The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

Medicare Regulatory Update for HospitalsOctober 16, 2019

Paul Holden, Partner, Cost Reimbursement and Regulatory Reporting Practice Leader

The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation,

legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but nor

limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for

professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought.

Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment

banking offered through Moss Adams Capital LLC.

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• Changes to Medicare Wage Index and the Ripple Impact to Other Program Reimbursement

• IPPS Final Updates for FFY 2020

• DSH/Uncompensated Care

• OPPS Proposed Updates for CY 2020 / Provider-Based Updates

• Emerging Issue(s)

Topics

IPPS Final Updates for FFY2020 – Released

August 16, 2019

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Background: Disparity in Wage Index Factors

6

The Downward Spiral (contd.)

Background: How is your Medicare payment calculated?

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11

The “adjusted”* area wage index is currently used in:• Medicare inpatient prospective payment system (IPPS)• Medicare outpatient prospective payment system (OPPS)• California Medi-Cal FFS (APR-DRG) system**

The “unadjusted” area wage index is used in:• Medicare skilled-nursing facility PPS (70.5% labor share)• Medicare inpatient rehabilitation facility PPS (70.5% labor share)• Medicare inpatient psychiatric facility PPS (74.8% labor share)• Other Medicare payment systems (ESRD, HHA, others)• Many hospitals factor the “adjusted” AWI into Medicare Advantage (MA) and• Medi-Cal Managed Care contracts. Also the AHW is used in setting MA rates.

* The “adjusted” AWI accounts for reclassification and rural floor budget neutrality**Any change to Medi-Cal FFS in one year will be adjusted the following year to make the change budget neutral.

Current Use of Medicare Area Wage Index (AWI) Data

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• CMS will make upward adjustments over the next four years to the wage indices of hospitals with a wage index value below the 25th percentile nationally.

• The adjustment for each eligible hospital will be equal to half of the difference between the otherwise applicable final wage index value for the hospital and the 25th percentile wage index value for all hospitals that same year.

• For FY 2020, the 25th percentile wage index value will be 0.8457.

• To budget neutralize these adjustments, CMS had proposed to reduce the wage index values of hospitals above the national 75th percentile. Facing strong opposition by commenters, CMS instead opted to apply a budget-neutrality adjustment to the national standardized amount (i.e. Alternative #1).

Final Rule: Changes to Wage Index Factors

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• CMS placed a cap on wage index decreases in FY 2020.

• The maximum amount that a hospital’s wage index can decrease in FY 2020 is five percent. This means that no hospital will be assigned a wage index in FY 2020 that is less than 95 percent of its wage index from FY 2019.

• This is a one-time transitional policy designed to limit the impact of the wage index policies in the FY 2020 rule and applies to all hospitals, regardless of whether their wage indices have decreased because of the changes in the rulemaking.

• To ensure that the cap is budget neutral, CMS will make an adjustment to the national standardized amount.

Final Rule on Wage Index Temporary Stop Loss

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Big Picture –What Does It All Mean?

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• PUF FY 2021 wage index file released 5/17/2019

FY 2017 W/S S-3 wage data files (9/30/17, 12/31/17, 3/31/18, 6/30/18)

• 9/3/2019 – deadline (not postmarked) for hospitals to request revisions to wage index and occupational mix data (3rd year of current occ mix files)

• 11/5/2019 – deadline for MACs to notify State hospital associations of hospitals that did not respond to wage index queries

Member hospitals failure to respond to MAC inquiries can result in lowering of area’s wage index value or an exclusion from the area wage index calculation

• 11/15/2019 – deadline for MACs to complete all desk reviews of submitted revisions

• 1/31/2020 – release of revised FY 2021 wage index PUF files on CMS web site

Wage Index Deadlines

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• 2/14/2020 – Deadline for hospitals to submit requests (including supporting documentation) for: 1) corrections to errors in the January PUFs due to CMS or MAC mishandling of the wage index data, or 2) revisions of desk review adjustments to their wage index data as included in the January PUFs (and to provide documentation to support the request). MACs must receive the requests and supporting documentation by this date.

• 3/19/2020 – Deadline for the following: 1) MACs to transmit final revised wage index data and 2) MACs must also send written notification to hospitals regarding the hospitals’ February 14, 2020 correction/revision requests by this date.

