Regulatory Bulletins

Bulletin 08 – 2020-10-22 CMS FY 2021 IPPS LTCH Final Rule Bulletin

CMS FY 2021 IPPS & LTCH Final Rule (CMS-1735-F)

Executive Summary of Changes

On September 2, 2020, the Centers for Medicare & Medicaid Services (CMS) published the FY 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Final Rule (CMS-1735-F). CMS has stated that these finalized policies support the Agency’s key priorities, including “Strengthening Medicare and Fostering Innovation.” The finalized policies are also intended to ensure that Americans continue to have access to potentially life-saving diagnostics and therapies through increased competition and innovative medical technology. Unless otherwise noted, all policies implemented will have an effective date of October 1, 2020.

In a corresponding fact sheet[1] issued by CMS regarding the Final Rule, the estimated total Medicare spending on acute care inpatient hospital services will increase by approximately $3.5 billion in FY 2021 or 2.7%. CMS further estimates the changes will affect approximately 3,200 acute care hospitals and 360 LTCHs. The following sections illustrate CMS’s most meaningful changes, with the full regulation accessible via the Federal Register[2].

Expansion of Add-On Payments for Approved Technologies

Under CMS focus on fostering innovation, CMS approved thirteen technologies that applied for new technology add-on payments for FY 2021 and will be continuing the new technology add-on payment for ten of the eighteen technologies currently receiving add-on payments. The remaining eight technologies are no longer considered “new” and are under review for possible new payment group. One such technology is Chimeric Antigen Receptor (CAR) T-cell therapy, which was approved for new technology add-on payment in 2019.

CMS has created a new Medicare Severity-Diagnosis Related Group (MS-DRG) and payment rate, specifically for cases involving CAR-T therapies to predictably compensate hospitals paid under IPPS based upon the available Medicare claims data.

IPPS Payment Rate Adjustments

CMS will be increasing the inpatient prospective payment system rates by 2.9% from FY 2020 for hospitals that are both meaningful users of electronic health records, and successful participants in the Hospital Inpatient Quality Reporting (IQR) program. CMS has also highlighted several indicators that may result in negative impacts to a hospital’s IPPS rates, including:

    • Penalties for excessive readmissions compared to other hospitals with a similar proportion of dual-eligible patients;
    • Percent penalty for worst-performing quartile under the Hospital-Acquired Condition Reduction Program;
    • Adjustments under the Hospital Value-Based Purchasing Program

Medicare Advantage Price Transparency

CMS also finalized an initiative requiring hospitals to report their median payer-specific negotiated charges for Medicare Advantage Organizations (MAOs) on the Medicare Cost Report for cost periods ending on or after January 1, 2021. CMS has indicated that beginning in FY 2024, it will be using this collected data in a new market-based methodology to set the MS-DRG relative weights used in determining Medicare payment rates for inpatient hospital stays.

 The payer-specific negotiated charges used by hospitals to calculate these medians are the same payer-specific negotiated charges that hospitals are already required to make public under the requirements finalized in the 2019 Hospital Price Transparency Final Rule[3]. As such CMS anticipates that the additional reporting of the median payer-specific charges will not result in an excessive administrative burden. 

It is important to note that the information required on the Medicare cost report includes the median rates of the payer-specific negotiated charges for every MS-DRG that the hospital has negotiated with its MAOs. Hospitals that do not negotiate payment rates and only receive non-negotiated payments for services would be exempt from this definition.

 Despite constitutionality concerns raised during the comment period, CMS has remained steadfast that the policies finalized in this final rule advance the substantial government interest in setting MS-DRG relative weights based on hospital resource use, and the requirement to disclose a summary measure on a cost report does not infringe on any rights or protections of the U.S. Constitution.

 Although CMS has not specifically outlined penalties for non-compliance with this requirement, the Agency has tied provider Medicare payments to full compliance with this reporting requirement through the statutory requirements of the Social Security Act, sections 1815(a) and 1833(e), which states: “(N)o Medicare payments will be made to a provider unless it has furnished the information, as may be requested by the Secretary, to determine the amount of payments due the provider under the Medicare program.”[4]

Medicare Uncompensated Care Payments

Medicare Disproportionate Share Hospital (DSH) payments are considered to be a critical portion of total Medicare payments for qualifying hospitals and are intended to offset the costs incurred by those hospitals treating a disproportionate population of under-insured, uninsured, or indigent patients. By law, DSH payments are equivalent to roughly 75% of what otherwise would have been paid as Medicare, adjusted for the change in the rate of uninsured people.


Under the Final Rule, CMS made changes to the disproportionate share hospital (DSH) payment program, utilizing a single year of data on uncompensated care based upon FY 2017 hospital cost reports. CMS has noted this particular data is being used partly because they have conducted audits on this data set, but they have expressed great confidence that the best available data in future years will be the most recent cost reporting year for which audits have been conducted. The adjustment in the fund allocation has resulted in a projected $8.3 billion set for distribution, resulting in an overall decrease of approximately $60.6 million from FY 2020. CMS has notably acknowledged that these projections incorporate the estimated impact of the COVID-19 pandemic.

