Connie Ouellette, CPA
Ellen Donahue

Final Rule: Inpatient Prospective Payment System (IPPS) FY 2014

Key Provisions: Update Factors – FY 2014 Inpatient Prospective Payment System (IPPS)

The following updates will become effective October 1, 2013:


  As Proposed       → Final  

Market basket update factor 2.50%        2.50%  

Multi-factor productivity adjustment -0.40%        -0.50%  

ACA required adjustment -0.30%        -0.30%  

American Tax Relief Act - documentation
and coding*
-0.80%        -0.80%  

Inpatient admission and medical review
-0.20%        -0.20%  

Increase in IPPS Operating Payment Rates 0.80%        0.70%  

*This documentation and coding reduction is not applicable to the hospital-specific rate for Sole Community Hospitals.  

Capital rate $432.03        $429.31  

Outlier threshold $24,140        $21,748  

Other key provisions include:

  • Medicare dependent status: Expires on September 30, 2013, unless extended by Congress
  • Low-volume hospital payment adjustment: The temporary changes to the low-volume payment adjustment expire on September 30, 2013. Unless extended by Congress, the low-volume payment adjustment will return to the methodology used prior to FY 2011.
  • American Tax Relief Act: A documentation and coding reduction of 0.80% is being imposed to recoup $11 billion in FYs 2014 through 2017 for changes in documentation and coding that do not reflect real changes in case-mix.

    • The documentation and coding reduction is not applicable to the
      hospital-specific rate for Sole Community Hospitals.
  • Refinement of MS-DRG relative weight calculation: Four additional cost centers were added to the existing 15 cost centers used to calculate the relative weights for MS-DRGs. 

    • The four new cost centers are implantable devices, MRIs, CT scans, 
      and cardiac catheterization.
  • Rebasing and revision of hospital market baskets: Base year cost weights were updated from a FY 2006 base year to a FY 2010 base year and the labor-related share of the FY 2010 hospital market basket was recalculated.
  • Reduction for excess readmissions: A reduction will be applied to the hospital’s base operating DRG payment due to excess readmissions of selected conditions. 

     The maximum readmission adjustment factor for FY 2014 cannot be
      more than a 2% reduction compared to a maximum 1% reduction for
      FY 2013.

     In FY 2013 and FY 2014 the three conditions are pneumonia, acute
      myocardial infarction, and heart failure. 

     In FY 2014 CMS increased the number and types of planned
      readmissions that no longer count against a hospital’s
      readmissions rate. 

     The final rule established two additional readmissions measures for
      FY 2015 – chronic obstructive pulmonary disease and total hip
      arthroplasty/total knee arthroplasty.
  • Hospital Value-Based Purchasing (VBP) program: Payment details for FY 2014 are included in the final rule. 

     The FY 2014 VBP payment pool is funded by a 1.25% reduction to
      base-operating DRG payments to applicable hospitals, up from 1%
      in FY 2013. The reduction will increase by 0.25% through FY 2017 to
      reach the cap of 2%, which will be applicable in future fiscal years. 

     The final rule established policies for the FY 2016 VBP program
      including measures, performance standards, and performance and
      baseline periods.
  • Hospital-Acquired Condition (HAC) reduction program: The final rule established measures, scoring, and risk adjustment methodology to implement the FY 2015 payment adjustment under the HAC reduction program. Under the HAC reduction program, hospitals that rank in the lowest-performing quartile of HACs will be paid 99% of what otherwise would have been paid under IPPS.
  • GME Inpatient days for Medicare payment eligibility purposes: Labor and delivery days will be included as inpatient days in the denominator of the ratio used to determine Medicare utilization for cost reporting periods beginning on or after October 1, 2013, for direct GME purposes. 
  • DSH payment adjustment changes and the provision of additional payment for uncompensated care: In FY 2014 hospitals will be paid 25% of the amount they previously would have received under the current DSH formula. The remaining 75% of what the hospitals would have received will be paid as additional payments after the amount is reduced for changes in the percentage of individuals that are uninsured. Each Medicare DSH hospital will receive its additional amount based on its share of the total amount of uncompensated care for all Medicare DSH hospitals for a given time period. Payments for the 75% related to uncompensated care will be paid on a per-discharge basis.
  • Medicare Part B Inpatient billing: If a Part A (Inpatient) stay has been denied as not reasonable or necessary, hospitals will be allowed to bill Part B (Outpatient) for the services that would have been considered reasonable and necessary if the patient had been an outpatient. Claims for Part B services must be filed within one year from the date of service.
  • Admission and medical review criteria for hospital inpatient services: A 2% reduction in the standardized and hospital-specific amount was implemented to offset additional expected IPPS payments, related to a clarification of the rules that presumes hospital inpatient status if a beneficiary is admitted to the hospital pursuant to physician orders and is expected to require care that crosses two midnights. CMS also specifies that hospital stays with the expectation the patient will require care less than two midnights will not generally be an appropriate inpatient stay.
  • Inpatient Psychiatric Facility (IPF) quality reporting program: For rate year 2014 and beyond, the update factor to a standard Federal rate will be reduced by 2% for IPFs that do not comply with quality data submission.

     For FY 2014 six chart-abstracted IPF quality measures are being used
      for payment adjustment. 

     No changes were made to the quality measures for FY 2015.

     Three new quality reporting measures were proposed for FY 2016 with
      only one (SUB-1, Alcohol Use Screening) being included in the final
      rule. A new claims-based measure (FUH – Follow-up After
      Hospitalization for Mental Illness) was added in the final rule.
  • Critical Access Hospitals (CAH): Conditions of participation were clarified to require that CAHs have the capacity to provide inpatient care on site.

Questions? Need more information? Contact Ellen Donahue or Connie Ouellette.