Medicare Payment and Reimbursement

HFMA Comments on Medicare Program IPPS 0.2 Percent Reduction

February 2, 2016 4:35 pm

February 1, 2016                                                                                  

Andrew Slavitt
Acting Administrator
Centers for Medicare & Medicaid Services
Department of Health and Human Services
Attention: CMS-1658-NC
P.O. Box 8013
Baltimore, MD 21244-8013  

File Code: CMS-1658-NC  

Medicare Program: Inpatient Prospective Payment Systems; 0.2 Percent Reduction  

Dear Mr. Slavitt:  

The Healthcare Financial Management Association (HFMA) would like to thank the Centers for Medicare & Medicaid Services (CMS) for the opportunity to comment on the assumptions CMS used to justify cutting payments to hospitals under the Inpatient Prospective Payment System (IPPS) by .2% as outlined in Medicare Program: Inpatient Prospective Payment Systems; 0.2 Percent Reduction (hereafter referred to as the Notice) published in the Dec. 1, 2015, Federal Register.   

HFMA is a professional organization of more than 40,000 individuals involved in various aspects of healthcare financial management. HFMA is committed to helping its members improve the management of and compliance with the numerous rules and regulations that govern the industry.  


HFMA would like to thank CMS for making the assumptions used in the final FY 2014 IPPS rule to reduce IPPS payments by .2% (estimated $220 million) available for public analysis. Our members, after reviewing the Notice, continue to believe that the .2% payment reduction is unjustified. Specifically, our members would like to comment on the following:

  • Adequacy of payment for short stay cases under the Outpatient Prospective Payment System (OPPS)
  • Assumption that medical MS-DRGs that do not meet the two-midnight criteria will continue to be billed and paid by Medicare under the IPPS as opposed to the OPPS
  • Timing of a final resolution of the .2% IPPS payment cut  

Below please find specific comments on the items listed above.  

Adequacy of Payment for Short Stay Cases under the OPPS

In the Notice, CMS requests comment on its estimate of the payment differential for impacted services between the IPPS and OPPS. CMS states that OPPS payment levels for the services provided during short stays that would shift between payment systems as a result of the “two-midnight rule” are approximately 30 percent of IPPS payments. HFMA’s members believe that CMS’s estimate of the payment differential is further proof that the OPPS fails to cover the cost hospitals incur to provide short-stay services to Medicare beneficiaries. As we have commented in prior letters, observation services are merely an administrative distinction without a difference in the resources required to provide medically necessary care. For these cases, despite the fact that the payment shifts from the IPPS to OPPS, the inputs to provide care (bed, nursing time, supplies, pharmaceuticals, etc.) cannot be adjusted to match the (inappropriately) lower rate of payment. Regardless of the administrative classification of the patient’s status, HFMA continues to believe that CMS must provide a level of payment that covers the cost of medically necessary services provided to beneficiaries.    

Assumption that Medical MS-DRGs that Do Not Meet the Two-Midnight Criteria Will Continue to Be Billed and Paid by Medicare under the IPPS as Opposed to the OPPS

CMS provides additional rationale for excluding medical MS-DRGs from the pool of potential cases that would shift to outpatient under the two-midnight criteria. The notice states:

Claims containing medical MS-DRGs were excluded because, as stated in the August 2013 memorandum, “it was assumed that these cases would be unaffected by the policy change.” Our actuaries excluded medical MS-DRGs when developing the −0.2 percent estimate because they believed that due to behavioral changes by hospitals and admitting practitioners most inpatient medical encounters spanning less than 2 midnights before the current 2-midnight policy was implemented might be reasonably expected to extend past 2 midnights after its implementation and would thus still be considered inpatient. They believed that the clinical assessments and protocols used by physicians to develop an expected length of stay for medical cases were, in general, more variable and less defined than those used to develop an expected length of stay for surgical cases. 