Incentive Program Updates

CMS highlighted several incentive program updates through the Final Rule, creating (or enhancing) financial inducements based upon particular hospital data sets. Some of the programs highlighted include the newly created Hospital-Acquired Condition (HAC) Reduction Program, which creates a new incentive for hospitals to reduce (by at least 1%) the incidence of patients contracting new conditions while being treated in-hospital.

 CMS also addressed an update to the Hospital Readmission Reduction Program (HRRP), which is a disincentivizing program that reduces payments to hospitals with excess readmissions, especially in relation to other hospitals with a similar proportion of dual-eligible patients. Beginning with the FY 2023 program year, CMS will be adopting measurable performance periods and updating the definition of an ‘applicable period’ in the Code of Federal Regulations.

 The Hospital Inpatient Quality Reporting (IQR) Program, which is a pay-for-reporting quality program that reduces payment to hospitals failing to meet program requirements, has also been highlighted in the Final Rule. Proposals relating to both Agency and public reporting of electronic clinical quality measures (eCQMs) are being finalized by CMS, as well as the validation process. One of the most impactful changes includes the progressive increase in the number of quarters of eCQMs required to be reported over the next three years, from one self-selected quarter up to four quarters of data by CY 2023 reporting period/FY 2025 payment determination. Additionally, it is estimated that the standardized amount for hospitals that successfully participate in this program is $5,961.19, an increase in nearly 2.8% from FY 2020.

Changes to LTCH Payment Rates

CMS has also made changes to the Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) rates for FY 2021, expecting a decrease by approximately $40 million or 1.1%. LTCH cases that are appropriate and meet the standard federal payment rate are anticipated to increase by 2.2% (approximately $74 million). Conversely, cases that do not meet clinical criteria and continue to transition to the site-neutral payment rate are expected to decrease by an estimated 24% or $114 million.

Medicare Bad Debt Amendments

CMS has also finalized an amendment to its bad debt policy including a timeframe requirement by which a hospital must issue a bill for the debt collection efforts to qualify. Among the most notable changes, for cost reporting periods beginning after October 1, 2020, hospitals must now issue a bill within 120-days after the later of either:

1) the date of the Medicare Remit Advice,

2) the date of the Remit Advice of the beneficiary’s secondary payer, or

3) the date of the notification that the secondary payer does not cover the services furnished to the beneficiary.

 CMS also amended its established timeframe by which a hospital can write off a debt as uncollectible. For cost reporting periods beginning before, on or after October 1, 2020, hospitals may not write off a bad debt until at least 120 days have passed since the bill’s issuance. Notably, the 120-day period resetting each time the hospital receives a partial payment.

 Hospitals are also now required to employ similar collection efforts between Medicare and non-Medicare bad debt. They will be required to furnish (upon request) the hospital bad debt collection policies, the patient account history(s), and the patient’s file with copy of bills and any follow up correspondence.

On the Horizon

On August 12, 2020, just before the 2021 IPPS Final Rule publication, CMS released the 2021 Outpatient Prospective Payment System (OPPS) proposed rule, which includes reference to a planned phase-out of the Inpatient-Only (IPO) list. If finalized, the phase-out would occur over the course of three years. CMS reminded the industry that the IPO list was initially created in 2000, “[T]o identify services that require inpatient care because of the invasive nature of the procedure, the need for at least 24 hours of postoperative recovery time, or the underlying physical condition of the patient who would require the surgery and, therefore, the service would not be paid by Medicare under the OPPS.”[5]

CMS further noted that removal of the IPO list is based upon the accepted standard that “[T]he physician should use his or her clinical knowledge and judgment, together with consideration of the beneficiary’s specific needs, to determine whether a procedure can be performed appropriately in a hospital outpatient setting or whether inpatient care is required for the beneficiary.”[6] Caveat: Ironically, in this same proposed rule, CMS suggests prior authorizations will now be required for certain services that, at present, rest on the medical judgement of the treating physician. It remains unclear how impactful the full scale removal of the IPO will be on the health care industry if physician medical judgement is still given deference; however, if CMS shifts to a more robust prior authorization model, providers may anticipate patient care delays, heightened administrative burden and a whole new realm of claim denials.



[1] Centers for Medicare & Medicaid Services. Fiscal Year (FY) 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Final Rule (CMS-1735-F) [Fact sheet]. Retrieved from: October 15, 2020

[2] 85 Fed. Reg. 58432 (September 18, 2020)

[3] 84 Fed. Reg. 65524 Nov. 27, 2019

[4] 85 Fed. Reg. 48,877

[5] 85 Fed. Reg. 48,772 and 48,908-909.

[6] Id.

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