2011 Medicare Payment Update for Post-Acute Care Providers

August 5, 2010

The Centers for Medicare & Medicaid Services (CMS) recently released various notices and final rules updating 2011 Medicare reimbursement rates for post-acute care providers, including long-term acute care hospitals (LTACHs), inpatient rehabilitation facilities (IRFs), skilled nursing facilities (SNFs), home health agencies (HHAs) and hospices. These Medicare rate updates generally implement negative payment adjustments mandated by the Patient Protection and Affordable Care Act (Pub. L. No. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152) (together, PPACA). Yet in spite of these adjustments, SNFs, hospices, IRFs and LTACH have fared relatively well garnering collective Medicare payment increases totaling $919 million, with HHAs offsetting these reimbursement gains by suffering a proposed $900 million Medicare reimbursement cut for calendar year 2011.

0.5 Percent ($22 Million) Medicare Payment Increase for LTACHs for Fiscal Year 2011

On July 30, 2010 CMS released a final rule implementing certain provisions of PPACA applicable to short-term acute care hospitals and LTACHs. As part of the rule, CMS finalized a net Medicare payment increase of 0.5 percent for LTACHs for Fiscal Year (FY) 2011 (applicable to discharges occurring on or after Oct. 1, 2010 through Sept. 30, 2011).

This payment update includes a 2.5 percent market basket update, as offset by a -2.5 percent adjustment to account for an alleged increase in aggregate case-mix unrelated to underlying changes in patients’ health status in prior fiscal years resulting from changes to LTACH documentation and coding practices, and an additional market basket reduction of 0.5 percent mandated by Sections 3401(c), 10319(b) and 1105(b) of PPACA. The net effect of these reductions would decrease the Standard Federal Rate for FY 2011 to -0.49 percent (applying a factor of 0.9951 in determining the LTCH-PPS Standard Federal Rate).

CMS, however, also proposed increasing high cost outlier payments by 0.6 percent and short-stay outlier payments by 0.3 percent for a net payment increase to LTACHs of 0.5 percent in FY 2011. CMS also finalized the LTACH high-cost outlier threshold for FY 2011 at $18,785. In total, CMS estimates Medicare LTACH payments will increase by $22 million to $4.9 billion in FY 2011 and has estimated that the average 2011 LTACH payment per case will increase to $37,405 (up from $37,235 in FY 2010).

2.16 Percent ($135 Million) Medicare Payment Increase Proposed for IRFs for Fiscal Year 2011

On July 22, 2010, CMS published a notice updating Case-Mix Group relative weights and length of stay values, the wage index, and outlier threshold for high-cost cases and containing its FY 2011 Medicare payment rates for IRFs using updated FY 2009 IRF claims and FY 2008 IRF cost report data. CMS estimates that aggregate Medicare payments to IRFs for FY 2011 would increase by approximately 2.16 percent, which equates with a $135 million bump in payments. This increase reflects a 2.5 percent market basket increase, as reduced by 0.25 percent as mandated by PPACA, together with an approximate 0.1 percent overall estimated decrease in estimated IRF outlier payments resulting from an update to the outlier threshold amount from 3.1 percent in FY 2010 to 3 percent in FY 2011.

1.7 Percent ($542 Million) Medicare Payment Increase Proposed for SNFs for Fiscal Year 2011

On July 22, 2010, CMS published a notice containing its FY 2011 Medicare payment rates for SNFs. Under the SNF prospective payment system, Medicare payments to nursing homes during FY 2011 will increase 1.7 percent for a total increase of $542 million. Skilled nursing facility payment rates are calculated using a market basket index that reflects the changes in value of goods and services relevant to nursing home care. CMS also makes a forecast error adjustment if the difference between the projected and actual market basket index exceeds 0.5 percent. To calculate the FY 2011 payment rate, CMS looked at the most recent available data from FY 2009, when the forecasted market basket index was 3.4 percent and the actual increase was 2.8 percent. As a result, the FY 2011 market basket increase factor of 2.3 percent was decreased by 0.6 percent, for the positive update of 1.7 percent.

In addition, the notice describes a provision of PPACA that changes that implementation schedule in FY 2011 for the Resource Utilization Groups, Version 4 case-mix classification system. CMS will delay implementing the provision “until system modifications are completed,” according to a CMS press release. Comments in response to the notice are due by Sept. 20, 2010.

4.75 Percent ($900 Million) Medicare Payment Cut Proposed for HHAs for Calendar Year 2011

In a proposed rule published in the July 23, 2010 Federal Register, CMS proposed a number of changes that would reduce Medicare payments to HHAs under the home health prospective payment system (HH-PPS) by 4.75 percent in calendar year (CY) 2011—representing an approximate $900 million cut in Medicare payments to HHAs from payments received by HHAs in CY 2010.

The proposed net reduction includes the combined effects of a market basket update ($270 million increase), a wage index update ($20 million increase), purported reductions to the HH-PPS rates to account for increases in aggregate case-mix unrelated to underlying changes in patients’ health status ($700 million decrease), and application of a 1 percent reduction to the home health market basket update, as mandated by PPACA. Based on updated data analysis of case-mix changes, instead of the planned 2.71 percent reduction for CY 2011, CMS said it proposes to reduce HH-PPS rates by 3.79 percent in CY 2011 and a further 3.79 percent in CY 2012.

HHAs receive outlier payments for 60-day home health episodes of care that carry unusually high costs. Prior to the enactment of PPACA, total outlier payments could not exceed 5 percent of total projected or estimated home health payments in a given year. However, due to uncontrolled growth in outlier payments in a few discrete areas of the country, PPACA implemented a change to the existing home health outlier policy through a 5 percent reduction to HH-PPS rates, with total outlier payments not to exceed 2.5 percent of the total payments estimated for a given year. HHAs are also permanently subject to a 10 percent agency-level cap on outlier payments. It is anticipated that these Medicare reimbursement adjustments will further increase the already 25 percent to 30 percent of home health agencies operating at a loss. Comments on the proposed rule are due by Sept. 14, 2010.

1.8 Percent ($220 Million) Medicare Payment Increase Proposed for Hospices for Fiscal Year 2011

On July 22, 2010 CMS issued a notice announcing that hospices would receive an estimated 1.8 percent Medicare payment rate increase for FY 2011—representing an approximate $220 million bump in Medicare payments to hospices from payments received by hospices in FY 2010. This estimated increase to the hospice wage increase is the net result of a 2.6 percent increase in the hospital market basket, as offset by an estimated 0.8 percent decrease in payments to hospices due to updated wage index data and the second year of CMS’s seven-year phase-out of its wage index budget neutrality adjustment factor (BNAF).

The BNAF was implemented in 1997, when CMS moved from an outdated wage index to a more current and accurate method for determining hospice payments. To minimize disruption to services, this special budget neutrality adjustment was applied. In its FY 2010 rulemaking, CMS finalized a schedule to phase out the BNAF over seven years, reducing it by 10 percent in FY 2010 and by 15 percent each year from FY 2011 through FY 2016. Comments in response to the notice are due by Sept. 20, 2010.

With implementation of numerous PPACA-mandated quality and cost-containment initiatives looming on the horizon for post-acute care providers, any adjustment to Medicare reimbursement rates highlights the need for maximizing operational efficiencies. Please contact one of the authors if you have questions regarding the information contained in this client alert or if we may assist you with reimbursement-related issues.