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Note from the Instructor: Taking another look at Medicare bad debt reimbursement

This week’s note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.  

In preparation for an upcoming custom MBC-H course, I had an opportunity to review the Medicare rules relating to bad debt. This issue has become even more prevalent in recent years as underlying health care costs have skyrocketed, significantly increasing beneficiaries’ cost sharing liability, particularly under Part B. In addition, with the growth in inpatient denials and the recent expansion of providers’ ability to rebill those denials under Part B, many beneficiaries are now incurring significant cost sharing that would not have arisen if these inpatient stays had been covered under Part A. Therefore, providers are experiencing increasing financial losses due to their inability to recover for applicable Medicare deductibles and coinsurance under Parts A and B.

Reimbursable bad debt

Under the Medicare program, bad debts attributable to uncollected deductibles and coinsurance for covered services are reimbursable, so long as certain requirements are met.

Under Medicare, costs of covered services furnished to beneficiaries are not to be borne by individuals not covered by the Medicare program, and, conversely, costs of services provided for non-beneficiaries are not to be borne by the Medicare program. Uncollected revenue related to covered services furnished to beneficiaries (including uncollected deductibles and coinsurance amounts) generally means the provider has not recovered the cost of services covered by that revenue.

To assure the failure of beneficiaries to pay the deductible and coinsurance amounts does not result in those costs being borne by others, the costs attributable to the deductible and coinsurance amounts that remain unpaid are added to the Medicare share of allowable costs. Bad debts arising from other sources, however, are not allowable costs.

To be allowable, bad debt must meet the following criteria:

  • The debt must be related to covered services and derived from deductible and coinsurance amounts.
  • The provider must be able to establish that reasonable collection efforts were made.
  • The debt was actually uncollectible when claimed as worthless.
  • Sound business judgment established there was no likelihood of recovery at any time in the future.

Timing of write off

The amounts uncollectible from specific beneficiaries are to be charged off as bad debts in the accounting period in which the accounts are deemed to be worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period; in such cases that income must be used to reduce the cost of beneficiary services for the period in which the collection is made.


In determining reasonable costs for hospitals, the amount of allowable bad debt is reduced, as follows:

  • For cost reporting periods beginning during FYs 2001 through 2012, by 30%.
  • For cost reporting periods beginning during a subsequent fiscal year, by 35%.

Implications for providers

Hospitals and other providers need to review their existing policies to assure they meet the relevant requirements for Medicare bad debt reimbursement. In particular, they need to assure they treat Medicare beneficiaries in the same way they treat all other patients with respect to bad debt, and they make consistent, reasonable efforts to bill and collect beneficiary and other patient cost sharing amounts.

Medicare has indicated that a reasonable collection policy must involve the issuance of a bill on or shortly after discharge or death of the beneficiary to the party responsible for the patient’s personal financial obligations. It should also include other actions, such as subsequent billings, collection letters and telephone calls or personal contacts with this party, to demonstrate they are making a genuine, rather than a token, collection effort. The provider’s collection policy may even include using or threatening to use court action to obtain payment.

Providers also need to make reasonable efforts to determine if and when such debt is unlikely to be recovered in the future. Medicare guidelines state that, if, after reasonable and customary attempts to collect a bill, the debt remains unpaid more than 120 days from the date the first bill is mailed to the beneficiary, the debt may be deemed uncollectible. All these policies, as well as their individual efforts to comply with them, should be carefully documented in the beneficiary’s file.

Source authorities

More information on bad debt reimbursement can be found in the following source authorities:

42 CFR. § 413.89

Medicare Provider Reimbursement Manual, Part I, Chapter 3

Note from the instructor: Part D coverage for prescription drugs and biologicals not covered under Parts A or B

This week’s note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.  

Prompted by a number of questions in recent Medicare Boot Camp-Hospital (MBC-H) classes and preparation for a custom MBC-H/Physician class, in this week’s note we will discuss differences in coverage for certain hospital services under Parts A, B, and D of Medicare. In particular, we will explore coverage under Part D for prescription drugs and biologicals (Prescription Drugs) not covered under Parts A or B when provided to hospital inpatients or outpatients.

Part D

Part D is an optional federal Medicare program designed to subsidize the costs of Prescription Drugs and Prescription Drug insurance premiums for individuals entitled to Medicare benefits under Part A or enrolled in Medicare benefits under Part B. Beneficiaries who enroll in most Medicare Advantage plans, as well as those who qualify for both Medicare and Medicaid (full-benefit dual eligibles) automatically receive the Medicare drug benefit. Enacted as part of the Medicare, Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”), Part D originally went into effect on January 1, 2006 and has been subsequently amended by several federal statutes, including the Medicare Improvements for Patients and Providers Act of 2008.

Under the MMA, Medicare beneficiaries generally receive coverage for Prescription Drugs in one of two ways:

  • Enrollment in a supplemental Prescription Drug Plan (PDP) offered by a private insurance company, to supplement the health coverage they receive under Medicare Part A and/or B; or
  • Enrollment in a Medicare Advantage Plan that offers coverage for Prescription Drugs (MA-PD) as an integral part of the health coverage it provides under Medicare Part C.

