing Facilities phased in over 3 years beginning July 1, 1998 Home Health on or after October 1, 2000 Inpatient rehabilitation facilities on or after January 1, 2002 Long term care hospitals on or after October 1, 2002 Inpatient psychiatric facilities on or after January 1, 2005 1. Inpatient Hospital PPS (Operating Costs) The inpatient hospital PPS ( IPPS ) was established by the Social Security Act Amendments of 1983, which mandated Medicare to create and implement a prospective payment system for the reimbursement of hospitals. 27 Prior to this time, hospitals were paid by Medicare on a retrospective reasonable cost basis and increases in provider operating expenses were passed on to the federal government. Spiraling health care costs prompted a rethinking of the Medicare payment system by Congress and this resulted in a complete reformulation of the program s methodology for reimbursing hospitals. 26 CMS Glossary at http://www.cms.hhs.gov/apps/glossary/. 27 Social Security Act Amendments of 1983, Pub. L. No. 98-21, 97 Stat. 65, 42 U.S.C.A. 1395 ww(d). 8

In short, the IPPS rate represents the average cost, nationwide, of treating a Medicare beneficiary according to his or her medical condition. IPPS hospitals are paid a predetermined flat rate for inpatient care that is based on the patient s diagnosis at discharge. 28 The full IPPS amount is paid for each stay during which there is at least one Medicare payable day of care. The IPPS rate may exceed the hospital s full costs for treating the patient, or it may not. Any costs incurred by the hospital in excess of the IPPS amount received from Medicare must be absorbed by the hospital. (a) The Scope of Costs Included in an IPPS Payment When a hospital receives a payment under IPPS for the services provided to a Medicare patient, such amount represents Medicare s reimbursement for certain costs but not all costs. The following chart summarizes those categories of costs that are included and those that are not included in the IPPS rate: 29 WHAT IS INCLUDED AND EXCLUDED IN THE IPPS PAYMENT AMOUNT Included Costs Excluded Costs (paid separately) Inpatient Operating Outpatient Services (paid under Part B) 30 Routine Ancillary Direct Medical Education (part B) Intensive Care Organ Acquisition Malpractice Insurance Non-physician Nurse Anesthetists Preadmission Services Services Covered By Parts B, C & D Inpatient Capital-related 31 Medicare Excluded Services (b) How to Calculate an IPPS Payment Determining the payment a hospital will receive under IPPS involves the following steps: Step 1 Assignment of a patient s condition to a MS-DRG and MS-DRG weight Step 2 Multiplying MS-DRG weight by the standardized amount 28 42 C.F.R. Part 412. 29 42 C.F.R. 412.2(c)-(d). 30 While hospital outpatient services are not included in the inpatient prospective payment system, there is a prospective payment system for outpatient services under Part B, often referred to as OPPS. 31 Capital-related costs are subject to a separate prospective payment system discussed later in this outline. 9

Step 3 If applicable, including a percentage add-on for disproportionate share hospitals and/or approved teaching activities. Step 4 If applicable, determine eligibility for additional payments for outlier cases. Step 5 Determine if any other special payment adjustments apply e.g., transfer-versus-discharge, etc. Determining payment can be complicated by numerous special payments and adjustments that may figure into the calculation of the final payment amount. Also, the IPPS rate and related payment adjustments seldom remain static. The IPPS rate and adjustments routinely figure into the budgetary deliberations of Congress and are the subject of the annual IPPS rulemaking by HHS. Commonly referred to as the Inpatient PPS (or IPPS) rule, the proposed IPPS rule is typically released in early May and the final IPPS rule is typically released in early August with an effective date of October 1 each year, the beginning of the federal fiscal year. (1) Step 1 Assignment of MS-DRGs and MS-DRG Weight. Historically, IPPS used diagnosis related groups ( DRGs ) to calculate the inpatient hospital payment rate. Developed by Yale University as a patient care management system in 1969, the DRG method groups diseases by diagnosis and assigns them into case types that consider, among other things, the amount of resources needed to treat the condition. The DRGs are then organized under major diagnostic categories ( MDCs ) that relate both to single organ and multiple body systems. Each DRG had a relative value (or case mix weight) that reflects the cost of treating Medicare patients in that particular group in comparison to the treatment cost of the average Medicare case. DRG selection is determined by: Specific Principal Diagnosis. The cause for admission as determined after treatment and discharge (note this is not the preliminary diagnosis but the actual reason for the admission), and Age. The patient s age. Cases are then further subdivided based on the presence of surgery (surgical DRGs) or the absence of surgery (medical DRGs). Surgical and medical DRGs may be further differentiated by the presence or absence of: Complications. A condition which arises during an inpatient s stay that increases the patient s overall length of stay by at least one day in approximately 75 percent of cases, or Co-Morbidities. A preexisting condition that increases the patient s length of stay by one day in 75 percent of cases. 10

