2020 IPPS Proposed Rule: Proposed Payment Changes

on Tuesday, 07 May 2019. All News Items | Documentation | Coding

Rethinking Rural Health

This is the second article in a series of 2020 IPPS Proposed Rule Articles. Last week’s article provided details of the significant proposed changes to the CC and MCC severity designations. This week we take a look at proposed payment rate changes and the wage-index adjustment proposal being touted by CMS as a key priority of “Rethinking Rural Health.”

Proposed Payment Rate Changes by the Numbers

“By law, CMS is required to update payment rates for IPPS hospitals annually, and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. This is known as the hospital “market basket.” The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area.”

  • 3.2% is the projected market basket update for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users.
  • 3.7% is the CMS estimated total increase in IPPS payments for FY 2020.
  • $4.7 Billion is the increase in total Medicare spending on inpatient hospital services, including capital, projected by CMS for FY 2020.

Hospital Readmission Reduction Program (HRRP)

  • 2,599 is the number of hospitals that CMS estimates will have base operating DRG payments reduced based on their hospital readmission rates.
  • $550 Million the estimated amount CMS will save in FY 2020 as a result of decreased payments to the estimated 2,599 hospitals.

Hospital Inpatient Quality Report (IQR) Program

CMS estimates that proposed changes for this program will result in changes to the information collection burden compared to previously adopted requirements. Specifically, the proposal to adopt the Hybrid Hospital-Wide All-Cause Readmission (Hybrid HWR) measure. Estimated impact of this change:

  • 2,211 hours in total collection burden increase, and
  • $83,266 total cost increase for all participating IPPS hospitals annually.

Hospital Value-Based Purchasing (VBP) Program

This program is a budget neutral program because “by law, the amount available for value-based incentive payments under the program in a given year must be equal to the total amount of base operating MS-DRG payment amount reduction for that year.”

  • $1.9 Billion is the estimated amount available for value-based incentive payments for FY 2020 discharges.


“Rethinking Rural Health:” Proposed Changes to the Inpatient Hospital Wage Index

Public Comments

In the FY 2019 IPPS Proposed Rule, CMS solicited comments, suggestions and recommendations for changes to the Medicare inpatient hospital wage index. Fast forward to the April 2019 release of the FY 2020 IPPS Proposed Rule where CMS shares that “many of the responses received…reflect a common concern that the current wage index system perpetuates and exacerbates the disparities between high and low wage index hospitals.” There was also a concern “that the calculation of the rural floor has allowed a limited number of States to manipulate the wage index system to achieve higher wages for many urban hospitals at the expense of hospitals in other states, which also contributes to wage index disparities.”

Inpatient Hospital Wage Index, What is it?

In the April 23, 2019 Press Release CMS Advances Agenda to Re-Think Rural Health and Unleash Medical Innovation, CMS notes the following about the Inpatient Hospital Wage Index:

  • It specifies how inpatient payment rates are adjusted to account for local differences in wages that hospitals face in their respective labor markets,
  • It is intended to measure differences in hospital wage rates across geographic regions,
  • It is updated annually based on wage data reported by hospitals, and
  • Hospitals located in areas with wages less than the national average receive a lower Medicare payment rate than hospitals located in areas with wages higher than the national average.

An example provided in the Press Release is that of hospital in a rural community receiving about $4000 in payment for treatment of a Medicare beneficiary with pneumonia while a hospital in a high wage area could receive nearly $6,000 for the same case due to differences in the wage index. CMS goes on to note that, “high wage index hospitals, by virtue of higher Medicare payments, can afford to pay their staff more, allowing the hospitals to continue operating as high wage index hospitals. Conversely, low wage index hospitals often cannot afford to pay wages that would allow them to climb to a higher wage index. Over time, this creates a downward spiral that increases the disparity in payments between high wage index and low wage index hospitals, and payment for rural hospitals and other low wage index hospitals decline.”


FY 2020 Inpatient Hospital Wage Index Proposals

Stopping the “Downward Spiral”

First, CMS is proposing to increase the wage index for hospitals with a wage index value below the 25th percentile wage index. For FY 2020, the 25th percentile wage index value across all hospitals is 0.8482.

Specifically, the increase would be equal to half the difference between the otherwise applicable final wage index value for a year for that hospital and the 25th percentile wage index value for that year across all hospitals.

To better understand what the increase would be, CMS provides the following example in the Proposed Rule:

  • First, assume the wage index for a geographically rural Alabama hospital is 0.6663,
  • Second, note the 25th percentile wage index value for FY 2020 is 0.8482.
  • Third, determine half the distance between the hospital wage index and the 25th percentile (0.8482 – 0.6663/2) = 0.0910
  • Fourth, add the Rural Alabama hospital wage index with half the difference to get the new FY 2020 wage index value for the hospital (0.6663 + 0.0910) = wage index 0.7573.

This proposal would be effective for at least 4 years beginning in FY 2020.

Budget Neutrality

Second, CMS believes that “it would be appropriate to maintain budget neutrality for the low wage index policy proposed…by adjusting the wage index for high wage index hospitals.” Specifically, CMS is proposing to identify high wage index hospitals as hospitals in the highest quartile. This would be hospitals above the 75th percentile wage index across all hospitals for a fiscal year.