Organizations offering drug plans (both PDPs and MA-PDs) have flexibility in the design of the Prescription Drug benefit packages they offer, including the establishment of formularies. Formularies are lists of Prescription Drugs that have been approved by that Plan for coverage. Even when not included on the formulary, beneficiaries may request an exception in certain circumstances. Other variables include deductibles, coinsurance, coverage, and out-of-pocket limits.

Currently, there is a coverage gap—popularly referred to as the donut-hole—during which the beneficiary bears the primary responsibility for payment of what would otherwise be covered Prescription Drugs. This gap occurs between the time the beneficiary has met the initial coverage limitation under the particular PDP or MA-PD and before he or she has reached his/her out-of-pocket threshold. Over time, the intent under Part D is for coverage to expand and cost sharing to diminish. More information on Part D can be found in related regulations—42 CFR Part 423—and the Medicare Prescription Drug Manual, Publication 100-18, which is available on the CMS Website.

Parts A and B

Medicare Parts A and B are sometimes referred to as original, traditional or fee-for-service Medicare. These are the original programs designed to cover both inpatient and outpatient hospital and other facility services, as well as professional and ancillary health care services. Part A primarily covers inpatient services provided by various health care facilities (e.g., hospitals, skilled nursing facilities, home health agencies, etc.). Part B primarily covers outpatient services provided by various health care facility (including hospitals), professional and ancillary providers.

Under a covered Part A inpatient hospital stay, there is broad coverage for the Prescription Drugs provided during that stay, including self-administered drugs (drugs that are generally administered orally, topically, in suppository form or by subcutaneous injections).

There is much more limited coverage for Prescription Drugs provided in the hospital outpatient setting under Part B. Most drugs administered by any method other than by infusion or deep, penetrating intramuscular injections, are considered usually self-administered and, therefore, not covered under Part B. There are three limited exceptions:

  • Statutorily covered drugs, including
    • Blood clotting factors for hemophilia patients,
    • Drugs used in immunosuppressive therapy,
    • Erythropoietin for dialysis patients, and
    • Certain oral anti-cancer drugs and anti-emetics used in certain situations.
  • Drugs provided incident to a physician’s service that are not usually self-administered; that is, drugs administered by infusion or deep, penetrating intramuscular injections; and
  • Certain self-administered drugs if they are an integral component of a procedure or are directly related to it or facilitate the performance of, or recovery from, the procedure, but not if they are the treatment itself. An example of a Prescription Drug covered under this exception would be an antibiotic ointment applied to a wound or surgical incision to guard against infection.

Potential coverage under Part D for Prescription Drugs not covered under Part B

As noted above, most Prescription Drugs otherwise medically appropriate are not covered under Part B when provided in the hospital outpatient setting. In that case, there may be coverage for those drugs under Part D. Whether there is coverage for those drugs under Part D, generally, or for a specific beneficiary, in specific circumstances, will largely depend upon the terms of coverage under that particular PDP or MA-PD. Generally, only those Prescription Drugs included on the Plan’s formulary will be covered. With respect to a specific beneficiary, coverage will also depend upon whether he or she has met the applicable deductible, has reached the initial coverage limitation and/or has reached his or her out-of-pocket threshold.

Medicare has created a brochure for original Medicare beneficiaries (“How Medicare Covers Self-administered Drugs Given in Hospital Outpatient Settings”), which can be downloaded from the following CMS website. In its brochure, Medicare notes most self-administered drugs provided in the hospital outpatient setting will not be covered and the hospital will probably bill the beneficiary for those non-covered drugs. In that case, they recommend a Medicare beneficiary with Part D do the following:

  • Check with the hospital to see if it participates in Part D.
  • Since most hospital pharmacies do not participate in Part D, the beneficiary may need to pay up front and out-of-pocket for these drugs and submit the claim to his/her PDP for a refund.
  • Follow the instructions in the PDP’s enrollment materials on how to submit an out-of-network claim, or call the plan for information about how to submit a claim.
  • The beneficiary should keep copies of any receipts and any paperwork sent to the PDP.

The PDP will probably ask for the following additional information:

  • Certain information, like the emergency room bill showing what self-administered drugs were given. He or she may also need to explain the reason for the hospital visit.
  • The PDP may ask if the beneficiary could have reasonably obtained any of the drugs from a participating network pharmacy. For example, if he or she could have taken a dose of a drug obtained from a network pharmacy before the outpatient hospital appointment, the PDP may not pay for that drug.

To determine whether the drug is covered under Part D, the PDP will check to see whether it is included on the PDP’s formulary or qualifies under an exception. Even if the drug is covered, the PDP may only reimburse the in-network cost for the drug, minus any deductibles, copayments, or coinsurance that would normally apply. In addition, the beneficiary also may need to pay the difference between what the hospital charged and what the PDP paid. This amount will be counted toward his/her Part D out-of-pocket costs, so long as he or she submits the claim to the PDP. If the drug is not covered, the beneficiary will be obligated to pay the full amount that the hospital charged for the drug.

Potential coverage under Part D for Prescription Drugs not covered under Part A

Presumably, Prescription Drugs that are provided in the inpatient hospital setting but are neither covered under Part A nor fall within one of the limited coverage categories under inpatient Part B, would also potentially qualify for coverage under Part D, following the same process and analysis outlined above.

Hospitals are encouraged to educate themselves and their patients with respect to the coverage policies and procedures for Prescription Drugs under Parts A, B, and D and to facilitate their patients’ ability to communicate and seek guidance from their respective PDPs and MA-PDs on these issues.

