A first look at the Medicare FY 2025 IPPS proposed rule

On April 10, 2024, the Centers for Medicare & Medicaid Services (CMS) released its annual proposed rulemaking for the Medicare Inpatient Prospective Payment System (IPPS) for fiscal year (FY) 2025 (proposed rule). The proposed rule seeks to update Medicare payment rates and policies for inpatient hospital services and proposes other policy changes. For FY 2025, the proposals include a separate payment for establishing and maintaining access to essential medicines, the distribution of new graduate medical education (GME) residency slots under § 4122 of the 2023 Consolidated Appropriations Act (CAA) and the establishment of a new episode-based payment model for certain surgical procedures. The proposed rule is scheduled for publication in the May 2, 2024, Federal Register and CMS will accept comments through June 10. Below we address key highlights from the proposed rule for IPPS hospitals and healthcare systems.

IPPS payment rates, uncompensated care and supplemental payment

The proposed payment rate increase for general acute care hospitals that successfully participate in the Hospital Inpatient Quality Reporting program and are meaningful electronic health record users is proposed to be 2.6 percent. If finalized, this would amount to an estimated US$2.9 billion increase in hospital payments in FY 2025, according to CMS. This increase is based on a projected FY 2025 hospital market basket percentage increase of 3.0 percent, reduced by a 0.4 percentage point productivity adjustment. Citing escalating costs in delivering healthcare, hospital groups have expressed disappointment with the proposed 2.6 percent update, which stakeholders consider inadequate.

CMS proposes to update the estimated factors used in determining uncompensated care payments. As such, payments for Medicare uncompensated care provided by disproportionate share (DSH) hospitals are expected to increase by US$560 million in FY 2025. Moreover, payments for inpatient cases involving new medical technologies would increase by US$94 million in FY 2025, primarily due to the continuation of new add-on payments for various technologies.

Unless Congress passes legislation, the additional payments for Medicare Dependent Hospitals and temporary changes in payments for low-volume hospitals are set to expire on December 31, 2024.

Low-hospital wage index policy 

CMS proposes to continue its temporary low-hospital wage index policy and related budget neutrality adjustment for at least three additional years, beginning in FY 2025 and lasting through FY 2027. In response to the COVID-19 public health emergency (PHE), CMS increased the wage index for hospitals with a wage index value below the 25th percentile. CMS has decided to postpone a full assessment of this policy, prior to making any changes or discontinuing it, until a sufficient duration has passed following the end of the PHE.

Separate payment for establishing and maintaining access to essential medicines

In response to the drug shortages many hospitals have experienced, CMS proposes establishing a separate IPPS payment for the additional resource costs that small, independent (i.e. not part of a chain) hospitals with 100 beds or less would incur in establishing and maintaining a six-month buffer stock of one or more of 86 essential medicines beginning in FY 2025. Significantly, only the costs associated with establishing and maintaining a buffer stock would be covered by this separate payment and not the cost of the essential medicines themselves. CMS estimates that 493 hospitals would qualify for separate IPPS payment under this proposal.

Distribution of graduate medical education residency slots under the CAA

CMS must distribute 200 new Medicare-funded GME residency positions to qualifying hospitals for FY 2026. The new positions are focused on training physicians, with at least 100 of them designated for psychiatry or psychiatry subspecialty residency training programs. The agency proposes establishing policies aligned with the statutory requirements that govern the distribution of additional residency slots to hospitals. If remaining slots are available, CMS also intends to prioritize distribution in health professional shortage areas. View additional information about the third round of applications for GME residency slots.

Conditions of participation (CoP) for acute respiratory illness

The proposed rule would modify and make permanent the CoP requiring hospitals to report data on acute respiratory illnesses. Under this proposal, hospitals would report weekly on COVID-19, influenza, respiratory syntactical virus (RSV), hospital capacity and patient demographic data outside of a public health emergency through a CDC-supported system. CMS also seeks comments on requiring hospitals to collect demographic information on race and ethnicity in connection with a modified CoP.

Reporting on quality of inpatient hospital care

CMS is requesting public comment on improvements to the reporting programs that measure quality of inpatient hospital care. This includes soliciting input on adopting measures that better represent certain patient outcomes, proposed changes to the Hospital Inpatient Quality Reporting (IQR) Program and cross-program modifications to the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey measure, among others.

Maternity care RFI and obstetrical services CoPs

CMS is requesting information on the differences in resources hospitals use to provide pregnancy and childbirth services to patients who are admitted for inpatient care for Medicare and non-Medicare patients. CMS is particularly interested in understanding whether non-Medicare payers and commercial insurers use the IPPS in determining payment rates for these services. Moreover, the agency wants to assess the possible impact of this practice on maternal health outcomes.

CMS also seeks public comment on potential policies that could help reduce the rates of maternal mortality and address disparities through one or more CoPs. As such, the agency notes that it is currently exploring options aimed at proposing targeted obstetrical services CoPs within the CY 2025 outpatient prospective payment (OPPS) / ambulatory surgery centers (ASC) proposed rule.

Transforming episode accountability model (TEAM)

CMS proposes to implement a new mandatory payment model called the "Transforming Episode Accountability Model” (TEAM) that would run for five years, beginning on January 1, 2026. The purpose of this model would be to test whether bundled payment can reduce Medicare expenditures for certain surgical procedures without compromising the quality of care for beneficiaries. Accordingly, CMS proposes to begin with the following surgical categories:

• Coronary Artery Bypass
• Lower Extremity Joint Replacement
• Major Bowel Procedure
• Surgical Hip/Femur Fracture Treatment
• Spinal Fusion

Almost all acute care hospitals located within the Core-Based Statistical Areas that CMS selects for implementation would participate in TEAM, with limited exceptions. The proposed plan includes a 1-year “glide path” for TEAM participants to gradually transition into full financial risk. Additionally, there will be different participation tracks to accommodate varying levels of financial risk and reward.

Under TEAM, healthcare providers will continue to bill Medicare fee-for-service, as usual. However, they will receive a "target price" based on all non-excluded Medicare Parts A and B items and services included in a particular episode of care. If a hospital's spending is below the target price, the hospital may receive a payment from CMS subject to a quality performance adjustment. Conversely, if a hospital's spending exceeds the target price, the hospital may owe CMS a repayment amount.

Our team of experienced lawyers and professionals at Norton Rose Fulbright will closely monitor the development and finalization of the IPPS rule. If you have any questions related to the IPPS rule or other federal and state regulations, please do not hesitate to contact us.