Beginning October 1, 2006, CMS began a three-year transition plan to change the DRG weighting system significantly. Historically, CMS weighting was based on hospital charges and cost to charge ratios. During the federal fiscal year 2007 (October 1, 2006 September 30, 2007), DRG weights were based half on costs and half on charges. For federal fiscal year 2008 (October 1, 2007-September 30, 2008), DRG weights were 2/3 rd based on costs and 1/3 rd based on charges. For federal fiscal year 2009 and since, DRG weights are determined 100% on costs. Another significant overhaul of the DRG system occurred in 2007 with severity-adjusted DRGs. Effective October 1, 2007, CMS replaced 538 DRGs with 745 new Medicare-severity DRGs or MS-DRGs. After a transition phase-in that blended payment under the old DRG system and the MS-DRG system, payment is now 100% based on the MS-DRG system. Providers may appeal the MS-DRG assignment within sixty days from the date the claim was filed. 32 There are similarities in the two systems in that both are rooted in the existence or absence of complications or co-morbidities. The MS-DRG system adds the possibility of a third category major complications and/or co-morbidities. Cases are classified into MS-DRGs for payment based on the following information reported by the hospital: the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of MS-DRGs, classification is also based on the age, sex and discharge status of the patient. The diagnosis and discharge information is reported by the hospital using codes from the ICD-9-CM (the International Classification of Diseases, 9th Edition, Clinical Modification). CMS, providers and payors were preparing for the use of a new coding system, ICD-10, which was scheduled to be effective as of October 1, 2013. However, the transition to ICD-10 has been a massive undertaking for providers, leading to resistance to the implementation date. As a result, CMS delayed the implementation date to October 1, 2014. 33 ICD-10 coding is expected to enable CMS to increase its capabilities to process diagnosis and procedures on hospital claims up to 25 diagnosis codes and 25 procedure codes. MS-DRG Weight. An appropriate weighting factor is assigned to each MS-DRG representing the average resources required to care for that specific MS-DRG relative to the average resources used to treat all MS- DRGs (the MS-DRG weight ). For example, a MS-DRG which requires more resources than average may have a weight of 2.5 while a MS-DRG which requires less resources than average may have a weight of 0.75. 32 42 C.F.R. 412.60(d). 33 77 Fed. Reg. 54664 (Sept. 5, 2012). 11

Changes to the MS-DRG weights resulting from changes in resource patterns, technology and various other factors are published in the annual IPPS rulemaking by the Secretary of HHS. (2) Step 2 The Standardized Amount. The MS-DRG weight is then multiplied by a dollar amount that is based on the average Medicare allowable operating cost per discharge (the standardized amount ) for that year (the base period ). 34 The standardized amount is divided into a labor-related and a non-labor share. a) The Labor-related Share: Wage Index. The labor component is adjusted by the wage index applicable to the area where the hospital is located. The wage index accounts for variations in area hospital labor costs (which is established by the Secretary of HHS based on an annual survey of wage and wage-related costs for short-term acute care hospitals). 35 The Secretary of HHS also is required to make an annual adjustment to the wage index. b) The Non-labor Share: Cost of Living Factor. The non-labor component is adjusted by a cost of living factor. This component is determined by whether a hospital is located in a large urban or rural area, as classified by the Medicare Geographic Classification Review Board ( MGCRB ), an independent appeals board established for this purpose under the Omnibus Budget Reconciliation Act of 1989. 36 A hospital may request that it be reclassified or re-designated to a different geographic area for purposes of using the other area s standardized amount, wage index or both. Reclassification is accomplished by appealing to the MGCRB. 37 Procedurally then, the calculation of the standardized amount is as follows: CALCULATING THE STANDARDIZED AMOUNT Step 1 (Labor component) x (MS-DRG weight) x (wage index) = A Step 2 (Non-labor component) x (MS-DRG weight) = B 34 42 U.S.C.A. 1395ww(d). 35 This data is derived from each hospital s annual Medicare cost report and reflects the earnings and paid hours of employment by occupational category. 36 Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, 103 Stat. 2106. 42 U.S.C.A. 1395ww(d)(10); 42 C.F.R. 412.230-.234,.246-.280. 37 The guidelines concerning the criteria and conditions for hospital reclassification are located at 42 C.F.R. 412.230-.235. 12