The methodology would be analogous to methodology used for hospitals below the 25th percentile. Following is the example provided in the Proposed Rule:

  • First, assume high wage index Hospital A has a wage index value of 1.7351,
  • Second, CMS notes that based on data for the proposed rule, the 75th percentile wage index value is 1.0351.
  • Third, determine the distance between the hospital wage index and the 75th percentile (1.7351 – 1.0351) = 0.7000,
  • Fourth, CMS would estimate the uniform multiplicative budget neutrality factor needed to reduce those distances for all high wage index hospitals so the estimated decreased payments offset the estimated increased aggregate payments to low wage index hospitals. For FY 2020 the estimated factor is 3.4 percent. Therefore, Hospital A’s wage index would be reduced by 0.0238 (Prior distance of 0.7000 x 0.034) = 0.0238.
  • Fifth, the new wage index for Hospital A would be 1.7113 (that is, current value 1.7351 – wage reduction of 0.0238) = 1.7113.

To help mitigate any significant wage index decreases, CMS is “proposing to place a 5-percent cap on any decrease in a hospital’s wage index from the hospital’s final wage index in FY 2019. In other words, we are proposing that a hospital’s final wage index for FY 2020 would not be less than 95 percent of its final wage index for FY 2019.”

Rural Floor Calculation Change

Commenters to the FY 2019 Proposed Rule “indicated that another contributing systemic factor to wage index disparities is the rural floor….for discharges on or after October 1, 1997, the area wage index applicable to any hospitals that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State.”

CMS is proposing to remove the urban to rural reclassifications from the calculation of the rural floor beginning in FY 2020. You can read a detailed discussion about this on pages 19396 – 19398 of the FY 2020 IPPS Proposed Rule in the Federal Register.

April 29, 2019 CMS.Gov Newsroom Article: “What they are Saying / CMS Advances Agenda to Re-Think Rural Health and Unleash Medical Innovation”

Less than a week after the FY 2020 IPPS Proposed Rule was released, CMS posted a CMS.Gov Newsroom Article with reaction from key healthcare stakeholders to the Proposed Rule. Since I live in Alabama and work for a company located in Birmingham, I wanted to share what Alabama leaders are saying about “Rethinking Rural Health.”

Executive Vice President and Chief Policy Officer Danne Howard
Alabama Hospital Association

“We could not be more grateful to CMS Administrator Seema Verma and her staff for listening to our concerns and taking action,” Howard said.  “Alabama has been penalized for decades by this flawed formula, which has resulted in some states being paid three times as much as Alabama’s hospitals for the exact same procedure.  Alabama’s entire congressional delegation worked tirelessly in a non-partisan manner to make this happen, and we specifically would like to acknowledge Sens. Richard Shelby and Doug Jones and Rep. Bradley Byrne for leading the charge.”

Sen. Richard Shelby (R-Ala)

“The Medicare Wage Index has negatively affected Alabama hospitals for over 20 years,” said. [sic], who wrote a letter last month signed by the state’s congressional delegation to Center for Medicare and Medicaid Services Administrator Seema Verma requesting a change to the index. After two decades of working to address a problem that significantly contributes to heightened hospital closures throughout our state, I am glad to see Administrator Verma and CMS taking steps to solve this dire issue. I look forward to continuing my work with the agency to make sure that this sort of careless imbalance is eliminated moving forward.”

Sen. Doug Jones (D-Ala)

“The decision by CMS to propose a new reimbursement formula is welcome news and a great first step for the health care providers across our state who have struggled for years with an inexplicably low reimbursement rate,” the senator said. “These hospitals provide care to all Alabamians, regardless of their insurance status, and they have to absorb the costs when that care isn’t reimbursed. That puts the entire system on slippery financial footing and can hurt the broader community if a hospital is forced to close its doors.”

CMS is accepting comments to the Proposed Rule no later than 5 p.m. EDT on June 24, 2019.


CMS 2020 IPPS Proposed Rule Home Page: https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/FY2020-IPPS-Proposed-Rule-Home-Page.html

CMS Fact Sheet Announcing Release of 2020 Proposed Rule: https://www.cms.gov/newsroom/fact-sheets/fiscal-year-fy-2020-medicare-hospital-inpatient-prospective-payment-system-ipps-and-long-term-acute

CMS April 23, 2019 Press Release: CMS Advances Agenda to Re-think Rural Health and Unleash Medical Innovation: https://www.cms.gov/newsroom/press-releases/cms-advances-agenda-re-think-rural-health-and-unleash-medical-innovation

Article by Beth Cobb

Beth Cobb, RN, BSN, ACM, CCDS, is the Manager of Clinical Analytics at Medical Management Plus, Inc.  Beth has over twenty-five years of experience in healthcare including eleven years in Case Management at a large multi-facility health system. 

In her current position, Beth is a principle writer for MMP’s Wednesday@One weekly e-newsletter, an active member of our HIPAA Compliance Committee, MMP’s Education Department Program Director and co-developer of MMP’s proprietary Compliance Risk Assessment (CRA) Tool. You may contact Beth at This email address is being protected from spambots. You need JavaScript enabled to view it..

This material was compiled to share information.  MMP, Inc. is not offering legal advice.  Every reasonable effort has been taken to ensure the information is accurate and useful.

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