Big Changes Ahead: Medicare IPPS 2012 and What It Means for Hospitals

Medicare and hospitals go hand in hand. Hospital payments account for the greatest share of the federal program's spending, and Medicare is the largest payor for hospital services, comprising a significant portion of most hospitals' revenue. As of Oct. 1, though, hospitals will operate under a revised inpatient prospective payment system — one that could put many hospitals at risk.

The proposed changes to IPPS for fiscal year 2012
Imagine if the method of assessing individual taxes changed and the government scrapped its traditional, income-based approach for a model that taxed Americans based upon their personal caliber.

This may sound far-fetched, but healthcare leaders might share a strange yet familiar connection with the scenario — particularly in light of the Centers for Medicare & Medicaid Services' proposed changes to IPPS. These rules, unveiled in April 2011 for fiscal year 2012 (thus going into effect Oct. 1), contain payment rate changes, coding adjustments, and the quality reporting program which mandates hospitals to report on 55 measures for FY 2012.

More than 60 percent of hospitals already lose money on Medicare, according to the American Hospital Association. Section 3401 of the Patient Protection and Affordable Care Act detailed across-the-board Medicare payment reductions for hospitals. These cuts are estimated to reduce reimbursements by $155 billion from 2010-2019, a strategy hospitals agreed to accept in 2009 to help fund healthcare reform. While good news for CMS, these additional Medicare cuts could prove devastating to hospitals, particularly when paired with extensive performance-based healthcare delivery reforms, such as value-based purchasing, which is set to begin in Oct. 2012.

Putting IPPS into context
From an academic and legal standpoint, Craig B. Garner, a professor of law at Pepperdine University in Malibu, Calif., says the proposed changes are fascinating. "Throughout its history, Medicare has employed variations of cost-based reimbursement, originally factoring in the actual cost to a provider and then transitioning to a predetermined rate based upon a patient’s particular diagnosis. Soon it may not matter anymore," says Mr. Garner. "The new regulations are changing a very complex system and steering it in a totally new and equally complicated direction, only this time based on performance.  This will include what people think of a hospital, the patient experience during a hospital stay, and ultimately the reliability of a hospital in its delivery of patient care," says Mr. Garner.

The release of the proposed IPPS rule was met with a subdued reaction compared to the distaste that followed the publication of the proposed rules for accountable care organizations. Few organizations issued written responses to CMS throughout the IPPS comment period, which ended June 20. As perhaps explanation for the lack of response, the IPPS rule, as written, is extremely dense and difficult to comprehend.

"On ACOs, everybody was voicing an opinion on it," says Ken Perez, who directs healthcare performance management provider MedeAnalytics' healthcare policy team and serves as the company's senior vice president of marketing. ACOs are an optional program, but the IPPS is the mandatory, main reimbursement system for every hospital providing inpatient care for Medicare beneficiaries. "The details are going to surprise a lot of people. The impact of the proposed reductions is much bigger than what we expected in April," says Mr. Perez.

Doing the math
How much bigger? Well, a 300-bed hospital with $250 million in revenue in FY 2010 will need to reduce costs by more than $6 million in FY 2012 to maintain Medicare margins, according to "Medicare Zero," a white paper Mr. Perez co-authored. That finding is based on this rationale: The IPPS market basket update for FY 2012 is 2.8 percent. A 0.1 percent reduction, as mandated by the Patient Protection and Affordable Care Act, and productivity adjustment of -1.2 percent leaves this figure at 1.5 percent. Combined with a proposed document and coding improvement recoupment (-2.9 percent) and a proposed document and coding improvement prospective cut (-3.15 percent), the market basket update is -4.55 percent. Finally, a 1.1 percent increase (to restore rural floor budget neutrality adjustments) leaves the net payment reduction for FY 2012 at -3.45 percent.