Note from the Instructor: CMS Posts Hospital Outpatient Supervision Documents

This week’s note from the instructor is written by Debbie Mackaman, RHIA, CPCO, regulatory specialist for HCPro.  

CMS posted a document on its Advisory Panel on Hospital Outpatient Payment website regarding hospital outpatient therapeutic services that were evaluated for a change in supervision levels.  The three page document contains a chart that includes the HCPCS code, level of supervision required for coverage, and the effective dates of the changes for various services.

Hospital outpatient therapeutic services paid under OPPS or paid to critical access hospitals (CAHs) on a cost basis must be furnished “incident to” a physician’s service to be covered. In order to qualify for “incident to” coverage, the service must meet four requirements:

  1. The service must be furnished in the hospital or a provider-based department of the hospital;
  2. There must be an order for the service;
  3. The service must be an integral, though incidental, part of a physician’s service; and
  4. The service must be provided under the correct level of physician supervision.

CMS began amending and clarifying the requirements for supervision extensively in 2010 and this process continues under the Hospital Outpatient Payment Panel subregulatory process. In most cases, CMS has designated direct supervision to be the default level of supervision for hospital outpatient therapeutic services. CMS also designated general supervision as appropriate for specific services based on recommendations from the Panel and provider comments. General supervision requires the service is furnished under the physician or non-physician practitioner’s (NPP’s) overall direction and control, but does not require them to be present during the service. Effective for dates of service January 1, 2015, CMS has listed the following as requiring general supervision when provided in a hospital outpatient department, including provider-based departments:

  • 99490 Chronic care management service, 20 minutes;
  • 99495 Transitional care management, 14 days post discharge; and,
  • 99496 Transitional care management, 7 days post discharge.

Several years ago, CMS defined a list of non-surgical extended duration therapeutic services (NSEDTS) which must be provided initially under direct supervision and then may be transitioned to general supervision once the supervising physician or NPP determines the patient is stable and the remainder of the service can be delivered safely under general supervision. This transition must be documented in the patient’s medical record. In the notice just published, there were no changes listed for NSEDTS in 2015.

Also included on the CMS website, which will be of interest for CAHs and small rural hospitals, is a brief notice stating non-enforcement of supervision requirements for these providers will continue through December 31, 2014 as afforded through H.R. 4067.

Beginning in 2010, CMS instructed its contractors not to enforce the supervision requirements for therapeutic services provided to outpatients in CAHs and further expanded the non-enforcement to small rural hospitals in 2011. The non-enforcement instruction expired for the hospitals on January 1, 2014 and since then, there has been a lot of activity through various lobbying groups and organizations. The Protecting Access to Rural Therapy Services (PARTS) Act, which will now have to be reintroduced in 2015 under the new Congress, was intended to permanently change supervision levels from direct to general for therapeutic outpatient services which are not high risk or complex for certain hospitals. Through the passing of H.R. 4067, CAHs and small rural hospitals have dodged the supervision bullet once again by receiving a one year extension.

Note from the instructor: Update to the CMS Post-Acute Transfer Policy Qualifying DRGs

This week’s note from the instructor is written by Debbie Mackaman, RHIA, CPCO, regulatory specialist for HCPro.  

CMS released Transmittal 3138 rescinded and replaced Transmittal 3066 regarding technical errors cited in the FY 2015 IPPS final rule correction notice published in the Federal Register on October 3, 2014. Recently, I have received several questions regarding CMS’s Post-Acute Transfer and Special Payment Policy so I thought it would be a good time to review how a PPS hospital’s payment may be affected by it.

A “post-acute transfer” is a discharge by a PPS hospital to one of several specific settings. The final DRG has been assigned by CMS to a “Qualifying DRG”. For FY 2015, there are a total of 753 Medicare Severity (MS)-DRGs and 279 of those are listed as “Qualifying DRGs”, affected by the post-acute transfer policy. The list of current MS-DRGs and if they qualify for payment under the policy can be found in Table 5 of the IPPS Final Rule.

Certain post-acute settings reported on the UB-04 claim form may trigger the post-acute payment policy. MLN Matters MM4046 and MLN Matters SE0801 provide detailed information to help hospitals select the most appropriate discharge setting. The effect on the DRG payment to the discharging/transferring hospital will depend on if the Qualifying DRG falls into the “post-acute DRG” category or the “special pay DRG” category as designated in Table 5.

When a discharge is paid as a transfer

  • The patient was discharged to one of the specific post-acute settings and the payment will be made under one of the Qualifying DRGs identified as a “post-acute DRG”.
  • A “per diem” rate is determined by dividing the full payment for the discharge DRG by the geometric mean length of stay (LOS) for the discharge DRG listed in Table 5.
  • The first day of the admission is paid at twice the per diem rate in recognition of the extra expenses incurred on the day of admission.
  • All subsequent days are paid at the per diem up to the full DRG amount.

When a discharge is paid under the special payment methodology

  • The patient was discharged to one of the specific post-acute settings and the payment will be made under one of 35 Qualifying DRGs identified as one that exhibits exceptionally high costs early in the hospital stay-called a “special pay DRG”.
  • A “per diem” rate is determined by dividing the full payment for the discharge DRG by the geometric mean LOS for the discharge DRG listed in Table 5.
  • The discharging hospital is paid 50% of the full DRG payment plus 50% of the calculated per diem rate for the first day.
  • All subsequent days are paid at 50% of the per diem up to the full DRG amount.

