AHA Urging CMS to Fix Rural Floor Budget-Neutrality Adjustment

The American Hospital Association has sent a letter to CMS urging it to correct errors in the Inpatient Prospective Payment System regarding its rural floor budget-neutrality adjustment, according to an AHA New Now news release.

The adjustment, which the AHA contends has been improperly calculated, has led to hospitals receiving inappropriately low Medicare payments (an estimated $430 million loss in payments), according to the AHA.

The letter urges CMS to change how it calculates the adjustment in its IPPS rule for fiscal year 2012 to "remove the compounding effect of the improper application of the FYs 1999 through FY 2006 budget-neutrality adjustments."

According to the letter:

"The Balanced Budget Act of 1997 established the rural floor by requiring that the wage index for hospitals in urban areas of a state cannot be less than the wage index for hospitals in the rural area of a state. The BBA also imposed a budget-neutrality requirement on this provision — the annual total Medicare payments made under the IPPS must equal the annual total Medicare payments that would have been made in the absence of the rural floor.

In FY 1999, when the rural floor was first introduced to the inpatient PPS, CMS applied the rural floor budget-neutrality adjustment to the standardized amount. Until FY 2008, CMS carried forward that adjusted standardized amount from the prior year when calculating inpatient PPS payments for the coming year. Yet, the agency also applied the full value of the coming year's budget-neutrality adjustment to the standardized amount. This reduced the total Medicare payments made under the inpatient PPS annually. The amount that payments were reduced greweach year as the budget-neutrality adjustments carried forward and compounded. Thus, the rural floor was not implemented in a budget-neutral manner, as required by the BBA.

In FY 2008, CMS changed its methodology for applying the rural floor budget-neutrality adjustment by applying the adjustment to the wage index rather than to the standardized amount. Also in that year, CMS made a positive adjustment to the standardized amount that was intended to reverse the FY 2007 budget-neutrality adjustment. This ensured that no further reductions to the total Medicare payments made under the inpatient PPS would occur as a result of this policy. However, CMS did not make positive adjustments to reverse the FY 1999 through FY 2006 rural floor budget-neutrality adjustments, as AHA and others repeatedly urged in responding to proposed rules. Thus, while the payment shortfall to hospitals is no longer increasing, total Medicare payments made under the inpatient PPS are still less than what they would have been in the absence of the rural floor, violating the BBA’s budget-neutrality requirement."

In January, a Court of Appeals suggested CMS recalculate payments using a formula that removes the effects of the prior adjustments, if the agency could offer no other rationale for its previous actions, according to the report.

Read the AHA News Now report on the rural floor budget-neutrality adjustment.