The Centers for Medicare & Medicaid Services late today issued its final rule for the fiscal year 2017 hospital inpatient prospective payment system, which will increase rates by 0.95% compared to FY 2016, after accounting for inflation and other adjustments required by law. In the rule, CMS finalizes two adjustments to reverse the effects of the 0.2% cut it unlawfully instituted when implementing the two-midnight policy in FY 2014. Specifically, it finalizes a permanent adjustment of approximately 0.2% to remove the cut prospectively for FYs 2017 and onward, as well as a one-time adjustment of 0.6% to address the retroactive impacts of this cut for FYs 2014-2016. In addition, the final rule includes an initial market-basket update of 2.7% for those hospitals that were meaningful users of electronic health records in FY 2015 and that submit data on quality measures, less a productivity cut of 0.3% and an additional market-basket cut of 0.75%, as mandated by the Affordable Care Act. CMS also finalizes a 1.5% cut that would fulfill the requirement of the American Taxpayer Relief Act of 2012 that the agency recoup what it claims is the effect of documentation and coding changes from FYs 2010-2012, which CMS says do not reflect real changes in case mix. The rule also includes reductions to Medicare Disproportionate Share Hospital payments mandated by the ACA, which will reduce overall Medicare DSH payments by $400 million compared to FY 2016. CMS did not finalize its proposal to begin to incorporate Worksheet S-10 data into the computation of uncompensated care payments in FY 2018. In response to concerns expressed by AHA and others, CMS says it will institute certain additional quality control and data improvement measures to the Worksheet S-10 instructions and data prior to moving forward with incorporation of the data. Against AHA’s recommendation, CMS will expand, beginning with the FY 2019 Inpatient Quality Reporting Program, the requirement to report electronic clinical quality measures. Starting in CY 2017, CMS will require that hospitals select and submit four quarters of data on eight of 15 eCQMs available in the IQR. CMS also will begin to validate eCQM data reported during CY 2018, which will affect payment in FY 2020. CMS also implements the Notice of Observation Treatment and Implication for Care Eligibility Act, which requires hospitals and critical access hospitals to provide a written and oral notification to Medicare beneficiaries receiving observation services as outpatients for more than 24 hours. In doing so, CMS makes a number of changes recommended by AHA, including providing hospitals with more than four months to fully implement the use of the standardized Medicare Outpatient Observation Notification. “Today, CMS finalized a rule that is a mixed bag for hospitals and the patients they serve,” said AHA Executive Vice President Tom Nickels. “On the one hand, we are pleased CMS reversed the effects of the 0.2% payment reduction that was part of the original ‘two-midnight’ policy, and restored the resources that hospitals are lawfully due. In addition, we commend the agency for pausing the incorporation of ‘Worksheet S-10’ data in order to improve its accuracy and consistency in determining the cost of treating uninsured patients. We will continue to advocate that CMS adopt a broad definition of uncompensated care that includes Medicaid shortfalls and discounts to the uninsured, and fully accounts for graduate medical education expenditures. However, we are disappointed that CMS finalized an unjustified cut to reimbursement rates for hospital services. While a reduction to the hospital update factor was mandated by law in 2012, CMS is undermining Congress’ intent by imposing a cut that is nearly two times what Congress specified. And while CMS reduced its proposed requirements on reporting electronic clinical quality measures, much more work needs to be done to ensure that the measures are valid and reliable before broad-scale implementation.” AHA staff are reviewing the rule, and members will receive a Special Bulletin with further details.