According to CMS, for a DRG to qualify for the special payment methodology under the post-acute transfer policy, the geometric mean LOS must be greater than four days and the average charges of 1-day discharge cases in that DRG must be at least 50% of the average charges for all cases within the DRG. Also, DRGs that are part of an MS–DRG group will qualify under the special payment policy if any one of the MS–DRGs sharing that same base MS–DRG falls into the special payment methodology. The special payment rules only apply to post-acute transfers and do not apply to discharges or transfers to short-term acute care hospitals.

For FY 2015, five new MS-DRGs were added to the Qualifying DRG list subject to the post-acute care transfer and special payment policy. The following DRGs will be paid under the special payment policy:

  • 266 and 267 – Endovascular Cardiac Valve Replacement with and without MCC respectively; and,
  • 518, 519 and 520 – Back & Neck Procedure Except Spinal Fusion with MCC or Disc Device/Neurostimulator, with CC, and without MCC/CC respectively.

MS-DRG 483 – Major Joint/Limb Reattachment Procedure of Upper Extremities was removed from the “Qualifying DRG” list because it was merged with MS-DRG 484 and the severity of illness level was reduced.

Facilities should pay special attention to discharge status codes 03-Discharged/Transferred to a Skilled Nursing Facility (SNF) with Medicare Certification in Anticipation of Skilled Care and discharge status code 06 – Discharged/Transferred to Home Under Care of Organized Home Health Service Organization in Anticipation of Covered Skilled Care. According to CMS and the OIG, these particular discharge status codes have created both overpayments and underpayments over the years in relation to the post-acute transfer and special payment policy. More information can be found in a recent OIG audit report.

CMS Completes Successful First Round of End-to-End Testing

The main concern of some Congress members regarding ICD-10 implementation during the recent House subcommittee hearing was CMS' ability to handle the switch, after well-publicized technical issues with launching
However, if the results of the first round of end-to-end testing are indicative of CMS' readiness, and that of the industry at large, concerns about the technical aspects of implementation may be overblown.
During the testing, 661 volunteers submitted nearly 15,000 test claims, with an 81% acceptance rate. The reasons for the rejected claims were:
  • 3%, invalid submission of ICD-9 diagnosis or procedure code
  • 3%, Invalid submission of ICD-10 diagnosis or procedure code
  • 13%, non-ICD-10 related errors, including issues setting up the test claims (e.g., incorrect NPI, Health Insurance Claim Number, submitter ID, dates of service outside the range valid for testing, invalid HCPCS codes, invalid place of service)
The main problem CMS identified during testing involved confusion surrounding claims submitted on or around the October 1 implementation date. CMS has reiterated that all services provided before the October 1 deadline should be submitted with ICD-9 codes, while all claims for services on or after that date should be submitted with ICD-10 codes.
The only problem CMS identified regarding its systems involved fewer than 10 test claims for home health services. CMS says the issue will be resolved before the next testing week, and providers will be able to resubmit those claims to ensure the problem has been fixed.
Another round of end-to-end testing, which previous volunteers are automatically eligible for, will take place April 27-May 1, and providers are encouraged to participate in upcoming acknowledgment testing weeks March 2-6 and June 1-5. Acknowledgement testing provides limited feedback because claims do not go through the adjudication process and the MAC does not produce remittance advice. However, submitters will find out whether they can submit a claim correctly and whether the MAC’s system can accept the claim.
Did you facility take part in in the first round of ICD-10 end-to-end testing, or are you signed up for future testing weeks? If so, and you'd like to share your experience, please email Steven Andrews at and you may be included in a future story.
This article was written by Steven Andrews for APCs Insider. To subscribe to APCs Insider, click here.

Note from the instructor: NCCI Manual Updated for January 1, 2015

This note from the instructor is written by Debbie Mackaman, RHIA, CHCO, regulatory specialist for HCPro.  

CMS posted on its website an update to the National Correct Coding Initiative Policy Manual for Medicare Services which will be effective with dates of service January 1, 2015.

The National Correct Coding Initiative (NCCI) edits were created many years ago “to promote national correct coding methodologies and to control improper coding that leads to inappropriate payment in Part B claims.” There are two sets of edits – one for physicians and a separate file for hospitals. NCCI edits apply only to Medicare Part B claims and they do not apply to hospital inpatient services or any other services covered under Medicare Part A.

According to the NCCI Manual, the NCCI is developed by CMS for the Medicare program and the most important consideration in developing the edits is CMS Policy. CMS also considers American Medical Association’s Current Procedural Terminology (CPT) Manual, national and local Medicare policies and edits, coding guidelines developed by national societies, standard medical and surgical practice, and current coding practice.

NCCI includes three types of edits:

  • Procedure-to-Procedure (PTP) edits are pairs of CPT or HCPCS Level II codes that are not both separately payable when billed by the same provider for the same beneficiary for the same date of service, unless an appropriate modifier is reported;
  • Medically Unlikely Edits (MUEs) represent the maximum number of units reportable for a HCPCS code by the same provider for the same beneficiary for the same date of service, in most circumstances; and,
  • Add-on Code edits describe a service that is always performed in conjunction with another primary service and is eligible for payment only when provided with an appropriate primary service.

