Medicaid Payment and Reimbursement

Medicaid Healthcare-Acquired Condition Fact Sheet

October 18, 2012 10:34 am


CMS published a final rule in the June 6, 2011, Federal Register implementing section 2702 of the Affordable Care Act (ACA), which directs the Health and Human Services (HHS) Secretary to issue Medicaid regulations that prohibit, beginning July 1, 2011, the distribution of federal payments to states under section 1903 of the Social Security Act (the Act) for funds spent on the provision of medical assistance for healthcare-acquired conditions (HCACs). The prohibition on payment for HCACs shall not result in a loss of access to care or services for Medicaid beneficiaries. The rule also authorizes states to identify other provider-preventable conditions for which Medicaid payment will be prohibited.


Section 2702 of the ACA sets out a general framework for application of Medicare prohibitions on payment for HCACs to the Medicaid program. The development of Medicare policy on quality measures and related payment adjustments thus serves as essential background to the June 6, 2011, final rule.

Quality Improvements and the Medicare Program

The Medicare statute authorizes the HHS Secretary, in the course of operating the Medicare program, to develop, implement, and monitor quality measures, as well as take other actions to ensure the quality of the care and services received by Medicare beneficiaries. Section 5001(a) of the Deficit Reduction Act (DRA) of 2005 amended section 1886(b)(3)(B) of the Act to expand the set of hospital quality measures collected by Medicare. In particular, this provision directed the HHS Secretary to start collecting baseline measures set forth by the Institute of Medicine in its November 2005 report. This provision also directed the Secretary to start collecting baseline measures set forth by the Institute of Medicine in its November 2005 report. In fiscal year 2008 and subsequent years, the HHS Secretary was required to add other measures that reflect consensus among affected parties. The provision also allowed the HHS Secretary to replace and update existing quality measures. Section 5001(c) of the DRA amended section 1886(d)(4) of the Act to adjust payment to hospitals for certain preventable hospital-acquired conditions (HACs) identified by the HHS Secretary. Specifically, the HHS Secretary is required to select codes associated with at least two conditions to be identified as HACs. These conditions are required to have the following characteristics:

a. High cost or high volume or both,

b. Result in the assignment of a case to a MS-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.

Section 5001(c) of the DRA provides for revision of the list of conditions from time to time, as long as it contains at least two conditions.

Previously Specified Medicare HACs

When a HAC is not present on admission (POA), but reported as a secondary diagnosis associated with the hospitalization, the Medicare payment under IPPS to the hospital may be reduced to reflect that the condition was hospital-acquired. More specifically, the hospital discharge cannot be assigned to a higher paying MS-DRG if the secondary diagnosis associated with the HAC was the only reason for this assignment. Since October 1, 2007, hospitals subject to the IPPS have been required to submit information on Medicare claims specifying whether diagnoses were POA. The POA indicator reporting requirement and the HAC payment provision apply to IPPS hospitals only. This requirement does not apply to hospitals exempt from the IPPS.

Following is a list of the Medicare HACs for FY11:

  • Foreign object retained after surgery
  • Air embolism
  • Blood incompatibility
  • Stage III and IV pressure ulcers
  • Falls and trauma
    • Fractures
    • Dislocations
    • Intracranial injuries
    • Crushing injuries
    • Burns
    • Electric shock


  • Manifestations of poor glycemic control
    • Diabetic ketoacidosis
    • Nonketotic hyperosmolar coma
    • Hypoglycemic coma
    • Secondary diabetes with ketoacidosis
    • Secondary diabetes with hyperosmolarity


  • Catheter-associated urinary tract infection (UTI)
  • Vascular catheter-associated infection
  • Surgical site infection following:
    • Coronary artery bypass graft (CABG)-Mediastinitis
    • Bariatric surgery
      • Laparoscopic gastric bypass
      • Gastroenterostomy
      • Laparoscopic gastric restrictive surgery


    • Orthopedic procedures
      • Spine
      • Neck
      • Shoulder
      • Elbow 


  • Deep vein thrombosis (DVT)/pulmonary embolism (PE)
    • Total knee replacement
    • Hip replacement

The Final Rule

The final rule includes the umbrella term “provider-preventable conditions” (PPC), which is defined as two distinct categories: HCACs and other provider-preventable conditions (OPPCs).

An HCAC is defined as “a medical condition for which an individual was diagnosed that could be identified by a secondary diagnostic code described in section 1886(d)(4)(D)(iv) of the Act.” HCACs:

  • Apply to Medicaid inpatient hospital settings, and
  • Are defined as the full list of Medicare’s HAC, with the exception of deep vein thrombosis/pulmonary embolism following total knee replacement or hip replacement in pediatric and obstetric patients, as the minimum requirements for states’ PPC nonpayment programs.