• 4/2/2020 – Deadline for Provider’s to appeal MAC determinations/request CMS intervention. Also deadline to request CMS corrections related to the mishandling of a Provider’s data due to no fault of their own.

Wage Index Deadlines (cont.)

FFY 2020 Final(8/16/19)

FFY 2019 Final(9/28/18 CN)

Labor-Related $3,962.17 $3,856.27

Non-Labor 1,838.96 1,789.81

Capital 462.61 459.41

Total Payment Rate $6,263.74 $6,105.49

DRG Payment Rates (Quality Data/MU MET) Wage Index > 1.0000

Wage Index <= 1.0000FFY 2020 Final

(8/16/19)FFY 2019 Final

(9/28/18 CN)

Labor-Related $3,596.70 $3,500.57

Non-Labor 2,204.43 2,145.51

Capital 462.61 459.41

Total Payment Rate $6,263.74 $6,105.49

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Labor/Non-Labor DRG Rates: Wage Index > 1.0000

Description(for FFY 2020-Final for 10/01/19) Labor Non-Labor

FY2019 Base Rate, after removing PY Reduction Factors $4,126.19 $1,915.09

FY2020 Net Market Basket Update Factor - SEE NEXT SLIDE 1.026 1.026

FY2020 MS-DRG Recalibration Budget Neutrality Factor (BNF) (-.24%) 0.997649 0.997649

FY2020 Wage Index Budget Neutrality Factor (BNF) (+.16%) 1.001573 1.001573

FY2020 Reclassification ‘BNF’ (-1.46%) 0.985425 0.985425

FY2020 Lowest Quartile ‘BNF’ (-0.20%) 0.997987 0.997987

FY2020 Transition ‘BNF’ (-0.12%) 0.998838 0.998838

FY2020 Operating Outlier Factor (-5.1%) 0.949 0.949

FY2020 Rural Demonstration Budget Neutrality Factor (-.02%) 0.999771 0.999771

FY2020 Sections 414 (MACRA) and 15005 of PL 114-255 (+.50%) 1.005 1.005

National Standardized Amount FY2020 DRG Payment Rate (-3.98% from FY19 Base Rate) $3,962.17 $1,838.96

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Quality Data Submitted and

Meaningful User

Quality Data Submitted /

NOT a Meaningful

User

Quality DataNOT

Submitted / Meets

Meaningful Use

Quality Data NOT

Submitted / NOT a

MeaningfulUser

MB “Rate of Increase” 3.0% 3.0% 3.0% 3.0%

Failure to submit Quality Data 0.00 0.00 -0.75 -0.75

Failure to meet Meaningful Use 0.00 -2.25 0.00 -2.25

MFP Adjustment -0.40 -0.40 -0.40 -0.40

Net Percent Increase/Decrease 2.6% 0.35% 1.85% -0.40%

FINAL FFY 2020 Update

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Service Line Winners and Losers

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• DRG weights re-calibrated on annual basis using claims data and cost report data Claims data from MedPAR file for 10/1/2017 – 9/30/2018 received thru 12/31/2018

Excludes Medicare managed care claims, critical access hospitals

FFY 2017 cost report data from 12/31/2018 HCRIS data file; Data is typically three years prior to IPPS fiscal year

• Reset costly HAC claims to force claims into higher severity DRGs, as HCA claims generate lower payments

• MedPAR data trimmed to remove statistical outliers, incomplete claims Once trimmed, charges applied to cost to charge ratios from cost report to determine “cost” of

services (see next slide)

Annual Recalibration

Cost Center WS C CR Line #s Revenue Codes FY2020 FINAL CCRs

FY2019 FINALCCRs

Routine Services 30 10x, 11x, 12x, 13x, 14x, 15x, 16x-19x .432 .442

Intensive Care/ Coronary Care 31-35 20x, 21x .358 .368

Drugs 64, 73 25x, 26x, 63x .189 .191

Supplies & Equipment 71, 96, 97 270-274, 277, 279, 290-299, 621-623 .299 .299

Implantables 72 275, 276, 278, 624 .299 .309

Therapy Services 66-68 42x, 43x, 44x, 47x .297 .304

Inhalation Therapy 65 41x, 46x .150 .156

Operating Room 50, 51 36x, 71x .173 .179

Labor & Delivery (only for 8 MS-DRGs) 52 72x .373 .382

Anesthesia 53 37x .077 .078

Cardiology 69 48x, except 481, 73x .098 .103

Cardiac Cath 59 481 .106 .110

Laboratory 60, 61, 70 30x, 31x, 74x, 75x, 86x .109 .113

Radiology 54-56 28x, 32x, 331-335, 339, 342-344, 40x .140 .145

CT Scans 57 35x .034 .035

MRI 58 61x .072 .075

Emergency Room 91 45x .152 .159

Blood & Blood Products 62, 63 38x, 39x .283 .296

Other Services 74-76, 88-90, 92.01,93-95 All other rev codes .346 .345

National Average CCRs (Aggregation Bias/Mapping)