In reviewing the new manual for 2015, it appears Chapter 1 General Correct Coding Policies contains the most changes. Specifically, there were extensive revisions to the MUEs section. The changes included an explanation of the Modifier Adjudication Indicator (MAI), appealing a MAC’s denial, and the prohibition of issuing an Advance Beneficiary Notice or billing the patient when an MUE edit is triggered.

Chapter 1 of the updated NCCI manual did incorporate additional guidance in regards to Modifier 59 from MLN Matters article SE1418. This article was released earlier this year. It describes the three other limited situations in which two services may be reported as separate and distinct because they are separated in time and describe non-overlapping services even though they may occur during the same encounter.

In relation to Modifier 59 and the new subset modifiers X{ESPU}, an updated version of Modifier 59 article is also posted on the NCCI Edit website. Unfortunately, it does not provide any much needed guidance or examples for the use of the new modifiers. We continue to wait for further instruction from CMS and MACs on their required use although CMS is encouraging hospitals and physicians to begin using them on January 1.

Coding and billing staff, compliance and auditing staff, as well as department managers should at a minimum review Chapter 1 and any other applicable sections to their line of business. All changes are designated by italicized red font.

Note from the instructor: Therapy Caps Applied to Hospital and Critical Access Hospital (CAH) Outpatient Therapy

This note from the instructor is written by Kimberly Anderwood Hoy Baker, JD, regulatory specialist for HCPro.  

Note from the instructor: Therapy Caps Applied to Hospital and Critical Access Hospital (CAH) Outpatient Therapy

CMS released the updated outpatient therapy cap threshold for 2015. The outpatient therapy cap for 2015 will be $1940 for physical therapy and speech language pathology combined and $1940 for occupational therapy per beneficiary per year. This represents an increase from $1920 in 2014. The application of the therapy caps, and the exception process, is very different for PPS hospital outpatient departments and CAHs. In my note I thought I would take the opportunity to clarify how the application of the caps and the exception to the caps differs and what the means for therapy in CY 2015.

Therapy Caps Applied to PPS Hospitals

The therapy caps originally only applied to PPS hospitals for a very short period of time beginning October 1, 2012, through December 31, 2012. Subsequent legislation extended the application of the caps, with the latest extension through March 31, 2015, in the Protecting Access to Medicare Act of 2014 (PAMA). Unless further action is taken by Congress, the therapy caps will no longer apply to therapy provided in PPS hospital outpatient departments beginning April 1, 2015.

While the therapy caps apply to therapy in PPS hospitals, PPS hospitals can use the legislative exception process to the caps to provide and be paid for medically necessary therapy in excess of the caps. The exception process is also time limited and has also been extended through March 31, 2015, in PAMA.   When PPS hospitals provide therapy in excess of the therapy caps, and they determine the therapy is medically necessary, the therapy can be billed with the –KX modifier and the MAC will pay the therapy under the exception process up to $3700.

Once $3700 of therapy has been paid on behalf of the beneficiary additional therapy is subject to manual review by Recovery Auditors to verify it is medically necessary. The provider initially bills therapy they believe is medically necessary with the –KX modifier. Once the $3700 manual review threshold is reached, the MAC will either pay the claim (subject to manual post payment review) or hold the claim for prepayment manual review. Pre-payment review is conducted in the states included in the prepayment Recovery Auditor demonstration project (California, Florida, Illinois, Louisiana, Michigan, Missouri, New York, North Carolina, Ohio, Pennsylvania, and Texas) and post-payment review is conducted in all other states.

Unless Congress acts, the therapy caps will no longer apply to PPS hospital therapy effective April 1, 2015. Congress could extend the therapy caps to hospitals for an additional limited timeframe or indefinitely. If that occurs, it will be important for PPS hospitals to determine if the therapy cap exception process is also extended. If it is not extended, therapy will be limited to the then-current threshold and the KX modifier will not allow claims in excess of the threshold to be paid. If, however, Congress elects to allow the application of the caps to PPS hospitals to expire, then PPS hospital will not need to be concerned about the extension of the exception process because therapy in their outpatient departments will not be limited by the cap.

Therapy Caps Applied to CAHs

When Congress applied the therapy caps to PPS hospitals, they did not address CAH services. In the first extension of the application of the caps to PPS hospitals, they included CAH services in the calculation of the caps for CY2013, but did not actually apply the caps to CAH services themselves. The amount included in the caps for CAH services is calculated at the Medicare Physician Fee Schedule (MPFS) amount payable, rather than the cost-based payment the CAH receives to avoid penalizing patients receiving therapy at CAHs. For 2013, therapy provided at a CAH was counted toward the cap and could cause therapy at another provider to exceed the cap and require the KX modifier or trigger manual review. But if therapy services provided solely at the CAH exceeded the cap, no payment limitation would apply.

Congress did not further amend the Social Security Act related to application of the caps to CAHs; however, CMS applied the caps to CAHs through regulatory action. In the CY2014 MPFS Final Rule, CMS adopted regulations to apply the therapy caps to CAHs effective January 1, 2014. Unlike the caps applicable to PPS hospital therapy, this regulatory provision is not time-limited and will continue indefinitely unless CMS or Congress acts to change the application of the caps. This means CAH hospitals must be aware of the status of the exception process. If Congress allows the exception process to expire March 31, 2015, CAHs will not be able to bill therapy in excess of the caps after that time because the KX modifier exception process will no longer allow payment of medically necessary therapy.