Step 3 A + B = The Standardized Amount c) Case - Mix Adjustment. The Secretary of HHS may also adjust the average standardized amount to eliminate the effect of coding and discharge classification changes that do not reflect real changes in case mix for discharges occurring on or after October 1, 2001. 38 (3) Step 3 Percentage Add-ons for disproportionate share and teaching hospitals. For certain hospitals that qualify, CMS makes special add-on adjustments to the IPPS payment rate for certain costs. 39 These include: a) Treatment of Low-Income Patients. A percentage add-on payment is applied to the MS-DRG-adjusted base payment rate for hospitals that serve a disproportionate share ( DSH ) of low-income patients. In Medicare parlance, these hospitals are referred to as DSH hospitals. The DSH adjustment provides for a percentage increase in Medicare payment for hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculation. 40 b) Indirect Medical Education. Approved teaching hospitals may receive a percentage add-on payment for each case paid through IPPS. The indirect medical education ( IME ) adjustment provides additional IPPS payments to hospitals for the indirect costs attributable to approved medical education programs for physicians. The IME adjustment varies depending on the ratio of residents-to-beds under IPPS for operating costs, and according to the ratio of residents-to-average daily census under the IPPS for capital costs. 41 Note that Medicare Part B provides for a direct (or graduate) medical education (GME) payment adjustment for a hospital s activities based on a prospectively determined amount per resident. 42 38 42 U.S.C.A. 1395ww(d)(3)(A)(vi); BIPA 301(e). The term case mix refers to the types of cases that are treated by the hospital. 39 42 C.F.R. 412.90. 40 42 U.S.C.A. 1395ww(d)(5)(F); 42 C.F.R. 412.2(f)(6), 412.106, 412.320. See also, MMA 402, 951 and DRA 5002. 41 42 U.S.C.A. 1395ww(d)(5)(B); 42 C.F.R. 412.105, 412.322. 42 42 U.S.C.A. 1395ww(h)(4); 42 C.F.R. 413.75 -.83. 13

(4) Step 4 Outlier Cases. Special payment adjustments are made for cases involving extraordinary high costs compared to most discharges classified in the same MS-DRG. 43 If a hospital s actual costs in caring for a patient exceed the total payment received by Medicare plus a fixed dollar amount (the outlier threshold ), the hospital qualifies for additional payment for that patient s care as an outlier case. The threshold criteria for determining outlier payment is published in the annual IPPS rulemaking by the Secretary of HHS. (5) Step 5 Other Possible Payment Adjustments. a) New technologies and medical services. IPPS allows an add-on payment for new services and technologies under certain criteria. 44 The regulations implementing this statutory provision specify three criteria for a new medical service or technology to receive an additional payment: The medical service or technology must be new; The medical service or technology must be costly such that the DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and The service or technology must demonstrate a substantial clinical improvement over existing services or technologies. 45 The amount of the add-on payment depends on the cost incurred by the hospital for the new medical service or technology. If the cost of the discharge exceeds the full DRG payment, Medicare will make an add-on payment equal to the lesser of (1) 50% of the estimated costs of the new technology (if the estimated costs for the case including the new technology exceed Medicare s payment); or (2) 50% of the difference between the full DRG payment and the hospital s estimated costs for the case. 46 b) Transfer versus Discharge. IPPS distinguishes between patient transfers and discharges. Medicare considers a patient to be discharged when the patient is formally discharged from the 43 42 U.S.C.A. 1395ww(d)(5)(A). 42 C.F.R. 412.80-.86. Payment for day outliers (42 C.F.R. 412.86) was phased out of the Medicare program effective October 1, 1997. 44 42 U.S.C. 1395ww(d)(5)(K) and (L); 42 C.F.R. 412.87. 45 42 C.F.R. 412.87-.88. 46 42 C.F.R. 412.88. 14