HFMA finds CMS’s logic badly flawed for two reasons. First, it is important to remember that physicians writing an admission or discharge order have no direct financial exposure to a Recovery Audit Contractor (RAC) denial. Therefore, there’s no economic incentive for a physician to delay discharge to meet an administrative payment criteria impacting only the hospital. And in fact, doing so likely increases the physician’s malpractice risk should the patient experience harm while unnecessarily admitted.  

Second, as CMS correctly points out, there is more variability and less definition in the protocols used to estimate lengths of stay for medical cases than surgical cases. However, RACs have exploited that very variability to deny medically necessary short stay admissions for cases that would result in a medical MS-DRG upon discharge. These types of cases are a significant driver in the promulgation of the two-midnight rule and its misguided reduction of IPPS payments in the first place.   Given how aggressive the RACs have been with medically necessary stays prior to the two-midnight rule, it stretches credulity to believe that they would not review and challenge medical MS-DRG cases that fail to meet the two- midnight threshold. In all likelihood, they will pursue these cases with even greater zeal, given the smaller pool of cases from which they can collect a bounty under two-midnight. Based on this expectation of aggressive auditing for stays of less than two midnights, our members report an increased use of outpatient observation services for these stays as opposed to inpatient admissions.

As such, HFMA believes that CMS must incorporate Medical MS-DRGs with stays of less than two-midnights in any analysis of the impact of the two-midnight rule. Excluding these cases is logically incorrect and knowingly biases the results against hospitals, resulting in inappropriate reductions in IPPS payment. 

Timing of a Final Resolution of the .2% IPPS Payment Cut

In the Notice CMS seeks comment on whether it should await the completion of analysis of FY 2014 and FY 2015 data before coming to resolution of this issue. Table 1 provides data from an analysis comparing inpatient claims volume for stays of different durations conducted by the American Hospital Association. 

Percent Change in Inpatient Encounters, FY2013 to FY20141

Length of Stay FY 2013  FY 2014  Percentage Change
Less than 2 days  1,173,783  1,059,254  -10% 
2-3 days  3,376,510  3,356,805  -1% 
4 or more  5,016,479  4,773,975  -5% 
All cases  9,566,772  9,190,034  -4% 

This analysis of actual claims data, which is consistent with prior analyses, shows the volume of inpatient cases across all categories of duration has decreased. It contradicts the illogical assumptions (which to-date are unsupported by data) that CMS has used to justify the .2% payment cut. In light of this, HFMA believes that CMS must immediately reverse the inappropriate reduction in IPPS payments. Further, HFMA believes that hospitals are due interest associated with the inappropriately withheld payments. 

HFMA looks forward to any opportunity to provide assistance or comments to support CMS as it attempts to set adequate payment levels for hospitals. As an organization, we take pride in our long history of providing balanced, objective financial technical expertise to Congress, CMS, and advisory groups.  

We are at your service to help CMS gain a balanced perspective on this complex issue. If you have additional questions, you may reach me or Richard Gundling, Vice President of HFMA’s Washington, DC, office, at (202) 296-2920. The Association and I look forward to working with you.


Joseph J. Fifer, FHFMA, CPA
President & Chief Executive Officer
Healthcare Financial Management Association

1 American Hospital Association. Letter from Rick Pollack to Andy Slavitt, Acting Administrator, CMS. Aug. 27, 2015. 

About HFMA

HFMA is the nation’s leading membership organization for more than 40,000 healthcare financial management professionals. Our members are widely diverse, employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and long-term care facilities, physician practices, accounting and consulting firms, and insurance companies. Members’ positions include chief executive officer, chief financial officer, controller, patient accounts manager, accountant, and consultant. 

HFMA is a nonpartisan professional practice organization. As part of its education, information, and professional development services, HFMA develops and promotes ethical, high-quality healthcare finance practices. HFMA works with a broad cross-section of stakeholders to improve the healthcare industry by identifying and bridging gaps in knowledge, best practices, and standards.


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