In summary, the temporary application of the therapy caps to PPS hospitals may expire April 1, 2015, without further action by Congress, but the application of the caps to CAHs is not temporary and will not change unless Congress or CMS acts. The exception process allowing medically necessary therapy beyond the cap is also set to expire April 1, 2015, without congressional action. Providers should monitor the status of these provisions to ensure they know how therapy provided after April 1, 2015, will be treated when it exceeds the new $1940 caps for 2015.

Note from the instructor: Qualifying for and Calculating the Disproportionate Share Hospital (DSH) adjustment for FY 2015

This note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.  

In this note we will discuss one more potential adjustment to the IPPS payment for inpatient hospital discharges during FY 2015. Most inpatient short-term acute-care hospitals are reimbursed for inpatient stays based upon the IPPS. Under the IPPS, hospitals generally receive a single payment for all services provided to a particular patient during that inpatient stay, based upon the DRG to which the stay is assigned. The DRG payment is composed of two portions: a DRG operating payment and a DRG capital payment.

In recent years, CMS has implemented a number of programs that require an adjustment to the DRG operating and/or capital payments. In today’s issue we will focus on the Medicare DSH adjustment, which originally became effective for discharges occurring on or after May 1, 1986. Significant changes were made to this program with respect to discharges on or after the beginning of FY 2014. I recently researched these changes in preparation for teaching a custom MBC-H class and thought it would be beneficial to review them with the larger hospital community.

Scope and purpose of DSH adjustments

DSH adjustments are designed to compensate hospitals serving a disproportionate share of low-income inpatients. Qualifying hospitals may receive an adjustment (an increase) in the DRG payment they receive for each IPPS case. There are separate DSH adjustments for the operating and capital portions of the DRG payment. These DSH adjustments are generally based on the percentage of days attributable to low income individuals (the “DSH Percentage”) and the size and location (urban versus rural) of the hospital.

There are two categories of patients considered to be low income for DSH purposes:

  • Medicare Part A beneficiaries who are eligible for Supplemental Security Income (SSI); and
  • Medicaid patients without Medicare Part A coverage.

A Medicare beneficiary enrolled in a Medicare Advantage plan is included in the calculation of the Medicare Part A fraction. A patient without Medicare Part A coverage is included in the low- income count so long as the patient was eligible for Medicaid inpatient services, regardless of whether Medicaid actually covered or paid for the patient’s hospitalization. CMS is required to assist hospitals in obtaining relevant data to calculate the number of low-income Medicare Part A/SSI patients. The hospital, however, has the primary burden of furnishing data adequate to prove eligibility for each Medicaid inpatient day claimed.

Determining the hospital’s qualification for the DSH adjustment

There are two methods for a hospital to qualify for the Medicare DSH adjustment. The primary method is for a hospital to qualify based on a statutory formula used to determine the hospital’s DSH Percentage. The DSH Percentage is equal to the sum of the percentage of Medicare inpatient days attributable to patients eligible for both Medicare Part A and SSI, and the percentage of total inpatient days attributable to patients eligible for Medicaid but not Medicare Part A. The DSH Percentage is calculated using the following formula:


                                     Medicare SSI Days                            Medicaid, Non-Medicare Days

            DSH%   =   ______________________    +     ___________________________

                                 Total Medicare Part A Days                     Total Patient Days (All Payers)


The alternate special exception method (the “Special Exception Method”) applies to large urban hospitals (100 or more beds) able to demonstrate that more than 30% of their total net inpatient care revenue comes from State and local government programs for indigent care (other than Medicare or Medicaid).

A hospital qualifies for a DSH operating adjustment if the hospital has a DSH percentage over 15% or if it satisfies the requirements of the Special Exception Method. Only urban hospitals with 100 or more beds potentially qualify for a DSH capital adjustment. Urban hospitals with 100 or more beds will qualify for a DSH capital adjustment if the hospital serves any low income patients or if it satisfies the requirements of the Special Exception Method.

Determining the DSH adjustment factors for discharges prior to FY 2014

If a hospital qualifies for a DSH operating adjustment, the applicable DSH operating adjustment factor depends on the hospital’s DSH percentage.


  • If the hospital’s DSH percentage is equal to or greater than 15% but less than or equal to 20.2%, the following formula applies:


2.5% + (65% x (Hospital’s DSH% – 15%))


  • If the hospital’s DSH percentage is greater than 20.2%, the following formula applies:


5.88% + (82.5% x (Hospital’s DSH% – 20.2%))


There are limits applied to the DSH operating adjustment factor for certain categories of hospitals.


If a hospital qualifies for a DSH capital adjustment, for hospitals not subject to the Special Exception Method, the DSH capital adjustment factor is determined based on the following formula:

Adjustment Factor = Antilog of 1(0.2025 x DSH%) –  1

(Note: The antilog of 1 is approximately 2.718)


For hospitals subject to the Special Exception Method, the DSH capital adjustment factor is the same as the hospital’s DSH operating adjustment factor.