hospital, expires while in the hospital or is transferred to a non-pps hospital or to a distinct part unit. Activities that do not qualify as a discharge include the release of a patient to another IPPS hospital or a patient s leave of absence from the hospital. 47 A patient is considered transferred by Medicare when the patient is readmitted the same day to (i) to another IPPS hospital, or (ii) to a hospital excluded from IPPS because of a statewide cost control program or demonstration project. A patient is also considered to be transferred by Medicare when the patient is discharged and is assigned a certain qualifying DRG (listed in regulation), and the discharge is to (i) a hospital or unit that is excluded from PPS; (ii) a SNF; or (iii) home for home health care. 48 A transferring hospital is paid a per diem amount that is determined by the following formula the full DRG amount divided by the average length of stay ( ALOS ) for that DRG multiplied by the patient s length of stay at the transferring hospital. Certain exceptions to the payment rate for transferring hospitals apply to specific DRGs and cost outliers. 49 c) End-Stage Renal Disease ( ESRD ) Discharges. Hospitals receive a payment adjustment for ESRD discharges, if these discharges equal 10 percent or more of the hospital s total Medicare discharges. This is not very common. The ESRD payment adjustment is based on the estimated weekly cost of dialysis and the average length of stay of ESRD beneficiaries for the hospital. 50 d) Low-Volume Hospitals. A graduated payment adjustment of up to 25 percent is provided to low volume hospitals beginning with discharges occurring on or after October 1, 2004. The statute defines a low-volume hospital as a short-term general hospital that is located more than 25 road miles from a similar hospital and that has less than 800 discharges (including both Medicare and non- Medicare patients) during a fiscal year. 51 The regulation uses a different standard: 25 road miles from a similar hospital and that has less than 200 discharges. 52 In this case, the regulation is 47 42 C.F.R. 412.4. 48 42 C.F.R. 412.4. Note special rules apply as of October 1, 2005. 49 42 C.F.R. 412.4(f). 50 42 C.F.R. 412.104. 51 42 U.S.C.A. 1395ww(d)(12)(C). 52 42 C.F.R. 412.101. 15

actually the standard being implemented by CMS and its contractors. 53 Note: PPACA provided a temporary (for 2011-2012 only) expansion of eligibility for low-volume hospital add-on payments. During these years, hospitals within 15 miles and 1,600 discharges can qualify for the adjustment. Further, the Secretary is directed to use a sliding scale for the adjustment from 25% for hospitals with 200 discharges to 0% for hospitals with 1,600 discharges. 54 2. Incentive Payment Programs for Hospitals One of the limitations to prospective payments systems is that it pays providers based on performing services and regardless of the quality or outcome of the services. Recognizing this limitation, Congress and CMS have created various incentive payment programs to supplement or offset PPS payments based on how hospitals perform services. (a) Performance Measures Reporting and Annual Payment Update Beginning with the 2003 passage of MMA, Congress began linking updates to IPPS payment amounts to the voluntary reporting of hospital performance under certain quality indicators established by the Secretary of HHS. 55 This program began with the Federal FY 2005 cost reporting period. It originally operated under the title Reporting Hospital Quality Data for Annual Payment Update but on September 16, 2010, the name was changed to the Hospital Inpatient Quality Reporting Program ( IQR ). DRA made this quality reporting-update adjustment process permanent. 56 CMS has since added similar voluntary quality reporting systems for hospital outpatient services (now called the Hospital Outpatient Quality Reporting Program or OQR and formerly called the Hospital Outpatient Quality Data Reporting Program ), and for physicians and other eligible professionals (called the Physician Quality Reporting System or PQRS and formerly called the Physician Quality Reporting Initiative or PQRI ). As discussed later, PPACA further expanded the quality reporting initiatives. Hospitals that do not participate in the reporting of the required quality data will have their annual payment update factor reduced by 2.0 percent for the fiscal year in question up through federal fiscal year 2014; thereafter, the reduction will be 25% of the applicable annual payment 53 See e.g., Transmittal 1610 (October 3, 2008); Change Request 6189. 54 See 42 U.S.C.A. 1395ww(d)(12)(C). 55 MMA 501; 42 U.S.C. 1395ww(b)(3)(B). 56 DRA 5001(a); 42 U.S.C. 1395ww(b)(3)(B). 16

update factor. 57 CMS has gradually grown the number of quality measures required to be reported from a starter set of 10 measures in 2005 to a current list of 76 measures for federal fiscal year 2015 (October, 2014 September, 2015). Annually as part of the IPPS rule-making, CMS makes adjustments (mostly additions, but there have been some subtractions) to the Hospital IQR Program to report data and receive the full annual update. In its August 1, 2011 rule-making, CMS reported that 99% of the hospitals participated and 97% received the full annual update in FY 2011. 58 The reportable measures fall generally into the following categories: Acute myocardial infarction (AMI) Heart failure (HF) Pneumonia (PN) Surgical care improvement project (SCIP) Mortality measures (Medicare patients) Patients experience of care (using HCAHPS survey) Readmission measure (Medicare patients) AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators (IQIs) and Composite Measures AHRQ PSI and Nursing Sensitive Care Healthcare Associated Infections Hospital Acquired Conditions Stroke care Nursing Sensitive Care Emergency Department Throughput Prevention: Global Immunization Structural measures (participation in disease registries) Venous Thromboembolism (VTE) Set 57 42 C.F.R. 412.64(d)(2). 58 76 Fed. Reg. 51476-51846 (Aug. 18, 2011). 17