As defined by the final rule, OPPCs:

  • Apply broadly to Medicaid inpatient and outpatient healthcare settings where these events may occur,
  • Are defined to include at a minimum, the three Medicare National Coverage Determinations (NCDs) addressing surgery on the wrong patient, wrong surgery on a patient, and wrong site surgery,
  • Would allow states to expand to settings other than inpatient hospitals with CMS approval by nature of identifying events that occur in other settings, and
  • Would allow states to expand the conditions identified for nonpayment with CMS approval, based on criteria set forth in the regulation.

The final rule requires that states revise Medicaid plans to comply with this provision and mandates that states implement provider self-reporting through claims systems. It also protects beneficiary access to care by eliminating states’ ability to unduly impact providers for the occurrence of conditions identified.

Specifically, the final rule requires that:

  • No reduction in payment for a provider preventable condition will be imposed on a provider when the condition defined as a PPC for a particular patient existed prior to the initiation of treatment for that patient by that provider.
  • Reductions in provider payment may be limited to the extent that the identified PPCs would otherwise result in an increase in payment; and the state can reasonably isolate for nonpayment the portion of the payment directly related to treatment for, and related to, the PPCs.

While the statutory effective date is July 1, 2011, CMS intends to delay compliance action on these provisions until July 1, 2012.

The inclusion of the new terms-PPCs and OPPCs-is consistent with the implementation of a broader application of this policy which allows CMS to appropriately incorporate existing state practices. CMS notes that the adoption of a new term is necessary because the term ”healthcare-acquired condition” is very narrowly defined in the statute and does not provide for the inclusion of conditions other than those identified as HACs for Medicare. Specifically, the definition of HCACs excludes the three Medicare NCDs addressing the “never events” of surgery on the wrong patient, wrong surgery on a patient, and wrong site surgery. Additionally, the ACA definition of HCACs only applies to the inpatient hospital setting.

CMS adopted the term PPC for use in Medicaid because it appropriately identified the scope of the conditions and could act as a “catch-all.” Also, the term had not been narrowly defined by use in Medicare, Medicaid, or in the industry at large.

Impact of the Final Rule

Because the final rule does not reach the required economic threshold of $100 million, it is not considered a major rule under the Congressional Review Act and CMS is not required to prepare a regulatory impact analysis. While it is difficult to estimate the amount which will be withheld from providers under the final rule, as not all of these events will be billed, CMS notes that the total dollar amount of Medicare claims denied under its HAC policy is approximately $20 million per year.

The CMS Office of the Actuary estimate (Estimated Financial Effects of the ”Patient Protection and Affordable Care Act,” as Amended, 2010) projected an impact from section 2702 of the ACA on the Medicaid program of $2 million in cost savings for FY11 ($1 million for the federal share and $1 million for the state share), with an aggregate cost savings of $35 million ($20 million for the federal share and $15 million for the state share) for FY11 through FY15.

While there are administrative cost impacts on states to modify their systems to meet reporting requirements, CMS believes these are not significant. CMS notes that the reporting system in the final rule relies on an existing billing system currently in place. Additional costs may occur in order for hospitals to reduce PPCs. Such costs include hiring additional nurses to ensure enforcement of the infection prevention policies. In turn, preventing or reducing HCACs will lead to a reduction in direct health spending, which is a benefit realized by Medicaid, hospitals, and other payers.

Anticipated Effects

There are currently 21 states that have already implemented similar policies. While CMS has reviewed existing state policies and incorporated those policies that it believes would best apply on a national level, these states will have to make changes to comply with the minimums set in the final rule. In addition, states will have to work through the state plan amendment (SPA) review process to ensure that their existing policies do not serve to limit beneficiaries’ access to health care. States that have used state plan authority to implement their nonpayment policies will need to review them and ensure they comply with any final provisions of the rule. These states will likely have to submit revisions to their state plans.

In addition, states that implemented these policies through some other authority such as state law or administrative procedures will have to submit new SPAs for review and work with CMS to ensure that their policies effective July 1, 2011, are in line with the provisions of the final rule. States that have elected not to implement Medicaid specific policies or that do not have related policies at all will need to submit new SPAs, and states that use a managed care delivery system to provide Medicaid benefits to beneficiaries will have to amend and submit managed care contracts that reflect the new requirements for CMS review and approval.

All states will need to incorporate the reporting requirements into their claims systems. Additionally, states will need to evaluate the best ways to identify and reduce payment for PPCs under their respective Medicaid plans. CMS anticipates that this provision will prompt programmatic changes for states regarding quality improvement considerations within healthcare systems. Although this provision pertains to payments, it is primarily targeted at preventing medical errors. CMS anticipates that the final rule will prompt healthcare providers to adopt quality programs that would limit the risk of providing services or using resources in error, which will not be reimbursed.

While both Medicare and the states are not estimating substantial short-term financial savings within healthcare systems as a result of the final rule, CMS notes that there are more significant gains to be realized when considering the broader impact of increased quality on the health system overall, or the savings created when preventable conditions and related treatment are measured. The anticipated public benefit to all providers and payers from programs that hospitals develop to avoid Medicaid HCACs will likely benefit all patients and reduce healthcare costs.


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