April 17, 2023

CMS Proposes FY 2024 Inpatient Payment Policies for Hospitals

Recommendations Call for Increased Payment Rates, Advanced Equity and Quality Reporting Changes
Holland & Knight Alert
Miranda A. Franco


  • The Centers for Medicare & Medicaid Services (CMS) published its annual proposed rule for the federal fiscal year (FY) 2024 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System.
  • Among numerous proposals, CMS calls for a 2.8 percent increase – down from a 4.3 percent increase in FY 2023 – in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting program and are meaningful electronic health record users.
  • A final rule is expected by Aug. 1, 2023, with a statute-required annual effective date of Oct. 1.

The Centers for Medicare & Medicaid Services (CMS or Agency) on April 10, 2023, published its annual proposed rule for the federal fiscal year (FY) 2024 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS).

In addition to annual payment updates, advancing health equity is a major theme throughout the proposed rule. CMS proposes to increase the severity of the designation of homelessness from NonCC to complication or comorbidity as an indicator of increased resource utilization, which may result in higher payment for certain hospital stays. CMS also proposes to provide incentives to hospitals in the Hospital Value-Based Purchasing Program to perform well on existing measures and to those that care for high proportions of individuals dually insured by Medicare and Medicaid.

Additionally, the agency seeks stakeholder input focused on safety net hospitals, health equity and the long-term care hospital quality reporting program.

View the Proposed Rule and a CMS fact sheet on the Proposed Rule. Comments on the Proposed Rule are due June 9, 2023. A final rule is expected by Aug. 1, 2023, and, as required by statute, the final rule must be effective annually by Oct. 1. Several of the Proposed Rule's most noteworthy components are listed below.

Proposed Key Payment Updates

Proposed IPPS Payment Updates: CMS proposes an increase of 2.8 percent (compared to a 4.3 percent increase in FY 2023) in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record (EHR) users. This reflects a projected FY 2024 hospital market basket increase of 3 percent, reduced by a 0.2 percentage point productivity adjustment.

Proposed Changes to Payment Rates Under LTCH PPS: CMS proposed increasing the LTCH payment rate by approximately 2.9 percent. However, CMS projected that LTCH payments will decreased by 0.9 percent ($24 million) due to an expected decrease in high-cost outlier payments.

Proposed Wage Index and Geographic Changes

Proposed Continuation of the Low-Wage Index Hospital Policy: To help mitigate wage index disparities between high-wage and low-wage hospitals, CMS adopted a policy in the FY 2020 IPPS/LTCH PPS rule to increase wage index values for certain hospitals with low-wage index values. In this rule for FY 2024, CMS is proposing to continue the low-wage index hospital policy and the related budget neutrality adjustment. Due to only one year of relevant data that CMS could use to evaluate any potential impacts, CMS believes it is necessary to wait until CMS has usable data from additional fiscal years before making any decision to modify or discontinue the policy.

Proposed Rural Wage Index Caculation: Based on public comments and court rulings, CMS proposed considering hospitals reclassified as rural under the same as geographically rural hospitals for wage index calculations beginning FY 2024. CMS estimates that this would result in a total of 596 hospitals receiving the rural floor in FY 2024. The rule also stated that the area wage index for any hospital in an urban area may not be less than the area wage index for rural hospitals.

Proposed DSH and Uncompensated Care Payment Changes

DSH and Uncompensated Care: For the Medicare DSH Payment Adjustment, CMS projects that the amount available to distribute as payments for uncompensated care for FY 2024 would decrease by approximately $161 million, using the three most recent years of audited Worksheet S-10 data. The supplemental payment is not budget-neutral, and CMS estimates the impact for FY 2024 to be approximately $90.3 million, which would be an approximately $6 million decrease from estimates of supplemental payments in FY 2023. CMS proposes to continue its supplemental payment for Indian health services and tribal hospitals, as well as Puerto Rico hospitals. CMS finalized this policy in FY 2023 to mitigate the discontinued use of low-income insured days as an alternative for uncompensated care costs.

Proposed Changes to Physician-Owned Hospital Expansion

Physician-Owned Hospital Expansion: CMS proposes several changes to physician-owned hospital expansion criteria. CMS is proposing to provide additional clarity as to what will be required for requests to be considered. CMS is also proposing to revise certain aspects of the process for requesting an expansion exception.

In addition, CMS is proposing to reinstate restrictions for hospitals that meet the criteria for a "high Medicaid facility" expansion exception request, including the frequency of requests, maximum aggregate expansion of a hospital and location of expansion facility capacity that were removed in the calendar year (CY) 2021 hospital Outpatient Prospective Payment System and Ambulatory Surgical Center final rule.

