On August 1, 2024, CMS released its fiscal year 2025 Inpatient Prospective Payment System (IPPS) final rule. CMS estimates hospital inpatient payments will increase by $2.9 billion nationally in FY 2025 due to the changes. CMS also takes a step toward achieving its goal of having all Medicare fee-for-service (FFS) beneficiaries covered under a value-based payment arrangement by 2030 by implementing a new, mandatory bundled payment model in 25% of core-based statistical areas (CBSAs).
Below are 10 takeaways from the final rule.
1. Payment Update Less Than Recent Input Price Inflation
CMS finalized a net IPPS market basket update (MBU) of 2.9% and capital update of 3.1%. The resulting base operating and capital rates are available here (pg. 2822).
The MBUs in 2021 through 2023 were underestimated by a cumulative 4.3 percentage points compared to the actual data collected after the fact. Despite concerns from hospitals and MedPAC, CMS has indicated it will not adjust the MBU to reflect inflation. This puts pressure on hospitals to accelerate aggressive cost management efforts and look for opportunities to increase allowable Medicare reimbursement.
2. Mandatory Bundles in Select Markets
Beginning on January 1, 2026, CMS will require hospitals in selected CBSAs to participate in the Transforming Episode Accountability Model (TEAM). Current participants in other CMMI episodic payment models may elect to participate in TEAM.
TEAM is a 30-day risk-bearing bundle that includes almost all Part A and B spending from the date of the triggering procedure to 30 days post-procedure for five surgical episodes. Target prices are based on regional data adjusted for certain hospital- and patient-specific factors and include a discount—which varies based on episode—to promote CMS savings.
These five episodes account for 15% of allowable inpatient charges nationally. Hospitals have at least 16 months before the model begins, but preparation will take time. Important steps include analyzing claims data from the benchmark period to understand improvement opportunities, aligning with physicians to redesign care pathways, and developing the high-value post-acute care networks essential to success. Additional details on TEAM are available here.
3. Uncompensated Care Disproportionate Share Hospital Payment Shrinks Again
The dollars available for distribution to disproportionate share hospitals (DSH) for uncompensated care (UC) decreased by $200 million compared to the FY 2024 IPPS final rule. Despite ongoing Medicaid redeterminations, CMS projects the uninsured rate will decrease relative to 2024, which drives the reduction in payment.
Since 2020, CMS has decreased UC by approximately 32% ($2.6 billion). The shrinking UC DSH pool increases the importance of accurately capturing all eligible UC costs on worksheet S-10 and the related exhibits that became effective for cost reports filed on or after October 1, 2022. A comprehensive understanding of the exhibit requirements is imperative for hospitals to receive their share of these shrinking funds.
4. Wage Index
CMS finalized a labor-related share of 67.6%, a three-year extension of its low-wage index policy, and implemented changes to certain CBSAs. CMS estimates 771 hospitals will receive their state’s rural floor wage index value in FY 2025.
CMS may not be able to sustain the low wage index policy for its intended three-year extension. On July 23 the U.S. Court of Appeals for the D.C. Circuit not only upheld a lower court ruling that found the policy impermissible, but vacated the regulations. The 9th Circuit Court is hearing a similar legal challenge. CMS has 90 days from the date of the decision to seek a review by the Supreme Court, or it may seek an en banc review by all the judges of the D.C. Circuit Court.
The final rule notes approximately 33 hospitals considered part of an urban CBSA will be considered located in a rural area for FY 2025 under the revised CBSA delineations. An additional 24 hospitals in rural areas will be located in urban areas under the revised CBSAs.
In general, affected hospitals should review any add-on payments and/or special payment statuses they currently receive to understand the payment impact of the change in CBSA and review the CMS regulations to identify steps they can take.
Moving from rural to urban status cancels Critical Access Hospital, Sole Community Hospital, or Medicare Dependent Hospital status and impacts resident caps. Depending on the circumstance, hospitals may need to reclassify to mitigate the impact or take advantage of a transition period. Urban hospitals that become rural could experience a cap on DSH payments. CMS provides a three-year transition period in these instances.
5. Medicare Dependent Hospital (MDH) Status
Unless Congress intervenes, the final rule reminds hospitals that by statute MDH status expires for discharges occurring on or after January 1, 2025. If an MDH qualifies, it may apply for Sole Community Hospital (SCH) status. To receive SCH status effective January 1, 2025, an MDH must apply by December 2, 2024. CMS estimates that of the 173 MDHs, 117 would be paid based on the blended rate.
6. Outlier Threshold
CMS finalized an acute outlier threshold of $46,152 for FY 2025. This is lower than the proposed threshold of $49,237 but higher than the FY 2024 final rule threshold of $42,750. The increase in the threshold will result in a reduction in outlier payments relative to FY 2024.
7. Graduate Medical Education (GME)
CMS finalized distribution criteria for the 200 new residency slots, effective July 1, 2026, created by the Consolidated Appropriations Act (CAA) of 2023. The criteria are largely similar to the criteria CMS is using to allocate the 1,000 new slots included in the CAA of 2021. The one exception is that by statute, half of the slots created by the CAA of 2023 must be allocated to psychiatry or psychiatry subspecialty residency training programs.
Applications for the additional slots created by the CAAs of 2021 and 2023 are due by March 31, 2025, and must be submitted via the Medicare Electronic Application Request Information System (MEARIS). To assist hospitals in preparing for their applications, Health Professional Shortage Area (HPSA) information will be posted when the online application system becomes available on the CMS website. It is anticipated the application and related information will become available in early 2025.
8. Small, Independent Hospitals Eligible for Separate Payment for Stockpiling Essential Medicines
Independent hospitals with 100 or fewer beds are eligible for payment for the “IPPS share” of the additional resource costs necessary to establish and maintain a six-month buffer stock of one or more of 86 essential medicines. The payment is effective for cost reporting periods beginning on or after October 1, 2024.
9. Inpatient Quality Reporting/Value-Based Purchasing Program Updates
CMS finalized seven new measures for the Hospital Inpatient Quality Reporting (IQR) Program—five measure removals and two measure modifications—including changes to the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) measure. CMS made related changes to the scoring methodology of the Hospital Value-Based Purchasing (VBP) Program to account for the HCAHPS modifications. The rule also includes modifications to the Electronic Clinical Quality Measures (eCQM) data reporting and submission requirements, including a progressive increase in the number of eCQMs hospitals are required to report.
10. Conditions of Participation Requirements for Hospitals and Critical Access Hospitals (CAHs) to Report Acute Respiratory Illnesses
CMS replaced the COVID-19 and Seasonal Influenza reporting standards for hospitals and CAHs with a new standard addressing acute respiratory illnesses. Beginning on November 1, 2024, hospitals and CAHs must electronically report information about COVID-19, influenza, and respiratory syncytial virus (RSV). CMS also finalized that outside of a public health emergency, hospitals and CAHs would have to report these data on a weekly basis.
If you have questions about the FY 2025 IPPS final rule and how it may impact your organization, please reach out to a professional at Forvis Mazars.