Determining the DSH adjustment factors for discharges on and after October 1, 2013

Effective for discharges on or after October 1, 2013, the amounts otherwise payable to a hospital under the above-referenced DSH operating adjustment rules are reduced by 75%. For FY 2014 and subsequent fiscal years, the remainder, equal to 75% of what otherwise would have been paid as DSH operating adjustment payments, will become available for uncompensated care payments, subject to certain reductions for changes in the percentage of uninsured individuals. Each Medicare DSH hospital will receive an additional uncompensated care payment based on its share of insured low income days as reported by all Medicare DSH hospitals. This additional amount will be equal to the product of the following three factors:

  • Factor 1: 75% of the estimated DSH payments that would otherwise be made under the old DSH operating adjustment methodology;
  • Factor 2: 1 minus the percent change in the percent of individuals under the age of 65 who are uninsured (minus 0.1 percentage points for FY 2014, and minus 0.2 percentage points for each of FYs 2015 through 2017); and
  • Factor 3: A hospital’s amount of uncompensated care relative to the amount of uncompensated care for all DSH hospitals expressed as a percentage.

Applying the DSH adjustment factors

The DSH operating and/or capital adjustment factors are applied to the respective DRG operating and/or capital payments after any applicable Hospital Readmission Reduction Program or Hospital Value-based Purchasing Program adjustments, but before any applicable Hospital Acquired-condition Reduction Program adjustment or outlier payment calculation.

Source authorities

More information on DSH adjustments can be found in the following principal source authorities:

FY 2015 IPPS Final Rule, 79 Fed. Reg. 49854–50449

FY 2014 IPPS Final Rule, 78 Fed. Reg. 50496–51040

42 CFR § 412.106

42 CFR § 412.320 

Medicare Claims Processing Manual, Chapter 3 § 20.3


The DSH operating and/or capital adjustment factors are applied to the respective DRG operating and/or capital payments after any applicable Hospital Readmission Reduction Program or Hospital Value-based Purchasing Program adjustments, but before any applicable Hospital Acquired-condition Reduction Program adjustment or outlier payment calculation.


Note from the Instructor: CMS Releases OPPS Final Rule

This note from the instructor is written by Kimberly Anderwood Hoy Baker, JD, CPC, regulatory specialist for HCPro.  

CMS released the OPPS final rule. There are three significant changes I wanted to discuss in my note this week. First, CMS finalized the packaging of most ancillary services. They also finalized the Comprehensive APC (C-APC) policy. Lastly, certification for most inpatient cases was eliminated.

For CY2015, CMS eliminated the ancillary services status indicator X and conditionally packaged most of these services, reassigning them to status indictor Q1. Status indicator Q1 triggers packaged payment if any other code with a status indictor S (significant procedure), T (surgical procedure) or V (visit) is reported on the claim. The service is only paid separately if no other service with an S, T, or V status indicator is reported. This separate payment will be made based on the codes reported on the claim and no additional action will be required by the provider, unlike the laboratory packaging for CY2014 which requires application of the modifier L1 for labs to be paid separately.

Under this new increased packaging policy, CMS conditionally packaged services with a geometric mean cost of $100 or less, except preventative services, psychiatry–related services, and drug administration services. The number of services assigned status indicator Q1 increased from 11 to 538. Newly conditionally packaged services include minor procedures such as foreign body removals, application of splints and strapping; diagnostic procedures such as x-rays and ECGs; and pathology and blood product– related services along with many others.

Continuing the increased level of packaging under OPPS, CMS finalized 25 C-APCs that make a single comprehensive payment for expensive primary procedures and all the related and “adjunctive” services reported on the claim with them. There are 248 primary procedures, identified by status indicator J1. CMS ranked each of the primary procedure codes in a table in Addendum J. The assignment of the final C-APC is controlled by the highest ranking primary procedure code reported on the claim.

CMS finalized a “complexity adjustment” allowing the C-APC to be increased one level if specific secondary or add-on codes are reported on the claim with the primary procedure. CMS finalized 63 complexity adjustment pairs affecting only 29 of the 248 primary procedure codes. The complexity adjustment pairs are published in a table in Addendum J.

CMS also published a list of services that will be excluded from the C-APC payment in Table 6 of the final rule. In general, services required to be paid separately by statute continue to be paid separately, including: preventative services; pass-through drugs, biologicals and devices; brachytherapy seeds and sources; and cost based services such as vaccines. Also excluded are services paid on other fee schedules, including ambulance services, mammography services, and therapy provided under a plan of care and reported on a separate monthly claim.

Lastly, CMS finalized their revised proposal to exclude self-administered drugs from packaging to the C-APC unless they function as supplies integral to the procedure. In CY2014, CMS had originally proposed to package the self-administered drugs into the C-APC. The finalized rule means patients will still be responsible for most self-administered drugs in hospital outpatient departments.

Also included in this otherwise outpatient rule was a change to the requirements for certifications for hospital inpatients. CMS eliminated the need for certification for most inpatients, with the requirement now only applying to patient stays of 20 days or greater and cost outlier cases. This change provides relief from a very onerous requirement for providers. However, the requirement for a certification prior to billing an outlier case will require hospitals to be diligent in monitoring for cases that hit outlier. These cases can be difficult to identify because it requires you know the final DRG as well as all the charges on the case, some of which may be added later.

Additionally, I had hoped that CMS would allow inpatient status orders to be signed in the same manner as other orders. They had previously taken the position that the order had to be signed before discharge because it was the first element of the certification which had to be signed before discharge. Now that certification is not required in most cases, I was hoping they would loosen this requirement to match the requirements for other kinds of orders. In the preamble commentary to the rule, however, they reiterated the requirement that the inpatient order must be signed before discharge, even if the case does not require a certification.

