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CMS Inpatient Hospital Proposed Rule to Repeal Market-based MS-DRG Weight Methodology

This week, our In Focus section reviews the key provisions of the Centers for Medicare & Medicaid (CMS) Fiscal Year (FY) 2022 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Proposed Rule (CMS-1752-P), which includes Medicare payment updates and policy changes for the upcoming FY, with a comment deadline of June 28, 2021. This year’s proposed rule includes several proposals the hospital industry should carefully consider. In particular, the Biden Administration has proposed to:

  • Repeal the prior Administration’s policy to collect and use hospital-reported Medicare Advantage plan negotiated charge data to set inpatient payment weights
  • Deviate from traditional processes (due to the COVID-19 Public Health Emergency) by using 2019, rather than 2020, claims data to set 2022 payment rates
  • Increase IPPS payments consistent with historical norms
  • Begin using hospital-reported 2018 data to calculate uncompensated care payments which is likely to cause distributional changes in payments

On April 27, 2021, CMS released the FY 2022 IPPS and LTCH Proposed Rule (CMS-1752-P). The agency continues to shape policies around the implications of the COVID-19 Public Health Emergency (PHE). HMA highlights some of the most important policies hospitals and payors should understand and consider commenting on. Comments on the Proposed Rule are due to CMS by June 28, 2021, with an expected Final Rule publication date in late August, and a subsequent implementation date of October 1, 2021.

Market-based Medicare Advantage charge data and its use in calibrating MS-DRG weights: In a major reversal of policy, CMS proposed to repeal the requirement that hospitals report MS-DRG-level payer-specific negotiated charges for their business with Medicare Advantage plans. Further, CMS also proposed to repeal the policy which would have used these data to set “market-based” inpatient MS-DRG payment weights beginning FY 2024. These policies were unpopular with hospitals, payors, and others, because they would add administrative burden to hospitals, publicly divulge sensitive data, and generate unreliable IPPS payment weights. CMS invites public comment on the proposed repeal of both the data collection requirement and use of these data to calculate MS-DRG weights. CMS also invites public comment on alternative approaches or data sources that could be used in Medicare fee-for-service (FFS) rate setting.

Data used to set hospital inpatient payment rates: Many IPPS payment policies will remain largely unchanged from 2021 to 2022 due to CMS’s proposal to forego using Medicare 2020 claims data to calculate payment rates and quality incentive payments. In general, 2020 data are viewed as problematic for calculating payments due to cancellation of elective procedures or delays in seeking care during the COVID-19 PHE. This caused disruptions in MS-DRG level case volumes, which could translate into year-over-year fluctuation in MS-DRG case weights and quality data. Therefore, CMS proposed to use 2019 claims data to set 2022 payment rates. This will have a moderating impact on various elements of inpatient reimbursement in FY 2022, because the 2019 data were also used to calculate the FY 2021 MS-DRG level case weights, inpatient disproportionate share payments, and indirect medical education payments. In addition, CMS proposed to suppress the results of various hospital quality measures that rely on 2020 claims data. While FY 2022 quality measures will not be affected by 2020 data, FY 2023 quality measures do rely on these data. As a result, we foresee only moderate changes in quality-related payment penalties and incentives from FY 2022 to FY 2023. This includes the Hospital Readmissions Reduction Program, the Value Based Purchasing (VBP) program, and other quality programs.

Payment rates: CMS estimates the FY 2022 IPPS Proposed Rule will increase general acute care hospital payments by $2.5 billion from FY 2021 to FY 2022, or 2.7 percent. CMS proposed to increase Medicare operating payment rates by 3.0 percent, which reflects the sum of the projected hospital market basket update (2.5 percent), the statutory reduction for productivity (-0.2 percent), and the statutory increase stemming from the transition of the IPPS from DRGs to MS-DRGs (+0.5 percent). Combining operating and capital payments, the FY 2022 inpatient standardized amount will be $6,612.18 per case. CMS’ proposed net percent increase in Medicare IPPS payments of 2.7 percent is lower than the 3.0 percent increase in Medicare operating payment rates because other components of proposed FY 2022 payment changes will lower payments.

Uncompensated Care payments: From FY 2021 to FY 2022, uncompensated care payments will decrease by $700 million, or 8 percent. This reduction is the result of several changes in CMS assumptions, including the estimated share of uninsured patients (10.1 percent, 0.2 percent lower than last year’s estimate) and estimated inpatient discharge volume (a decrease from the FY 2021 estimates). In addition, CMS proposed to use uncompensated care cost data from hospitals’ audited FY 2018 Cost Reports (worksheet S-10), rather than 2017 data, to distribute uncompensated care payments to hospitals. Because the 2017 and 2018 data differ, we anticipate substantial year-over-year variation in per case uncompensated care payments for many individual hospitals.  For example, among the nearly 200 hospitals eligible for uncompensated care payments in Virginia and Ohio, nearly 30 percent will see a decline in uncompensated care payments of 10 percent or greater.  

New Technology Add-on Payments (NTAP): CMS proposed to dramatically expand the scope of the NTAP program in FY 2022 by approving more technologies for these extra payments. This program, which increases payments for inpatient cases involving innovative and costly medical devices and drugs has grown rapidly in the last decade. For 2022, CMS estimates payments for the NTAP program could amount to more than $1.5 billion and include between 23 and 61 technologies, depending upon which technologies gain approval. By contrast, in FY 2021 and FY 2016, NTAP program spending was estimated to be $900 million for 24 technologies and $100 million for 7 technologies, respectively.   

HMA continues to monitor legislative and regulatory developments and funding opportunities that will impact the hospital sector. For more information or questions, please contact Zach Gaumer ([email protected]).