In addition, the Agency proposes to permit a hospital to request an expansion exception up to once every two years only, regardless of the type of exception the hospital is requesting. Currently, this restriction concerns only hospitals applying for an applicable hospital expansion exception. Under the proposal, this restriction would also apply to hospitals requesting a high Medicaid facility expansion exception.

Further, CMS is proposing to require hospitals submitting an expansion exception request to include information regarding the requesting hospital's need for additional operating rooms, procedure rooms or beds to serve Medicaid, uninsured and underserved populations. If finalized, CMS would require the use of Healthcare Cost Report Information System (HCRIS) data for all expansion exception requests, instead of allowing the use of external data sources.

Rural Emergency Hospital Proposals

Proposal to Allow Medical Residents to Train in Rural Emergency Hospitals: The Consolidated Appropriations Act, 2021, established rural emergency hospitals (REHs) as a new Medicare provider type to address concerns over increasing closures of rural hospitals. REHs are facilities that convert from either a critical access hospital (CAH) or a rural hospital with 50 or fewer beds that do not provide acute-care inpatient services.

CMS proposes to allow REHs to be designated as graduate medical education training sites. This proposal aims to address workforce shortages in rural communities by allowing medical residents to train in these settings.

Proposed MS-DRG Changes

Post-Acute Care Medicare Severity Diagnosis-Related Groups (MS-DRGs): CMS proposed modifying several MS-DRGs that are subject to post-acute care transfer policy and MS-DRG special payments policies, including reassignment, creation and deletion of MS-DRGs. Proposed modifications include:

  1. reassigning thrombolysis for pulmonary embolism procedures from MS-DRGs 166-168 to a proposed new MS-DRG 173 (Ultrasound Accelerated and Other Thrombolysis for Pulmonary Embolism)
  2. creating a new base MS-DRG 212 (Concomitant Aortic and Mitral Valve Procedures) for certain inpatient episodes with aortic valve repair or replacement procedures
  3. reassigning cardiac defibrillator implant procedures by deleting MS-DRGs 222-227 (Cardiac Defibrillator Implant, with and without Cardiac Catheterization, with and without AMI/HF/shock) and creating proposed new MS-DRGs 275-277

Proposed Changes to Relative Weight Calculation for MS-DRG 18: In the FY 2021 IPPS final rule, CMS created MS-DRG 018 for cases that include Chimeric Antigen Receptor (CAR) T-cell therapies and finalized a payment adjustment for applicable clinical trial and expanded access immunotherapy cases grouped to this DRG.

For FY 2024, CMS is proposing technical changes to its methodology for identifying clinical trial claims and expanded access use claims. Specifically, CMS is proposing that in calculating the relative weight for MS-DRG 018 for FY 2024, claims that group to MS-DRG 018 that 1) contain ICD-10-CM diagnosis code Z00.6 and do not include payer-only code "ZC," or 2) contain condition code "ZB" (or, for subsequent fiscal years, condition code "90") would be excluded from the calculation of the average cost for MS-DRG 018.

CMS is also proposing to no longer use the proxy of standardized drug charges of less than $373,000 to identify clinical trial claims and expanded access use cases when calculating the average cost for MS-DRG 018.

New Technology Add-On Payment (NTAP) Applications for FY 2024

NTAP Applications for FY 2024: CMS assessed 19 NTAP applications under the traditional pathway and 20 applications for consideration under alternative pathways (17 for technologies with or seeking Breakthrough Device designation and three for technologies with Qualified Infectious Disease Product designation). CMS proposed continuing NTAP payments for 11 technologies still considered to be new and discontinuing NTAP payments for the 15 no longer considered new for FY 2024. The FY 2024 NTAP application cycle is the first where applications and certain related materials would be made publicly available; the rule includes web links to abridged applications.

CMS also proposed modifying the NTAP eligibility criteria for technologies that have not yet received U.S. Food and Drug Administration (FDA) market authorization at the time of the NTAP application submission. These proposed eligibility criteria revisions include:

  1. requiring the applicant to have a "complete and active FDA market authorization request" at the time of NTAP application submission
  2. moving the FDA market authorization deadline to May 1 of the application cycle (up from the current deadline of July 1)

Hospital Quality Reporting Proposed Changes

Hospital Inpatient Quality Reporting Program: For FY2024, CMS is proposing the adoption of three new measures: Hospital Harm-Pressure Injury electronic clinical quality measure (eCQM), Hospital Harm-Acute Kidney Injury eCQM, and Excessive Radiation Dose or Inadequate Image Quality for Diagnostic Computed Tomography (CT) in Adults.