Cost Efficiency (b) Value-Based Purchasing Section 3001(a)(1) of PPACA required CMS to implement a hospital value-based purchasing (VBP) program that rewards hospitals for the quality of care they provide. 59 Under the hospital VBP program, CMS will evaluate hospitals performance during a performance period based on both achievement and improvement on selected measures. Hospitals will receive points on each measure based on the higher of their level of achievement relative to an established standard or their improvement in performance from their performance during a prior baseline period. Their combined scores on all of the measures will be translated into value-based incentive payments for discharges occurring on or after October 1, 2012. 60 PPACA requires CMS to fund the aggregate hospital VBP incentive payments by reducing the base operating diagnosis-related group (DRG) payment amounts that determine the Medicare payment for each hospital inpatient discharge. The law sets the reduction at 1 percent in federal FY 2013, rising to 2 percent by federal FY 2017. As a result, the hospital VBP program does not increase overall Medicare spending for inpatient stays in acute care hospitals. 61 The VBP program began with payments for discharges on and after October 1, 2012. CMS established the first performance period as July 1, 2011 through March 31, 2012. Looking back to that performance period against an initial set of measures pertaining to acute myocardial infarction, heart failure, pneumonia, surgeries and healthcare-associated infections (all of which must be a subset of the measures hospitals have been voluntarily reporting for years as a part of the Hospital Inpatient Quality Reporting Program discussed above), hospitals are awarded points based on their achievement or improvement, assuming the applicable minimum number of measures and minimum number of cases requirements are met. For scoring on achievement, hospitals will be measured based on how much their current performance differs from all other hospitals baseline period performance. Points will then be awarded based on the hospital s performance compared to the threshold and benchmark scores for all hospitals. Hospitals receive ten points for meeting or exceeding the benchmark score for all hospitals, which is defined by CMS as the mean of the top ten percent. Hospitals receive zero to nine points if the hospital s performance during the performance period is less than the 59 Public Law 111-148 and Public Law 111-152, enacted March 23 and March 30, 2010. 60 42 U.S.C. 1395ww(o). 61 42 U.S.C. 1395ww(o)(7). 18

benchmark but exceeds a minimum rate called the threshold, which is defined by CMS as the 50th percentile of hospital scores during the baseline period. For scoring on improvement, hospitals will be assessed based on how much their current performance changes from their own baseline period performance. One to nine points will then be awarded based on how much improvement there is between that baseline and the benchmark score. Points will only be awarded for improvement if the hospital s performance improved from their performance during the baseline period. CMS then calculates a Total Performance Score for each hospital by combining the greater of its achievement or improvement points on each measure to determine a score for each domain, multiplying each domain score by the proposed domain weight and adding the weighted scores together. For example, for the first year of the VBP program in federal FY 2013, the clinical process of care domain was weighted at 70 percent and the patient experience of care domain was weighted at 30 percent. 62 For VBP program payments beginning in federal fiscal year 2014 and thereafter, CMS can expand the measures used for calculating VBP payments and must add efficiency measures, including measures of Medicare spending per beneficiary. All measures must have been included in the Hospital Inpatient Quality Reporting program for at least one year prior the beginning of the performance period. 63 Hospital performance under the VBP program must be made available to the public, including posting on the Medicare Hospital Compare website. Hospitals have an opportunity to review and submit corrections for information that is made public, and have the right to appeal the calculation of a hospital s performance assessment and score. 64 (c) Hospital Readmissions Reduction Program Section 3025 of PPACA required CMS to implement a hospital readmissions reduction program by adjusting payments to hospitals with excess readmissions. 65 The term readmission is defined as in the case of an individual who is discharged from an applicable hospital, the admission of the individual to the same or another applicable hospital within a time period specified by the Secretary from the date of such discharge. The Secretary established thirty days following discharge as 62 42 C.F.R. 412.164, 412.165. 63 42 U.S.C. 1395ww(o)(2). 64 42 U.S.C. 1395ww(o)(10)-(11). 65 Public Law 111-148 and Public Law 111-152, enacted March 23 and March 30, 2010. 19