Providers interested in these new rules should review the comment and response sections of the CY2015 OPPS Final Rule preamble because they contain good clarifications and information. Additionally, the Addenda contains detailed information on the status indicators for codes and the rankings and complexity adjustments for the C-APCs, and can be found on the final rule home page.

Note from the instructor: Summary of potential adjustments to Inpatient Prospective Payment System (IPPS) payment for inpatient hospital discharges during FY 2015, Part II

This note from the instructor is written by Judith L. Kares, JD, regulatory specialist for HCPro.  

Under the HVBPP, for each FY (beginning with FY 2013), value-based incentive payments are made to hospitals that meet or exceed certain performance standards for that FY, resulting in an upward adjustment to the hospital’s base operating payment. The incentive payments for each FY are funded by a prescribed percentage reduction (the “applicable percent”) to the total base operating payments of all hospitals subject to the HVBPP, resulting in a downward adjustment to every participating hospital’s base operating payment.

Those hospitals subject to the HVBPP include most IPPS hospitals, except the following:

  • Hospitals subject to the reduced update for failure to meet Inpatient Quality Reporting program requirements;
  • Hospitals for which the Department of Health and Human Services (DHHS) has cited deficiencies posing immediate jeopardy to health/safety of patients; and
  • Hospitals that fail to meet minimum number of cases/measures for that FY.

Given the possibility of both an upward and a downward adjustment, a specific hospital’s total HVBPP adjustment may result in either an increase or a decrease to the hospital’s base operating payment for each case during the FY. The HVBPP adjustment is made by applying the hospital’s FY “value-based incentive payment adjustment factor” to each inpatient discharge. CMS publishes both proxy and final adjustment factors in Tables 16A and 16B, respectively, of the IPPS Final Rule for each FY.

For each FY, a hospital’s value-based incentive payment, if any, is based on the hospital’s Total Performance Score, as determined by its “Achievement” or “Improvement” score (whichever is higher) during the Performance Period. The “Achievement Score” is based on the hospital’s performance compared to all other hospitals. The “Improvement Score” is based on the hospital’s performance compared to its performance during the “Baseline Period.”

For discharges during FY 2015, CMS has implemented the following changes to the HVBPP:

  • CMS is withholding 1.5% of anticipated DRG operating payments to create the funding pool for incentive payments
  • There are four quality domains
    • The Clinical Process of Care domain, weighted at 20%
    • The Patient Experience of Care domain, weighted at 30%
    • The Outcomes domain, weighted at 30%
    • The Efficiency domain, weighted at 20%
  • The Performance Period for each domain is as follows:
    • For the Clinical Process of Care and Patient Experience of Care domains–CY 2013
    • For the Outcomes domain
      • Three 30-day mortality measures—10/1/12-6/30/13
      • Agency for Healthcare Research and Quality patient safety indicator 90 (AHRQ PSI-90)—10/15/12-6/30/13
      • Central line-associated bloodstream infection (CLABSI)—2/1/13-12/31/13
    • For the Efficiency domain–5/1/13-12/31/13

HACRP adjustments for inpatient discharges during FY 2015

The HACRP is designed to reduce the number of HACs, including HAIs, arising during inpatient hospital stays. Effective for discharges on or after 10/1/14, payment to “applicable hospitals” is equal to 99% of what would otherwise apply to such discharges. As noted earlier, this reduction adjustment is made to the “base operating portion of the applicable hospital’s DRG payment,” which includes all applicable DSH, IME, LV, HRRP and HVBPP adjustments  For purposes of the HACRP, “applicable hospitals” include IPPS hospitals, sole community hospitals (SCH)s, and Indian Health Service (IHS) hospitals.

Adjustments are only made to applicable hospitals with the worst HAC rates. For FY 2015, these are hospitals that rank in the top quartile of all subsection (d) hospitals for HACs acquired during the “applicable period.” DHHS will determine the HACs to be counted and the “applicable period” during which measurement will be taken to determine a hospital’s “Total HAC Score” for a specific FY.

  • For FY 2015, CMS has finalized measures in the following two domains:
    • Domain 1, composed of a single composite measure, AHRQ PSI-90, which is a claims-based measure, weighted at 35%; and
    • Domain 2, composed of two CDC National Healthcare Safety Network (NHSN) measures, weighted at 65%
      • Central line-associated bloodstream infection (CLABSI); and
      • Catheter-associated urinary tract infection (CAUTI), which are chart-abstracted measures
  • The 24-month applicable periods are
    • 7/1/11-6/30/13 for the AHRQ measures
    • 1/1/12-12/31/13 for the two NHSN measures

Source authorities

More information on the issues discussed above can be found in the following principal source authorities:

FY 2015 IPPS Final Rule, 79 Fed. Reg. 49854–50449 

FY 2014 IPPS Final Rule, 78 Fed. Reg. 50496–51040 

FY 2013 IPPS Final Rule, 77 Fed. Reg. 53258–53750 

Fact sheets: CMS to Improve Quality of Care during Hospital Inpatient


Fact sheets: Fiscal Year 2015 Policy and Payment Changes for Inpatient

Stays in Acute-Care Hospitals and Long-Term Care Hospitals