On November 18, 2016, the Centers for Medicare and Medicaid Services (“CMS”) published its Final Rule addressing changes to the physician fee schedule and other Medicare Part B payment policies.[1]  For Federally Qualified Health Centers (“FQHCs”), the Final Rule contains the final calculation of the FQHC-specific market basket (the “Market Basket”) for calendar year (“CY”) 2017.  The market basket replaces the Medicare Economic Index (“MEI”), which was previously used to adjust payments rates for the Medicare FQHC Prospective Payment System (“PPS”) based on estimates of annual changes in physicians’ operating costs.  The Final Rule is effective January 1, 2017.

Why make the switch?

Section 10501(i)(3)(A) of the Affordable Care Act[2] added § 1834(o) to the Social Security Act (the “Act”), requiring the establishment of PPS for FQHC services under Medicare Part B.  The FQHC PPS Final Rule was published on May 2, 2014, using FQHC cost report and claims data to determine the base payment rate.[3]  The adjusted base payment rate for October 1, 2014 through December 31, 2015 was $158.85.  To calculate the PPS payment, the base payment rate was multiplied by the FQHC geographic adjustment factor and adjusted for new patients, initial preventative physical examinations, and annual wellness visits.  As of January 1, 2016, all FQHCs are paid under the Medicare FQHC PPS.

The base payment rates are not static.  The Act requires that payments after the first year of the implementation be adjusted by the increase in the MEI.[4]  In CY 2016, the base payment rate was adjusted by the MEI.  The MEI was based on data from the American Medical Association for self-employed physicians from 2006, rather than being based on the cost structures of FQHCs.  Moving forward, the Act requires that the base payment rate be increased “by the percentage increase in a market basket of [FQHC] goods and services.[5]  If the Market Basket is not available, the base rate should be increased by the MEI again.

How is the Market Basket is Calculated?

CMS describes the Market Basket as “a fixed-weight, Laspeyres-type price index.”  This type of index “measures the change in price, over time, of the same mix of goods and services in the base period.”  The index does not consider any change in the quantity of mix of goods and services purchased over time, but only the change in price.  The index is constructed by:

1. CMS estimates total base period costs for a set of mutually exclusive and exhaustive categories (see below) for the base year (in this case, 2013). CMS then calculates the proportion of the total cost each category represents, called the cost weight.

2. “[E]ach cost category is matched to an appropriate price or wage variable, referred to as a price proxy.” CMS used Producer Price, Consumer Price, and Employment Cost Indexes as the price proxies.

3. Each category’s cost weight is then multiplied by the proxy index level. The sum of all the categories yields the composite index level of the market basket for the given time period.

CMS derived eight major costs categories from the CY 2013 Medicare costs reports for freestanding FQHCs to develop the Market Basket.  The categories are:

1. FQHC-Practitioner Compensation – Compensation for physicians, nurse practitioners, physicians assistants, certified nurse midwives, clinical psychologists, and clinical social workers.

2. Other Clinical Compensation – Compensation for any health-related clinical staff who do not fall under the definition of FQHC-Practitioner.

3. Non-Health Compensation – Compensation for office staff, housekeeping and maintenance, and pharmacy.

4. Fringe Benefits – The Medicare cost report, worksheet A, columns 1 and 2, line 45 captures fringe benefits and payroll tax expenses.

5. Pharmaceuticals – Drugs and biologicals that are not usually self-administered, and certain Medicare-covered preventive injectable drugs are paid incident to a FQHC visit.

6. Fixed Capital – The cost of rent, interest on mortgage loans, depreciation on buildings and fixtures, and property tax.

7. Moveable Capital – Costs for depreciation of medical equipment, office equipment, and other equipment.

8. All Other (Residual) – The remaining costs after estimating the expenses of the other seven cost categories. CMS further divides Residual costs into nine categories:  utilities; miscellaneous office expenses; telephone; postage; medical equipment; medical supplies; professional, scientific, and technical services; administrative and facility services; and other services.

Professional liability insurance was omitted because FQHCs receiving Public Health Service Act § 330 funding are eligible to apply for medical malpractice coverage under the Federally Supported Health Centers Assistance Acts.

While the MEI and the Market Basket structures are similar, there are key differences.  First, non-health compensation accounts for a larger share of the compensation costs for in the Market Basket than in the MEI.  Second, pharmaceutical costs are not included in the MEI calculation, but are considered in the Market Basket.  Third, as mentioned, professional liability insurance is not considered in the Market Basket.  Fourth, fixed capital expenses are double in the MEI what they are in the Market Basket.

The Market Basket will be updated on an annual basis.  After the first year, in which the FQHC PPS base rate was increased by the percentage increase in MEI, the base rate will increase by the percentage increase in the Market Basket.  Similar to the MEI, the Market Basket will apply a productivity adjustment to its annual updates.  The productivity adjustment ensures that FQHC physicians do not receive increased payments from both “their ability to increase their individual outputs and from the productivity gains already reflected in the wage proxies used in the index.”

How does the Market Basket affect your reimbursement?

The Market Basket is effective January 1, 2017.  In the proposed rule, CMS recommended a 1.7 percent increase in the FQHC base rate, reflecting a 2.1-percent increase in FQHC input prices adjusted by a 0.4-percent productivity adjustment.  By comparison, the MEI was projected only to increase by 1.3 percent in CY 2017.  This Final Rule, however, sets the Market Basket increase at 1.8 percent, reflecting a 2.2 percent increase in input prices with a 0.4 percent productivity adjustment.  By comparison, the MEI adjustment for CY 2017 will only be 1.2 percent.  CMS notes that the difference in the Market Basket and the MEI derives mostly from the inclusion of pharmaceuticals in the Market Basket.

For more information about FQHC reimbursement, please contact an attorney at Feldesman Tucker Leifer Fidell LLP at 202-466-8960.  You can also visit our trainings page for a full list of FTLF trainings and webinars.

[1] Medicare Program; Revisions to Payment Policies Under the Physician Fee Schedule and Other Revisions to Part B for CY 2017; Medicare Advantage Bid Pricing Data Release; Medicare Advantage and Part D Medical Loss Ratio Data Release; Medicare Advantage Provider Network Requirements; Expansion of Medicare Diabetes Prevention Program Model; Medicare Shared, 81 Fed. Reg. 80170 (Nov. 15, 2016).

[2]  Pub. L. 111-148 and Pub. Law. 111-152.

[3]  See 79 Fed. Reg. 25436.

[4]  Social Security Act § 1834(o)(2)(B)(ii)(I).

[5] Id. § 1834(o)(2)(B)(ii)(II).