On April 24, 2018, the Centers for Medicare and Medicaid Services (CMS) released the Fiscal Year 2019 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital Prospective Payment System (LTCH PPS) Proposed Rule (the “Proposed Rule”). In addition to other proposals (see our previous Client Alert which discusses proposed revisions to the Medicare and Medicaid EHR Incentive Programs found here), the Proposed Rule revises certain requirements for hospitals and hospital units that are excluded from the IPPS and proposes to eliminate the 25-percent threshold policy under the LTCH PPS.

Hospital and Hospital Units Excluded from the IPPS

For hospitals and hospital units that are excluded from the IPPS – including, but not limited to, qualifying inpatient rehabilitation facility hospitals and units (IRFs), long-term care hospitals (LTCHs), and psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)) – reimbursement is determined on the basis of reasonable costs, subject to a ceiling. Historically, CMS has been concerned with acute care hospitals carving out long-term care units into separate but co-located LTCHs to receive the higher payments associated with LTCHs’ exclusion from the IPPS, which could lead to inappropriate patient shifting. This concern extended to both hospital-within-hospitals (HwHs) and satellite facilities. As a result, CMS required IPPS-excluded HwHs and satellite facilities that co-located with IPPS hospitals or IPPS-excluded hospitals to demonstrate they were under separate control.

Satellite Facilities

Last year, CMS finalized a change to the HwH regulations to require that only the IPPS-excluded HwHs that are co-located with IPPS hospitals must comply with the separateness and control requirements. The updated regulations allow an IPPS-excluded hospital to co-locate with an HwH without requiring the HwH to demonstrate that the co-located hospitals were under separate control. CMS found the separateness and control requirement was no longer necessary in these circumstances due to changes in the way most types of IPPS-excluded hospitals were paid under Medicare. In response to the change to HwHs, CMS received comments requesting analogous changes be made to the rules governing satellite facilities.

In the Proposed Rule, CMS proposes that only IPPS-excluded satellite facilities that are co-located with IPPS hospitals must comply with the separateness and control requirements in order to be excluded from the IPPS. A satellite facility that is part of an IPPS-excluded hospital that provides inpatient services in a building also used by an IPPS-excluded hospital, or in one or more entire buildings located on the same campus as buildings used by an IPPS-excluded hospital, would no longer be required to meet the separateness and control requirements.

Consistent with these changes, the Proposed Rule further proposes an IPPS-excluded satellite facility of an IPPS-excluded unit of an IPPS-excluded hospital would not have to comply with the separateness and control requirements so long as the satellite of the excluded unit is not co-located with an IPPS hospital. However, CMS does emphasize the importance that payment rules, such as the HwH or satellite facility rules, never waive or supersede the requirement that all hospitals comply with the hospital conditions of participation (CoPs), and that all hospitals demonstrate separate and independent compliance with the hospital CoPs, even when an entire hospital or part of a hospital is located in a building also used by another hospital, or in one or more buildings located on the same campus as buildings used by another hospital.

Finally, CMS notes that the changes would not affect IPPS-excluded satellite facilities that are co-located with IPPS hospitals that are currently grandfathered under 42 CFR 412(h)(2)(iii)(A)(2) (hospitals and satellite facilities excluded from the IPPS prior to October 1, 2009). Those satellite facilities would continue to maintain their IPPS-excluded status without complying with the separateness and control requirements so long as all applicable requirements under the rules were met.

IPPS Excluded Units of Hospitals

Under the existing regulations, an excluded psychiatric or rehabilitation unit cannot be part of an institution that is excluded in its entirety from the IPPS. This policy was adopted because at the time it would have been redundant to allow an IPPS-excluded hospital to have an IPPS-excluded unit because both the hospital and the unit would have been paid under the same Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) payment system methodology. CMS was also concerned that the IPPS-excluded hospitals might artificially inflate their target amounts by operating IPPS-excluded units. However, given the introduction of prospective payment systems for both IRFs and IPFs, CMS no longer believes it is redundant for an IPPS-excluded hospital to have an IPPS-excluded unit, nor is it possible for an IPPS-excluded hospital to artificially inflate their target amounts because Medicare payment for discharges from the unit would not be based on reasonable cost. Therefore, the Proposed Rule revises the regulations to allow an excluded psychiatric or rehabilitation unit to be part of an IPPS-excluded hospital.

For example, under the proposed rule, an LTCH operating a psychiatric unit would receive payment under the IFP PPS for discharges from the psychiatric unit because Medicare pays for services provided by an excluded hospital unit under a separate payment system from the hospital in which the unit is a part. The LTCH would still receive payment under the LTCH PPS for discharges not from the psychiatric unit.

While this change would allow an IPPS-excluded hospital to have an excluded psychiatric and / or rehabilitation unit, the Proposed Rule makes it clear that an IPPS-excluded hospital may not have an IPPS-excluded unit of the same type as the hospital. Once again, CMS emphasizes that an IPPS-excluded hospital operating an IPPS-excluded unit is still required to be in compliance with all other Medicare regulations and the CoPs applicable to the hospital or unit.

Proposed Elimination of the “25 Percent Threshold Policy”

The “25 percent threshold policy” is a per discharge payment adjustment in the LTCH PPS that is applied to payments for Medicare patient discharges from an LTCH when the number of such patients originating from any single referring hospital is in excess of the applicable threshold for a given cost reporting period (such threshold is generally set at 25-percent, with some exceptions). If an LTCH exceeds the applicable threshold during a cost reporting period, payment for the discharge that puts the LTCH over the threshold and all discharges subsequent to that discharge in the cost reporting period from the referring hospital are adjusted at cost report settlement.

CMS proposes to remove this payment adjustment policy.

However, in order to counter the potential increase in aggregate LTCH PPS payments, CMS is proposing a one-time permanent budget neutrality factor adjustment to the LTCH PPS standard Federal payment rate to ensure that the removal of the 25-percent threshold policy is budget neutral. Based on the best available claims data, CMS has determined a proposed budget neutrality factor of 0.9 percent that would be applied to the proposed Fiscal Year 2019 LTCH PPS standard Federal payment rate.

CMS invites public comments for the proposed changes under the Proposed Rule. The deadline for submitting comments is June 25, 2018.

Additional Information

If you have questions regarding the proposed changes for hospitals excluded from the IPPS or the elimination of the “25 Percent Threshold Policy”, please contact one of the authors.