Hospitals will receive a large pay bump from CMS’s reversal of three years of pay cuts related to its two-midnight short-stay policy.

Aug. 3—The final rule setting FY17 inpatient pay rates includes sought-after changes to disproportionate share hospital (DSH) payments but few changes to a new patient notice.

The hospital inpatient prospective payment system final rule for FY17 increased rates by 0.95 percent over FY16 after accounting for inflation and other adjustments required by law. The final rate was slightly larger than the one proposed in April and will increase total Medicare spending on inpatient hospital services, including capital, by about $746 million in FY17—instead of the $539 million increase in the proposed rule—according to a fact sheet.

Among the 2,434-page rule’s many policy provisions was the decision by the Centers for Medicare & Medicaid Services (CMS) to abandon plans to incorporate Worksheet S-10 data to determine Medicare DSH uncompensated care payments. CMS dropped plans for a transition beginning in FY18 followed by sole use of S-10 data beginning in FY20 after hospital advocates raised the need for “additional quality control and data improvement measures” in the S-10.

“CMS did the right thing today to help preserve hospitals’ ability to care for uninsured patients,” Chip Kahn, president and CEO of the Federation of American Hospitals (FAH), said in an emailed statement. “FAH and many others detailed the serious concerns with moving to Medicare disproportionate share payments (DSH) based on data from the flawed S-10 worksheet. It is gratifying that CMS clearly listened and it is essential that critically important DSH funds will continue to flow where they are most needed.”

CMS is searching for an “appropriate proxy for uncompensated care” for FY18 and future years until the reworked S-10 worksheet becomes available by FY21.

The rule also continued to implement Medicare DSH payment cuts as mandated by the Affordable Care Act (ACA), cutting such pay by $400 million relative to FY16 levels.


Hospital finance experts were more mixed in their reactions to how the final rule addressed changes sought to a new notification required for all Medicare patients who are placed under observation status for at least 24 hours. The Notice of Observation Treatment and Implication for Care Eligibility Act required hospitals and critical access hospitals (CAHs) to provide written and oral notification to such beneficiaries.

The American Hospital Association (AHA) hailed the rule for allowing hospitals more than four months to fully implement use of the standardized notification form, known as the Medicare Outpatient Observation Notice (MOON). According to the final rule, CMS is providing a 30-day comment period on the revised MOON form, to be followed by a review by the Office of Management and Budget. Once the MOON form has been approved, hospitals and CAHs must begin using it within 90 calendar days.

However, CMS rejected other changes sought, including a request by HFMA to follow previous Medicare standards and provide MOON forms in languages spoken by as few as 5 percent of Medicare enrollees or 1,000 total Medicare beneficiaries.

CMS countered that other federal laws already require hospitals and CAHs “to provide language assistance to [limited English proficiency] individuals, and that these requirements apply to delivery of the MOON.”

Two-Midnight Pay

Hospital advocates hailed the elimination of cuts CMS had included in hospitals’ Medicare payments since FY14 to offset the higher volume of admissions it expected to result from its two-midnight short-stay payment policy. In the final rule, CMS eliminated the cut going forward and added a 0.6 percent pay bump to reimburse hospitals for 0.2 percent pay cuts under the policy in FY14, FY15, and FY16.

CMS said the change was “in light of recent review and the unique circumstances surrounding this adjustment.” Those circumstances included multiple lawsuits from hospitals and their advocacy groups challenging whether the supposed increase in admissions ever occurred.

Tom Nickels, executive vice president for AHA, said in a written statement that the reversal of the pay cut “restored the resources that hospitals are lawfully due.”


Hospital advocates were surprised by a larger-than-expected cut under the requirements of the American Taxpayer Relief Act of 2012 (ATRA). That law required CMS to recover $11 billion by FY17 to offset suspected overpayments to hospitals from the transition to MS-DRGs that began in FY08. CMS had used 0.8 percent annual cuts over the past three years, but in FY17 the reduction will jump to 1.5 percent, or $5.05 billion, after the agency concluded that amount would be needed to meet the $11 billion total by next year.

“While a reduction to the hospital update factor was mandated by law in 2012, CMS is undermining Congress’s intent by imposing a cut that is nearly two times what Congress specified,” Nickels said.

EHR Requirements

CMS drew praise for reducing its proposed requirements on reporting electronic clinical quality measures (CQMs). The rule included requirements for eligible hospitals and CAHs to report CQMs under the Medicare and Medicaid EHR incentive programs. CMS finalized modifications to some of the CQM reporting and submission requirements, including removal of certain CQMs to align with the hospital inpatient quality reporting program.

However, Nickels noted that “much more work needs to be done to ensure that the measures are valid and reliable before broad-scale implementation.”

SES Changes

The final rule backed away from the possibility floated in the proposed rule of using socioeconomic status (SES) to adjust hospital payments.

CMS officials wrote, “We continue to have concerns about holding hospitals to different standards for the outcomes of their patients of diverse sociodemographic status, because we do not want to mask potential disparities or minimize incentives to improve the outcomes of disadvantaged populations.”

Although the agency noted that the National Quality Forum and the U.S. Department of Health and Human Services continue to study the impact of patients’ “sociodemographic status” on quality measures, hospital advocates expressed their disappointment.

Beth Feldpush, senior vice president of policy and advocacy for America’s Essential Hospitals, said in a written statement that her group was “disappointed CMS missed another opportunity to adjust for the social and economic challenges of vulnerable patients in its quality improvement and reporting programs. The evidence is clear that these programs disproportionately penalize hospitals that serve disadvantaged patients and communities.”

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C. office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, August 03, 2016