the window for determining whether a readmission occurred. The readmissions penalties began with payments for discharges on or after October 1, 2012. 66 For the first year of the readmissions reduction program, CMS established readmission measures for the same measures used in the first year of the VBP program: acute myocardial infarction, heart failure and pneumonia. CMS also established the calculation of the excess readmission ratio for these measures as a measure of a hospital s readmission performance compared to the national average for the hospital s set of patients with that applicable condition. The excess readmission ratio includes adjustment for factors that are clinically relevant, including patient demographic characteristics, comorbidities, and patient frailty. CMS established a three year look-back period for analyzing hospital discharge data and a minimum of 25 cases to calculate a hospital s excess readmission ratio for each applicable condition. For the first year of the readmissions reduction program, federal FY 2013, the excess readmission ratio is based on discharges occurring during the three-year period of July 1, 2008 to June 30, 2011. 67 Beginning with federal FY 2015, CMS must expand the applicable conditions for which readmissions are evaluated. 68 The calculation of the readmission penalty uses an excess readmission ratio, defined as one minus the ratio of the aggregate payments for excess readmissions and the aggregate payments for all discharges. The ratio can be no lower than a floor adjustment factor, which is 99% for federal FY 2013, 98% for federal FY 2014 and 97% for federal FY 2015 and thereafter. The ratio is then used to reduce each base operating DRG payment amount received by the hospital during the applicable federal fiscal year. 69 As with performance under the VBP program, hospital readmission rates must be made available to the public, including posting on the Medicare Hospital Compare website. In addition, CMS must calculate readmission rates for all patients, not just Medicare beneficiaries, and similarly make that information available to the public. Hospitals have an opportunity to review and submit corrections for information that is made public, but do not have any right to appeal the determination of readmission rates or resulting penalties. 70 66 42 U.S.C. 1395ww(q); 42 C.F.R. 412.152. 67 42 C.F.R. 412.152. 68 42 U.S.C. 1395ww(q)(5). 69 42 U.S.C. 1395ww(q)(2)-(4); 42 C.F.R. 412.154. 70 42 U.S.C. 1395ww(q)(6)-(8). 20

(d) Hospital-Acquired Conditions Penalties Section 5001(c) of the Deficit Reduction Act of 2005 required CMS to identify conditions that are: (a) high cost or high volume or both; (b) result in the assignment of a case to a DRG that has a higher payment when present as a secondary diagnosis; and (c) could reasonably have been prevented through the application of evidence-based guidelines. The statute further provides that CMS can revise the list of conditions from time to time, as long as it contains at least two conditions. 71 For discharges occurring on or after October 1, 2008, Medicare will not pay for a higher payment DRG if the secondary diagnosis that causes the DRG payment to be higher was not present at the time of the patient s admission. The absence of such diagnosis at admission is presumed to mean that the condition was acquired during the patient s hospital stay and is therefore not permitted to result in a higher payment to the hospital. 72 In addition to the payment limitations in place since October 1, 2008, Section 3008 of PPACA created an additional incentive to reduce hospital acquired conditions. 73 The term hospital acquired conditions is defined as including the conditions used in the payment limitation described above as well as any other condition identified by CMS that an individual acquires during a stay in a hospital. Beginning with hospital discharges on or after October 1, 2014, hospitals scoring in the top quartile for the rate of hospital acquired conditions as compared to the national average will have their Medicare payments reduced by one percent for all DRGs. CMS is required to apply an appropriate risk adjustment methodology. The applicable period for determination of the rates will be the fiscal year. 74 As with performance under the VBP program and hospital readmission rates, information regarding hospital experience with hospital acquired conditions must be made available to the public, including posting on the Medicare Hospital Compare website. Hospitals have an opportunity to review and submit corrections for information that is made public, but do not have any right to appeal the determination of readmission rates or resulting penalties. 75 (e) Shared Savings Program (ACOs) Section 3022 of the ACA created a shared savings program under which the Medicare program would share cost savings for high quality care 71 Public Law 109-171, enacted February 8, 2006; 42 U.S.C. 1395ww(d)(4)(D). 72 Id. 73 Public Law 111-148 and Public Law 111-152, enacted March 23 and March 30, 2010. 74 42 U.S.C. 1395ww(p). 75 42 U.S.C. 1395ww(p)(6)-(7). 21