Two regulations in particular had the attention of hospitals this year: the two-midnight rule and the final rule on disproportionate share hospital payments from Medicaid.
The DSH final rule came in September, cutting payments by approximately $1.1 billion over the next two fiscal years.
The Affordable Care Act requires a total reduction of $18.1 billion in DSH payments to hospitals by 2020. The rule issued in September only covers FY 2014 and 2015. When it issued the final rule, the Centers for Medicare & Medicaid Services said that President Barack Obama and a number of lawmakers had tried to delay the cuts until 2015 but were not successful in getting any proposals passed.
"In the absence of a legislative change, the aggregate reductions in federal DSH funding will begin with FY 2014 as required by current law," CMS wrote in the final rule. "HHS has no flexibility to institute a delay of the DSH allotment reductions without congressional action."
CMS’ final rule outlined its methodology on how the DSH payment reductions would be made. There will be smaller reductions for hospitals in low-DSH states, larger reductions in states with smaller numbers of uninsured people, larger reductions in states that don’t target DSH payments on hospitals with high volumes of Medicaid inpatients and larger reductions in states that don’t target DSH payments on hospitals with high levels of uncompensated care.
Because many states, such as Texas, Louisiana and Florida, have said they won’t expand Medicaid under the ACA, safety-net hospitals in those states will find themselves in difficult financial situations. According to the final rule, those hospitals will still face the same DSH cuts but will also not see gains from the Medicaid expansion.
"Generally, we expect that states that do not implement the new coverage group would have relatively higher rates of uninsurance, and more uncompensated care, than states that adopt the new coverage group,” CMS wrote in the final rule.
While hospitals figure out how to adapt to the DSH reimbursement changes for FY 2014 and 2015, they’re faced with another reimbursement conundrum: CMS’ new two-midnight rule.
The rule is meant to outline and clarify the difference between hospital inpatient and outpatient stays. While medical necessity will still be taken into account, the rule said, if a patient’s stay is fewer than two midnights, the hospital will be paid on observation status instead of inpatient status.
Hospital groups are not happy with the new rule and have spoken out against it, including the Federation of American Hospitals, which said CMS used “flawed and arbitrary assumptions.”
Initially, Robert Wachter, MD, chief of the division of hospital medicine at the University of California, San Francisco, thought the change might make progress in clarifying observation status – a “wildly arbitrary” policy, he said.
In his area, where 95 percent of patients come through the emergency department, he thought the change might increase revenues for hospitals. But when he spoke with colleagues in care coordination, he said it became clear that was not the case for hospitals on the whole.
The area where the majority of inpatient money is made in his hospital, he said, is on patients that will have a procedure and have to stay for short periods in the hospital for monitoring. Many of these patients will go from inpatient to observation status.
“The fear is that it will cost them money,” Wachter said. “The ones that used to be obs and are moving to inpatient will be far outweighed by these patients.”
Ann Sheehy, associate professor and division head of hospital medicine at the University of Wisconsin Department of Medicine, modeled the potential effects of the rule on her organization. She confirmed Wachter’s estimations in a letter published online in August for the Journal of the American Medical Association.
She found that while hospitals would gain reimbursements from observation status patients staying longer than two midnights, their shorter inpatient stays would decrease, meaning lost reimbursement would offset and then some the gains from patients staying longer than two midnights.
“We found this would create a negative margin,” Sheehy said. “We won’t recover some of those charges.”
How much an impact the new rule will have on hospitals remains to be seen. CMS postponed the auditing process for the rule to allow hospitals 90 days to adjust to the change.