Unbiased Analysis of Today's Healthcare Issues

New Legislation affecting Medicare Hospital Payments

Written By: Jason Shafrin - Jul• 07•11

Recent Legislation

  • CMS completed its implementation of Medicare severity–diagnosis related groups (MS–DRGs) and cost-based relative weights in FY 2009.
  • TMA, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), the Congress mandated payment reductions of 0.6 percent in 2008 and an additional 0.9 percent in 2009 to offset the effects of documentation and coding improvements (DCI) projected by the CMS Office of the Actuary (actual hospitals’ DCI increased payments by 2.5 percent in 2008 and by a cumulative 5.4 percent by 2009)

PPACA (i.e., Health Reform) changes to Medicare’s inpatient prospective payment system (IPPS) for hospitals

Below are six key changes that the PPACA legislation made to hospital payments in the current and future fiscal years.

  • PPACA1: Congress mandated a 0.25 percentage point reduction in the payment update for the second half of FY 2010 and for all of FY 2011.
  • PPACA2: Congress temporarily expanded (through 2012) the policy providing additional payments to hospitals that have a low volume of Medicare (not all payers) inpatient discharges and are 15 miles or more from the nearest PPS hospital.
  • PPACA3: Instituted a new two-year program to provide additional payments to hospitals located in counties with relatively low levels of Medicare spending (age, sex, and gender adjusted, but not health status adjusted)
  • PPACA4: PPACA extended for all of FY 2010 the provision in Section 508 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, which gave eligible hospitals an opportunity for a one-time reclassification to a different labor market and allowed this change to increase their payments.
  • PPACA5: The frontier wage index floor will guarentee that hospitals in Montana, North Dakota, Nevada, South Dakota, and Wyoming will maintain a wage index equal to no less than 1.0.
  • PPACA6: Beginning in FY 2011 a rural-floor budget-neutrality adjustment will be applied on a national level, rather than on a state level. CMS estimated that this policy change will increase payments for urban hospitals whose wage index is raised up to the state’s rural level and will decrease payments for other hospitals (including all rural hospitals), which pay for the floor through a budgetneutrality adjustment.


  • Rural hospitals with 100 or fewer beds receive hold-harmless outpatient payments through 2011.  Thus, the switch from a cost-based to OPPS payment system will not effect reimbursement negatively for these providers.  In January 2012, the OPPS system is set to be instituted for these providers.

Source: MedPAC’s March 2011 Report to Congress.

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