Political factors weighing in on Medicare, Medicaid
In July, 219 members of the U.S. House of Representatives and 45 senators signed two separate letters to CMS Administrator Donald Berwick, MD, in an effort to reduce the coding offset within 2012 IPPS. This coding offset, or DCI, is the result of the two-year phase in that began in 2008 when CMS moved from DRGs to MS-DRGs to reflect severity-of-illness differences between patients. This change allowed more dollars for sicker patients, but also increased reported case-mix under MS-DRG even if the patients' level of illness and resources used to treat them did not vary from previous years.

The legislators claim the coding offsets are based on the assumption that hospital payments have increased solely due to changes in coding, but other factors — such as sicker patients or more complex conditions — might have brought on the change. Many opposing the coding offset also cite outpatient care as a source of change to hospital payments, since more patients are treated in the outpatient setting for less severe conditions and those admitted to the hospital are more likely to be severely ill.

The proposed changes to IPPS are a small wave in a much larger sea of change in the country's Medicare program. The debt-ceiling talks, which peaked in July, signaled serious concerns that Medicare and Medicaid payments may not be guaranteed if a solution wasn't agreed upon before the debt ceiling was reached. The delay in agreements placed approximately $50 billion in Medicare and Medicaid payments for the month of August at risk, further denting hospitals' confidence in federal reimbursement.

How can hospitals breakeven?
Behind the number-crunching stands a simple fact: It's impossible for any hospital to trim $6 million from its budget to breakeven without serious changes to its core operations. Mr. Perez recommends hospitals focus their efforts on improving the efficiency and effectiveness of their care delivery. To that end, strengthening partnerships with physicians is one of the four strategies Mr. Perez discusses in "Medicare Zero." Hospitals can identify the 10 MS-DRGs, or Medicare severity diagnosis-related groups, that are causing the hospital to lose the most money. By monitoring clinician adherence to best practice protocols and treatment programs, hospitals can reduce or eliminate variations in care for certain DRGs.

Hospitals should consider the elimination, reduction or combination of service lines that are unprofitable. Outsourcing the management of certain service lines may reduce costs while also maintaining or improving outcomes. On the other hand, high-volume and profitable service lines should be expanded. By analyzing market demand, hospitals can offer new services and attract new physicians or patients by doing so. Still, changes in staffing might be a likely option for many hospitals to pursue. The reduction of overhead costs, such as operating room utilization, can be accomplished through stricter scheduling and process standardization.

Value-Based Purchasing and performance periods
It is separate from IPPS and won't kick in for another year, but hospitals shouldn't rest on their laurels and brush the Value-Based Purchasing program to the sidelines. It presents another instance where hospitals will be based on their performance, which is being measured this very moment.

The VBP program, as outlined in Section 3001 of PPACA, is based on measures used in the Hospital Inpatient Quality Reporting program. This includes 17 processes of care measures, claims-based measures, structural measures and patient experience measures as indicated by the HCAHPS survey. VBP isn't set to kick in until Oct. 1, 2012. Hospitals that improve out comes or achieve certain performance standards, compared to their baseline performance, will receive incentive payments for discharges occurring on or after that time. Still, hospitals have already been measured and are currently in the midst of another performance period.

Quality data collected from July 1, 2009-March 31, 2010, will serve as the baseline for determining hospital's quality improvement. One year later, July 1, 2010-March 31, 2011 was known as the "performance period." Data collected from this timeframe (clinical process of care and patient experience) will be used to determine hospitals' achievement scores. This information will be compared to the national performance standards that were derived from the baseline period data. But that's not all — hospitals are being measured now for 30-day mortality rates for the FY 2014 VBP program. This 12-month reporting performance period goes from July 1, 2011-June 30, 2012.

Related Articles on Hospitals and Medicare:

CMS' Value-Based Purchasing Forum: The Time is Now to Shift to Quality Outcomes
More Than 200 Hospitals Leaders Visit Capitol Hill Demanding No More Cuts
Cuts to Medicare, Medicaid Loom as Debt Ceiling Limit Nears

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