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• Final outlier threshold for FFY 2020 is $26,473

• FFY 2019 final outlier threshold is $25,769

• CMS estimates threshold to result in outlier payments = 5.1% of total operating DRG payments

• CMS estimates that FY 2018 outliers were 4.98% of DRG payments

• Capital outliers to represent 5.42% of Federal capital payments

Outliers: Fixed Loss Threshold

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• Update factor for FY 2020 capital costs is 1.4%

• Capital costs about 10% of total payments

• 0% adjustment for reclassification/recalibration

• Net adjustment for case mix change expected at 0.0% (difference between real case mix increase and total increase in case mix)

Capital Costs

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• As proposed, CMS will allow hospitals to include in the FTE count residents training at Critical Access Hospitals (CAHs), if such training meets the non-provider setting requirements found at 42 C.F.R. §§ 412.105(f)(1)(ii)(E) and 413.78(g).

• CMS believed that this will “support the training of residents in rural and underserved areas.” This change is particularly beneficial for hospitals still within their 5-year cap-building period.

• The hospital claiming the FTEs must be able to demonstrate that it actually paid the residents’ salaries and fringe benefits.

• CAHs may continue to incur training costs in approved programs and receive payment based on 101 percent of reasonable cost—indirect costs, regardless if another hospital claims the FTEs, and direct costs if the CAH incurs salary and fringe benefits and no other hospital claims the FTEs.

Graduate and Indirect Medical Education

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• ACA § 5506 – Secretary redistributes residency slots after hospital training residents in approved program closes

• One FY 2019 Hospital Closure:

• Providence Hospital in Washington DC

• IME cap of 50.50 FTE and DGME cap of 52.12 FTE to be redistributed

• Application for FTE slots must be received by CMS on or before October 31, 2109.

Graduate and Indirect Medical Education

• For SCH hospitals, who experience a decrease in total discharges of 5.0% or more from one year to the next Adjustment allowed if decrease is due to circumstances beyond hospital’s control

• Current calculation leaves very few SCH hospitals eligible due to calculation of fixed costs Numerous PRRB appeals

• CMS proposed to change fixed cost calculation, which improves SCH chances of adjustment (payment relief) Effective for cost reporting periods beginning 10/1/2017 and after

Current methodology in place until then

Hospital’s not eligible for filing for adjustment until impacted cost report has been filed with MAC

Volume Decrease Adjustment Requests (Refresher)

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• Low-Volume adjustments back on (Section 50204 BBA 2018) Effective 10/1/2017

Hospital must be more than 25 road miles from another DRG hospital, aka subsection (d)

Less than 3,800 discharges in total

If eligible, be sure to provide MAC documentation that meets this reduced criteria

Documentation to MAC must be submitted by 9/1/2019 in order to obtain payment beginning 10/1/2019

Payment is up to a 25% add-on to Medicare inpatient payments

Low-Volume Hospital Payment

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Uncompensated Care Payments Increase by $183M

• Maryland, hospitals in Rural Community Hospital Demonstration Program, SCHs paid their hospital-specific rate are ineligible for DSH

• FFY 2020 gross DSH payments estimated at $16.584B in the final rule compared to $16.339B in FFY 2019

• 25% of DSH = $4.146 billion

• Factor 1 – uncompensated care = $12.437 billion compared to $12.254 billion for FFY 2019.

DSH/Uncompensated Care

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• CBO states the CY 2019 and 2020 uninsured population under age 65, including unauthorized immigrants, is 9.4%

Insured nonelderly population at 90.6%

No longer a mandatory 2% ACA reduction on FY 2020

• Factor 2 formula:

1 – [(0.094 - 0.14)/0.14] = 1 – 0.3286 = 0.6714 (67.14%)

Factor 2 = 67.14%

• Factor 1 after Factor 2 formula = $8.35B

($12.437B x 67.51%)

DSH/Uncompensated Care (cont.)

