Issues FY 2016 IPPS Final Rule: Signals Continued Transition to Value-Based

By Tawnya Bosko, DHA, MS, MHA, MSHL, Vice President, The Camden Group

value-based reimbursementsOn July 31, CMS issued the FY 2016 Inpatient Prospective Payment System (“IPPS”) final rule, which will take effect October 1, 2015. The final rule includes a payment update of 0.9 percent, a slight decrease from the proposed increase of 1.1 percent.

This 0.9 percent update applies to those acute care hospitals that participate in the inpatient quality reporting (“IQR”) program and are meaningful users of a certified electronic health record (“EHR”). The actual market basket update is 2.4 percent but is adjusted by the factors in Table 1:


 Table 1: FY 2016 IPPS Final Rule Payment Update

Market Basket Update 2.4%
Less Multi-Factor Productivity -.5%
Less ACA Mandated -.2%
Less Documentation and Coding Recoupment -.8%

The final rule also impacts disproportionate share hospital (“DSH”) payments in that the 75 percent of what otherwise would have been paid to hospitals based on their relative share of the total amount of uncompensated care is being adjusted to approximately 63.69 percent of the amount to reflect changes in the percentage of individuals that are uninsured and additional statutory adjustments. Ultimately, CMS projects this impact to be a downward payment adjustment of approximately 1 percent as compared to the Medicare DSH payments and uncompensated care payments distributed in FY 2015.

Hospitals that do not participate in IQR are subject to a penalty of 25 percent of the market basket update and those that are not meaningful users of a certified EHR are subject to a penalty of 50 percent of the market basket update. Additionally, the FY 2016 IPPS final rule updates and continues penalties for Readmissions, Hospital Acquired Conditions (“HACs”), and bonuses or penalties for hospital-Valued Based Purchasing (“VBP”).

  • Readmissions: While no changes were made to the current or planned readmission measures (see table 2) in the FY 2016 IPPS final rule, the pneumonia readmission measure has been refined to expand the measure cohort for FY 2017 and subsequent years. The modified version will include patients with a principal discharge diagnosis of pneumonia or aspiration pneumonia and with a principal diagnosis of sepsis with a secondary diagnosis of pneumonia. Patients with a principal discharge diagnosis of respiratory failure or severe sepsis are not included as had been previously proposed.

Table 2: Current and Planned Readmissions Measures

Fiscal Year Readmissions Measures Maximum Penalty
2013 Acute Myocardial Infarction, Heart Failure, and Pneumonia 1%
2014 Same as FY 2013 2%
2015 FY 2014 Measures plus: 1) Hip/Knee Replacement and 2) COPD 3%
2016 Same as FY 2015 3%
2017 FY 2015 Measures plus: Coronary Artery Bypass Graft ("CABG") 3%

  • HACs: The 1 percent payment reduction will continue to apply to those hospitals that rank in the top quartile relative to the national average of all applicable hospitals for HACs. The FY 2016 IPPS final rule changes the HAC program in several ways. First, it expands the population covered by the central line-associated bloodstream infection (“CLABSI”) and catheter-associated urinary tract infection (“CAUTI”) measures to include patients in select non-intensive care units, including pediatric and adult medical wards, surgical wards, and medical/surgical wards locations beginning in FY 2018. It also changes the relative contribution of each measure within domain 2 and the domain weighting of the total HAC score, which could impact the mix of hospitals receiving the HAC penalty.
  • VBP: In the final rule, the program has been expanded to include additional measures. Specifically, the rule adds a care coordination measure beginning with the FY 2018 program year and a 30-day mortality measure for chronic obstructive pulmonary disease beginning with the FY 2021 program year. Additionally, the rule signals future policy changes that will affect certain National Health Safety Network measures beginning with the FY 2019 program year.

Further, CMS has added seven new measures for the IQR: three new claims-based measures and one structural measure for the FY 2018 payment determination and subsequent years; and three new claims-based measures for the FY 2019 payment determination and subsequent years.

While acute care hospitals are continuing to see limited increases in reimbursement and an increasing focus on reimbursement tied to value and quality based metrics, long-term care hospitals were more drastically impacted by the FY 2016 IPPS final rule with a projected negative payment update of -4.6 percent.

CMS was clear in its final rule that it is committed to increasingly shifting Medicare payments from volume to value. When we discuss “value” in healthcare, we typically mean the quality of healthcare received per dollar spent on achieving that outcome. In essence, hospitals’ focus needs to be on providing the highest quality healthcare at the lowest relative price. Government and commercial payers alike are signaling the decline of per unit reimbursement. All hospital leaders should be taking the necessary steps now to understand and improve quality, understand and decrease the cost of care, both while managing in a blended reimbursement environment. Future success depends on actions taken now.

Source: The Center for Medicare and Medicaid Services (2015):, accessed August 2, 2015.

Ms. Bosko is a vice president with The Camden Group and specializes in designing and implementing clinical integration, high growth medical service operations (“MSO”) and finance, physician hospital organization and MSO development, managed care strategy, and physician alignment. She may be reached at or 310-320-3990.


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