CMS is also proposing the modification of three current measures: Hybrid Hospital-Wide All-Cause Risk Standardized Mortality (HWM) measure, Hybrid Hospital-Wide All-Cause Readmission (HWR) measure and COVID-19 Vaccination among Healthcare Personnel (HCP).

Additionally, CMS is proposing the removal of three current measures: Hospital-Level Risk-Standardized Complication Rate (RSCR) following elective Primary Total Hip Arthroplasty (THA) and/or Total Knee Arthroplasty (TKA) measure, Medicare Spending Per Beneficiary (MSPB)-hospital measure and Elective Delivery Prior to 39 Completed Weeks Gestation: Percentage of Babies Electively Delivered Prior to 39 Completed Weeks Gestation (PC-01).

Of note, CMS is proposing two changes to current policies related to data submission, reporting and validation: modification of the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey Measure and modification of the targeting criteria for hospital validation for extraordinary circumstances exceptions (ECEs). Further, CMS is proposing to codify its Measure Removal Factors.

Hospital Readmissions Reduction Program: For FY 2024, CMS is not proposing any changes to the Hospital Readmissions Reduction Program.

Hospital-Acquired Condition (HAC) Reduction Program: CMS proposed adopting a Validation Reconsideration process, beginning in FY 2025, which would affect CY 2022 discharges. The process would allow hospitals to request reconsideration of their validation scores before use in calculation of HAC scores and be structured similarly to the hospital Inpatient Quality Reporting (IQR) reconsideration process. Additionally, CMS proposed modifying the targeting criteria for data validation to include hospitals that received an Extraordinary Circumstances Exception during the data periods validated, beginning with the FY 2027 program year. This proposal would affect CY 2024 discharges.

CMS is seeking comments on a proposal to adopt three patient-safety-focused electronic clinical quality measures (eCQMs) currently in use in the Hospital IQR Program (Hospital Harm – Opioid-Related Adverse Events, Hospital Harm-Severe Hypoglycemia and Hospital Harm-Severe Hyperglycemia). The agency is also seeking comment on three new eCQMs proposed for adoption in the Hospital IQR Program (Hospital Harm-Acute Kidney Injury, Hospital Harm-Pressure Injury, and Excessive Radiation Dose or Inadequate Image Quality for Diagnostic Computer Tomography in Adults).

Hospital Value-Based Purchasing (VBP) Program: CMS proposed several changes to the Medicare Spending Per Beneficiary-Hospital measure, including allowing for readmissions to trigger new episodes, updating the calculation methodology and adding a new indicator variable in the risk adjustment model that accounts for inpatient stays within 30 days of an episode start date. All proposed changes would be effective beginning FY 2028.

CMS also proposed changes to the Hospital-Level Risk-Standardized Complication Following Elective Primary Total Hip Arthroplasty and/or Total Knee Arthroplasty measure beginning in FY 2023. Proposed changes consist of inclusion of index admission diagnoses and in-hospital comorbidity data from Part A claims and inclusion of 26 additional mechanical complication ICD-10 codes.

Beginning in FY 2026, CMS proposed adopting the Severe Sepsis and Septic Shock: Management Bundle with a performance period of CY 2024 and a baseline period of CY 2022.

Lastly, CMS proposed revising the scoring methodology for the Hospital VBP Program by adding Health Equity Adjustment (HEA) bonus points to the Total Performance Score. HEA points reward hospitals based on program performance and proportion of dual-eligible patients served. CMS also seeks input via a request for information (RFI) on potential additional program changes that would address health equity.

Temporary Legislative Extension of Medicare-Dependent, Rural Hospital (MDH) Program: Recent legislation extends the MDH program through FY 2024. Consequently, most providers classified as MDHs as of Sept. 30, 2022, continued to be classified as MDHs as of Oct. 1, 2022, with no need to reapply for MDH classification. However, if an MDH canceled its rural classification on or after Oct. 1, 2022, its MDH status may not be applied continuously or automatically reinstated.

Rural Community Hospital Demonstration Program: CMS summarized the status of the Rural Community Hospital Demonstration program and proposed methodologies for continued implementation and budget neutrality.