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• Factor 3 is hospital-specific value

• CMS to use S-10 data for Factor 3, believes S-10 data becoming more stable CMS invites continued public comments on use of S-10 for FFY 2020

Concern that S-10 errors more common in public hospitals that do not file a Form 990

• CMS analyzed relationship between S-10 data and Form 990 and believes data is “highly correlated”

• MACs were required to accept amended S-10 data for FFY 2014/2015/2016 cost reports

DSH/Uncompensated Care (cont.)

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• Concerns re: Factor 3 If S-10 uncompensated care data used, then hospitals in expansion States negatively

impacted

If Medicaid days used, hospitals in non-expansion States negatively impacted

• Factor 3 for FFY 2020 based on: FY2015 Worksheet S-10

Alternative proposal to use FY2017 Worksheet S-10

DSH/Uncompensated Care (cont.)

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• FY2015 Worksheet S-10 Data was included in FFY2020 rulemaking Hospitals had until December 31, 2018 to submit revisions to worksheet S-10 to their MAC

If a cost report has been finalized, MAC issued notice of reopening for S-10 corrections

DSH/Uncompensated Care – Correction Cycle

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Move from Proxy to Reported Uncompensated Care

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REMINDER• 42 CFR 412.106(b)(3) allows a hospital to request to

have the SSI ratio recomputed based on the hospital’s cost report year end

DSH – Realignment & Requests

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• https://www.cms.gov/Medicare/Medicare-Fee-for-Service-

Payment/AcuteInpatientPPS/FY2020-IPPS-Final-Rule-Home-Page.html• 1A – 1E – DRG Base Payment Rates, Capital Payment Rate• 2 and 3 – Hospital specific CMI, Average Hourly Wages, Geographic CBSA, Wage Index

Values for each CBSA• 5 – DRG Listing, Weights, ALOS• 7A and 7B – # of Discharges, Mean LOS by DRG • 10 – Cost Thresholds by MS-DRG for New Technology Add• 15 – Proxy Readmissions Adjustment Factors by Hospital• 16A – Proxy VBP Adjustment Factors by Hospital• 18 – Uncompensated Care Factor 3 Final Values

CMS Tables – IPPS

OPPS Proposed Updates for FFY2020 –Released July 29, 2019

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• Outpatient Prospective Payment System (OPPS) Final Updates for CY 2020 are expected to be issued on or about November 1, 2019 and will become effective for services rendered on and after January 1, 2020.

• Comment period: To be assured consideration, comments on this proposed rule must be received at one of the addresses provided in the ADDRESSES section no later than 5 p.m. EST on September 27, 2019.

• Comments can be submitted electronically, regular mail or overnight mail.

• Comments submitted via facsimile are not permitted.

Important OPPS Dates To Remember

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• CMS requires hospitals make public their standard charges (both gross charges and payer-specific negotiated charges) for all items and services.

• Hospitals must “make public” their standard charges, which CMS interprets as publishing online in a machine-readable format and, for “shoppable services,” in a consumer-friendly display derived from the machine-readable file.

• CMS provides a listing of 70 required “shoppable” services that hospitals must include, while allowing hospitals discretion to select another 230 “shoppable” services, for a total of 300 such services.

• CMS seeks comment on what constitutes a consumer-friendly format for hospitals to publish “shoppable” services but suggests that a consumer should be able to easily search for and find charges for the “shoppable” services based on the service description, identifying code, or by payer.

Price Transparency of Hospital Standard Charges

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• The Proposed Rule announced CMS’s plan to further reduce payment on OPPS Medicare payment rates for so called “excepted” off-campus provider-based departments.

• Under the Proposed Rule, CMS plans to continue with the final year of the phase-in by paying off-campus PBDs approximately 40 percent of the OPPS rate.

• For CY 2019, it was estimated that affected hospitals would receive $300 million less in Medicare funding and $610 million less in 2020 when the rate cut is fully implemented.

Site Neutrality Payment Reductions for Excepted Off-Campus Provider-Based Departments

39

• CMS is proposing to adopt the many changes to the Inpatient Prospective Payment System (IPPS) wage index as the wage index for the OPPS payment rate and copayment standardized amount.

