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CMS Finalizes Policy to Use Hospital Negotiated Charge Data to Set Payment Rates

This week, our In Focus section reviews the policy changes included in the Centers for Medicare & Medicaid Services (CMS) Fiscal Year (FY) 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Final Rule (CMS-1735-F). This year’s IPPS Final Rule includes several important policy changes that will change hospitals’ administrative procedures and may alter hospitals’ Medicare margins, beginning as soon as October 1, 2020.

HMA continues to monitor legislative and regulatory developments that will impact the hospital sector. For more information or questions about the policies described below, please contact Zach Gaumer or Eric Hammelman.

Key Provisions of the FY 2021 Hospital IPPS and LTCH Final Rule

On September 2, 2020, CMS released the FY 2021 IPPS and LTCH Final Rule. The scope of the FY 2021 Proposed Rule was slightly smaller than in past years, due to the demands of the COVID-19 public health emergency. However, this final rule finalized several significant and potentially disruptive policies stakeholders will need to understand and adjust to quickly.

Price transparency and use of private-sector negotiated charge data in calibrating DRG weights: CMS finalized much of their controversial policy to require hospitals to report payer-negotiated charge data and then use these data to calculate inpatient Medicare Severity-Diagnostic Related Group (MS-DRG) payment weights.

CMS had originally proposed that hospitals report two new forms of MS-DRG-level data as a part of their annual cost reporting process:

  • The median payer-specific negotiated charge that the hospital has negotiated with all of its Medicare Advantage payers, by MS-DRG, and
  • The median payer-specific negotiated charge the hospital has negotiated with all of its third-party payers (Medicare Advantage and other payers), by MS-DRG.

However, CMS chose only to finalize the requirement that hospitals report Medicare Advantage (MA) negotiated charge data, and not the negotiated charge data associated with third-party payers. Therefore, hospitals will be required to report these MA negotiated charge data, by MS-DRG, on all cost reports submitted from January 1, 2021, forward.

In addition, CMS finalized its proposal to use the MA negotiated charge data to calculate MS-DRG payment weights, beginning in FY 2024. CMS will use the relative payment differences determined by the negotiated charge data to update MS-DRG payment weights, including a budget neutral adjustment to ensure aggregate payments made under the current system (case-level resource-based costs used to set MS-DRG weights) are equal to estimated payments made under the new system. In implementing this new methodology CMS asserted they will: 1) implement payment weights in FY 2024 without a transition period; 2) make MA negotiated charge data publicly available prior to implementation; 3) and consider modifications to their methodology between now and FY 2024.

Hospital systems and other stakeholders will now race to determine the impact of using MA negotiated charge data on setting hospital inpatient MS-DRG payment weights. While CMS has stated it will ensure aggregate inpatient spending will not decline as a result of this new methodology, it is likely to cause significant fluctuations in payment rates by individual MS-DRG, at least initially. Because the mix of MS-DRGs varies by hospital, we anticipate this new methodology will also have a wide-ranging differential impact on individual hospitals. Therefore, before this methodology is implemented stakeholders will need to understand which MS-DRGs will experience reductions in Medicare payment rates and how their overall revenues will change. In addition, although it did not finalize the collection of third-party negotiated charge data, CMS has now sent a strong message to stakeholders that it may consider using negotiated charge data from commercial payers to set MS-DRG weights in the future. Therefore, hospitals and other stakeholders will also need to understand the impact these data may have on MS-DRG weights and inpatient payment rates.

Payment rates: CMS estimates the overall impact of the FY 2021 IPPS Final Rule on general acute care hospitals will increase payments by $3.5 billion from FY 2020 to FY 2021, or 2.7 percent. Specifically, CMS will increase Medicare operating payment rates by 2.9 percent, reflecting the sum of the projected hospital market basket update (2.4 percent), the statutory reduction for productivity (0.0 percent), and statutory increase stemming from the transition of the IPPS from DRGs to MS-DRGs (+0.5 percent). Combining operating and capital payments, the FY 2021 inpatient standardized amount will be $6,427 per case. CMS’ finalized net percent increase in Medicare IPPS payments of 2.7 percent is lower than the 2.9 percent increase in Medicare operating payment rates because other components of proposed FY 2021 payment changes will lower payments.

New or revised MS-DRGs: After several years of debate CMS finalized the creation of a new MS-DRG for CAR T-cell therapy (MS-DRG 018). This new MS-DRG will be reimbursed by Medicare at roughly $240,000 per case and CMS estimates Medicare spending for this new MS-DRG will amount to $34 million in FY 2021.

New Technology Add-on Payments (NTAP): CMS finalized a significant expansion of approved NTAP technologies for FY 2021, continuing a multi-year effort to create new opportunities for new technologies to receive additional payments. For FY 2021 CMS will pay add-on payments for 24 NTAP drugs or devices. CMS estimates this expansion will result in approximately $870 million in NTAP payments in FY 2021, more than 10 times higher than the $91 million of NTAP payments in FY 2015.

Uncompensated Care Payments: Amounting to $8.3 billion, the FY 2021 uncompensated care (UC) payments will be roughly equivalent to UC payments in FY 2020. One element in calculating the size of the UC payment pool is that CMS typically uses the estimated total number of uninsured individuals in the US. However, this year the Agency noted that due to the COVID-19 economic crisis it used a modified estimate that accounted for recent changes in unemployment. In addition, CMS finalized the use of UC cost data from hospitals’ audited FY 2017 Cost Reports (worksheet S-10) to distribute these payments to hospitals. This is the second consecutive year CMS has used a single year of UC cost data to distribute UC payments, and rather than the 2015 UC cost data used to distribute 2020 UC payments the Agency will use 2017 UC cost data to distribute 2021 UC payments.

Wage Index: CMS finalized the use of new geographic delineations created by the U.S. Office of Management and Budget (OMB). This policy change will result in numerous counties changing their urban and rural geographic designations or changing from one urban designation to another. Hospitals located in the effected geographic areas will experience increases and decreases in their wage index and therefore increases or decreases in their Medicare payment rates. CMS stated: 34 counties will be defined as urban when previously they were rural, 47 counties will be defined as rural when previously they were urban, and 19 counties will move from one urban geographic designation to a different urban geographic designation. Hospitals and health systems will need to understand whether their geographic designations may change and the extent to which they will be impacted by this policy financially.

Link to Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Final Rule