Medicare uses the Inpatient Prospective Payment System (IPPS) to provide fixed, prospectively determined payments to hospitals for inpatient care based on Medicare Severity Diagnosis-Related Groups (MS-DRGs). IPPS aims to encourage efficiency while also exposing hospitals to cost risk. Certain hospitals like sole community hospitals may receive special exempted payments based on historical rates. Components of the IPPS payment like operating costs are fixed prospectively, while others like indirect medical education costs vary by individual hospital. Some inpatient payments occur outside IPPS through cost-based reimbursement.

1. Medicare IPPS
Overview

2. MEDICARE/MEDICAID – BACKGROUND
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3. Medicare/Medicaid - Background
• Medicare = Federal Program
• Medicare regulations apply to all applicable health care
entities/practitioners across the country
• Main governing agency for Medicare:
The Centers for Medicare and Medicaid Services (CMS)
• Medicaid = State Program
• Medicaid regulations vary by State
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4. MEDICARE INPATIENT – ACUTE CARE
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5. Medicare – Inpatient Prospective Payment System
(IPPS) Defined
• IPPS system was effective October 1983
• Applies to acute care hospitals
• What does IPPS mean?
• A fixed, prospectively determined amount for each inpatient hospitalization based on
Medicare severity diagnosis-related groups (MS-DRGs);
• One of the purposes of the IPPS system was to encourage hospitals to operate more
efficiently;
• However, hospitals also run the risk for higher costs under IPPS as well
• IPPS is based on the law of averages – cost of some inpatient stays under IPPS
may be greater or less than the IPPS payment
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6. Medicare – Inpatient Prospective Payment
System (IPPS) - Exemptions
• Certain types of hospitals may not automatically receive the IPPS rates:
• Sole Community Hospitals (SCH)
• Medicare Dependent Hospitals (MDH)
• Currently MDH Status is set to expire March 31, 2014. Beginning April 1, all hospitals that
previously qualified for MDH status will no longer have MDH status.
• These types of hospitals are afforded special payment protection and payments
may be based upon hospital specific rates from a certain base year
• Congress established prospective payment systems (PPS) for other healthcare
facilities separate from IPPS:
• Rehab, Psych, long-term care hospitals (LTACs), SNF, HHA and Hospice
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7. Medicare – Inpatient Prospective Payment System
(IPPS) - Exemptions
• Certain types of hospitals still receive cost-based reimbursement:
• Children’s hospitals
• Cancer hospitals
• RNHCIs (Religious Nonmedical Health Care Institution)
• Critical Access Hospitals
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8. Medicare – Inpatient Prospective Payment System
(IPPS) – Prospective vs. Hospital Specific Components
• Technically – only operating and capital portion of IPPS is truly “prospective”
• These prospective items are NOT reconciled at any point in the future
• These prospective items are the same for each MS-DRG based upon a similar
category of hospitals (some variations with prospective components as well)
• Other components of IPPS are hospital specific (will vary by hospital):
• Indirect Graduate Medical Education (IME)
• Disproportionate Share (DSH)
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9. Medicare – Other Inpatient Payments
• Some areas of inpatient acute care Medicare reimbursement fall outside of IPPS
(but are reported and settled on a cost report each fiscal period):
• Direct Graduate Medical Education (DGME) (note that the Indirect Medical Education
component for teaching hospitals is included in IPPS)
• School of Nursing
• Transplants
• High percentage of ESRD add-on
• Medicare bad debts
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10. Medicare – Other Inpatient Payments
• Each respective methodology of Medicare reimbursement is as follows:
• DGME – Per Resident amount (caps apply and three year rolling average)
• School of Nursing, Transplants – cost-based reimbursement
• High percentage of ESRD add-on – fixed amount based upon ratio of chronic ESRD patients to total Medicare specified DRGs
• Medicare bad debts – submitted and audited logs
• Each of these categories are reimbursed through interim “pass-through”
payments
• Pass through payments are made bi-weekly and are not processed through any
claims payment mechanism
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11. Medicare – Other Inpatient Payments
• The pass through payments are estimates until compared to final audited cost
report data
• Monies will be exchanged for these categories of reimbursement between
hospitals and the Medicare program for each cost reporting period
• IPPS also includes an add-on to IPPS for outlier cases
• Outlier cases are unusually expensive cases and this reimbursement can mitigate
large financial losses
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