• Specifically, CMS opted to apply a budget-neutrality adjustment to the national standardized amount, finalized the increase to the wage index for hospitals below the 25th percentile and excluded wage data of reclassified rural hospitals from the calculation of the rural floor.

• In other words, one can expect that CMS will finalize such proposals in the CY 2020 OPPS final rule as specified in the FY 2020 IPPS final rule.

Rural Health Wage Index

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• CMS proposes to continue to pay for 340B-acquired drugs at the average sales price (ASP) minus 22.5 percent when furnished in nonexcepted off-campus Provider Based Departments (PBDs) paid under the PFS.

• As a matter of background, CMS’ legal authority to cut 340B drug payments to nonexcepted off-campus PBDs was challenged in federal court and was found to be unlawful.

• Nonetheless, CMS announces in the Proposed Rule that it will continue with its policy, stating it intends to appeal the court’s decision. CMS also explains it is taking steps to “craft an appropriate remedy” in the event it loses the issue on appeal.

• Therefore, CMS solicits comments on whether ASP plus 3 percent could be an appropriate payment amount for these drugs, both for CY 2020 and for purposes of determining the remedy for CYs 2018 and 2019.

340B Purchased Drugs

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• Organ Procurement Organizations (OPOs) Outcome Measures Reforms

• Changes to the Inpatient Only List

• Additions to the ASC Covered Procedures List (CPL)

• Hospital Outpatient Quality Reporting Program (OQR) and Ambulatory Surgical Center Quality Reporting Program (ASCQR)

• “Pass-through” Status for Innovative Devices

• Prior Authorization for Certain Outpatient Services

Other Notable Proposed Changes

Emerging Issues

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• By a 7-1 decision, the Supreme Court held that CMS couldn’t count Part C patient days in the Medicare fraction of the DSH calculation without first going through notice-and-comment rulemaking

• The government argued that it need not do so as it was only interpreting the Medicare statute

• The Court held that at least some interpretive rules under Medicare must go through notice and comment

• Case is back in federal court where the government is now arguing it is prohibited from retroactively reissuing SSI ratios containing Medicare Part C days based upon the Supreme Court’s decision in Allina.

• This issue is worth $4-$6B in additional DSH payments to providers nationwide.

Supreme Court Decision Azar v. Allina Health Services (June 3, 2019)

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• The Supreme Court’s 7-1 decision held the Medicare statute, in contrast to the APA, required CMS to adopt even “interpretative” rules through notice and comment rulemaking if those rules have a substantive legal effect on reimbursement. This decision impacts the following:

1. Medicare’s “must bill” policy for bad debts2. Expense and asset test rules for indigent bad debts3. Cost report instructions for nursing and allied health stepdown4. Volume decrease adjustments for SCHs and MDHs5. Thresholds for triggering outlier reconciliation process6. Organ acquisition costs7. Others???

Supreme Court Decision Azar v. Allina Health Services (June 3, 2019)

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• Historically, courts assume Congress meant to give a federal agency the power to authoritatively interpret the agency’s own rules. This is commonly known as deference.

• The Court, in an opinion by Justice Kagan, formally reaffirms but imposes new limits on the deference rule.

1. The agency regulation must be “genuinely ambiguous” 2. The agency’s reading of its own regulation must be “reasonable” 3. The reading it now offers must state the agency’s “authoritative or official

position” 4. The issue must implicate the agency’s “substantive expertise”5. The agency’s reading must reflect its “fair and considered judgment”6. The reading must not create “unfair surprise”

Supreme Court Decision Kisor v. Wilkie (June 26, 2019)

©2014 The Advisory Board Company • advisory.com

Volume Performance

Source: CMS, “2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds,” May 31, 2013, available at: http://downloads.cms.gov/files/TR2013.pdf; Health Care Advisory Board interviews and analysis.

Medicare to Become Majority of Volume by 2022

Projected Number of Medicare Beneficiaries

Millions of Beneficiaries

54.0

55.6

57.3

59.0

60.7

Average Inpatient Case Mix By Volume

n = 785 Hospitals

42%58%

19%

15%

33%25%

6% 2%

2012 2022

Medicare

Medicaid

Commercial

Self-Pay

2014 2016 2018 2020 2022

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Questions?

PaulHolden(503)478‐2108paul.holden@mossadams.com