Analysis: FY20 inpatient payment rule proposes changes to DSH, wage index

HFMA’s Rich Daly is reporting, “Hospital Medicare IPPS payments in FY20 will increase by about 3.5% on average after accounting for policy changes. However, the impact will vary as the proposed rule would shift Medicare wage index payments from hospitals in urban areas to those in rural areas.

Specifically, the rule increases the wage index for hospitals with a wage-index value below the 25th percentile while decreasing the wage index for hospitals above the 75th percentile. It also removes the urban-to-rural hospital reclassifications from the calculation of the rural-floor wage-index value. Decreases in a hospital’s wage index values are capped at 5% from its final wage index for FY19.

The IPPS base rate is also adjusted so the net effect of the changes to the wage index are budget neutral to the Medicare program. The rule also provides a slight increase in reimbursement for items qualifying for the new technology add-on payment (NTAP).

Another financially significant change in the proposed rule could affect CMS’s distribution of a prospectively determined amount of uncompensated-care payments to Medicare disproportionate share hospitals (DSH) based on their relative share of uncompensated care nationally. The roughly $8.5 billion in uncompensated-care payments planned for FY20 would be an increase of approximately $216 million from FY19 as a result of slight projected increases in Medicare discharges and case-mix. FY20 proposed changes in the uncompensated care DSH payment include using a single year of data on uncompensated-care costs from Worksheet S-10 for FY15 (or FY17 due to changes in worksheet S-10 instructions).”

Takeaway

A couple of comments on the proposed rule. 

1. Wage index: The administration has been saying they wanted to do something about the “disparities” inherent in the wage index for a while. However, I don’t think people were anticipating that they really were going to do something about it. Obviously, this is controversial, and my guess is it will end up being settled in court if it’s finalized as proposed. It will also be interesting to see whether Congress gets involved. 
2. New technology add-on payment (NTAP): CMS made a lot out of the changes to the NTAP in its press release, touting this as a way to ensure access to innovative treatment. While the payment increase is nice, hospitals that provide services with these technologies will still lose money on these cases due to the way the formula works. If CMS wants to truly incentivize the provision of these technologies, it should move to a model like what’s used in OPPS where the specific device or technology is paid for at 100 percent of the cost. 
3. Uncompensated care disproportionate share hospital (UC DSH) Factor 3: “Factor 3” is the mechanism CMS uses to allocate the pool of UC DSH funding to qualifying hospitals based on the level of uncompensated care they provide.  In the 2017 IPPS final rule, CMS increased the number of years it used to calculate factor three to “mitigate undue fluctuations in the amount of uncompensated care payments to hospitals from year to year and smooth over anomalies between cost reporting periods.” 

CMS’s rationale in 2017 was driven by the use of SSI ratios, which are notoriously unstable year-to-year, and were part of the formula for years that used the traditional DSH components to calculate Factor 3. However, the same rationale applies to the broad disparities in how CMS’s audit protocols for uncompensated care, which are relatively new and unavailable to providers, are applied to charity care and bad debt (non-Medicare allowable) hospitals report on worksheet S-10. In its rationale for moving to one year, CMS cites the efforts it has placed on auditing the FY 2015 data. It also discusses the audit results in the context that approximately 10% of audited hospitals have more than a $20 million difference between their audited 2015 and their unaudited 2016 data.

CMS seems to acknowledge that issues with the audits might exist. However, they attribute them to unclear instructions for worksheet S-10. Instead of continuing to use three years-worth of data, CMS proposes to use the unaudited 2017 data citing the revised, improved cost-report instructions. Yes…the S10 instructions weren’t particularly clear in 2015. The revisions in 2017 improved them. However, the instructions still leave a lot to be desired given there’s no discussion of non-Medicare charity care or non-Medicare bad debt in the provider reimbursement manual. This leaves MACs entirely too much discretion on what counts and doesn’t count for purposes of charity care, when in reality that   determination should be based purely on whether or not it adheres to the provider’s financial assistance policy, which could potentially disadvantage some providers based on the sheer random luck of how their auditor interprets/applies CMS’s audit protocols.