LTCH Quality Reporting Program (QRP): For FY2024, CMS is proposing several changes to the LTCH QRP:

  • adopt a modified version of the COVID-19 Vaccination Coverage Among Healthcare Personnel measure beginning with the FY 2025 LTCH QRP
  • adopt the Discharge Function Score measure beginning with the FY 2025 LTCH QRP
  • remove the Percent of LTCH Patients with an Admission and Discharge Functional Assessment and a Care Plan That Addresses Function measure beginning with the FY 2025 LTCH QRP
  • remove the Application of Percent of LTCH Patients with an Admission and Discharge Functional Assessment and a Care Plan That Addresses Function measure beginning with the FY 2025 LTCH QRP
  • adopt the COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date measure beginning with the FY 2026 LTCH QRP
  • public reporting of the Transfer of Health (TOH) Information to the Patient-Post-Acute Care (PAC) and TOH Information to the Provider-PAC measures beginning with the FY 2025 LTCH QRP

Additionally, CMS proposed raising the data thresholds for the LTCH Continuity Assessment Record and Evaluation Data Set Data Items, beginning in FY 2026. Finally, CMS requests information on principles for selecting and prioritizing LTCH Quality Reporting Program quality measures to address gaps in current measures and identify additional measures or measure concepts.

Medicare Promoting Interoperability Program: CMS proposed revising the definition of "EHR reporting period for a payment adjustment year" to require a minimum reporting period of 180 continuous days within CY 2025. Additionally, CMS proposed eliminating the requirement for eligible hospitals that have not demonstrated meaningful EHR use to attest to it by Oct. 1 of the year preceding the payment adjustment year. CMS proposed modifying the Safety Assurance Factors for EHR Resilience (SAFER) Guides measure to require attestation to conducting an annual self-assessment of all nine SAFER Guides during the reporting year. Finally, CMS proposed adopting three new eCQMs for eligible hospitals and CAHs to report as one of their self-selected eCQMs beginning in CY 2025.

PPS-Exempt Cancer Hospital Quality Reporting Program: Section 1866(k)(1) of the Act requires, for purposes of FY 2014 and each subsequent fiscal year, that a hospital described in Section 1886(d)(1)(B)(v) of the Act (a PPS-exempt cancer hospital or a PCH) submit data in accordance with Section 1866(k)(2) of the Act with respect to such fiscal year. There is no financial impact to PCH Medicare payment if a PCH does not participate. CMS is proposing to adopt these new measures for the PCHQR Program:

  • three health-equity-focused measures: Facility Commitment to Health Equity measure, Screening for Social Drivers of Health measure and Screen Positive Rate for Social Drivers of Health measure
  • a patient-preference-focused measure, the Documentation of Goals of Care Discussions Among Cancer Patients measure; CMS is proposing to adopt a modified version of the COVID-19 Vaccination Coverage among Health Care Personnel (HCP) measure beginning with the FY 2025 program year
  • CMS is also proposing to publicly report the Surgical Treatment Complications for Localized Prostate Cancer (PCH-37) measure beginning with data from the FY 2025 program year and modified data submission and reporting requirements for the HCAHPS survey measure beginning with the FY 2027 program year

Proposed Changes to Homelessness-Related Diagnosis Code Severity

Proposed Increase to Severity of the Designation of Homelessness: CMS is proposing to amend the severity level designation of three ICD-10-CM diagnosis codes describing homelessness – unspecified, sheltered and unsheltered – from NonCC to CC. The proposed change will allow CMS to identify homelessness as an indicator of higher resource utilization for FY 2024. IPPS payment depends on hospital resource use, so the proposed change would appropriately reimburse hospitals treating patients with high severity levels and resource consumption rates. CMS believes this proposal will support data reliability and validity, as well as advance health equity.

CMS is additionally requesting feedback on methods to incentivize documenting and reporting diagnosis codes describing social and economic conditions.

Safety-Net Request for Information (RFI)

Safety Net RFI: Among the goals of CMS's health equity pillar is to evaluate policies to determine how CMS can support safety-net providers, including acute care hospitals. As MedPAC noted in its June 2022 report to Congress, CMS concurs and believes the limited resources of many safety-net hospitals may make it difficult for them to compete with other hospitals for labor and technology and, in some cases, may even lead to hospital closure.

CMS is interested in public feedback on the challenges faced by safety-net hospitals and potential approaches to help safety-net hospitals meet those challenges. CMS discusses the Safety-Net Index (SNI), which was developed by MedPAC as a potential measure of the degree to which a hospital functions as a safety-net hospital. In addition, CMS discusses a potential alternative to the SNI, in which safety-net hospitals would be identified using area-level indices.

CMS seeks public feedback and comment on whether either of these two approaches would serve as an appropriate basis for identifying safety-net hospitals for Medicare purposes.

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