April 16, 2024

CMS Releases FY 2025 Inpatient Prospective Payment System Proposed Rule

Holland & Knight Alert
Miranda A. Franco


  • The Centers for Medicare & Medicaid Services (CMS) has released a proposed rule in which it plans to increase payments to inpatient hospitals by 2.6 percent, or about $2.9 billion, for fiscal year (FY) 2025.
  • Payments to disproportionate share hospitals also would increase by $560 million, as would technology payments by $94 million.
  • This Holland & Knight alert reviews the proposed CMS rule and its implications for a range of healthcare delivery systems.

The Centers for Medicare & Medicaid Services (CMS) on April 10, 2024, released a proposed rule for the fiscal year (FY) 2025 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS). Under the proposed rule, CMS plans to increase payments to inpatient hospitals by 2.6 percent for FY 2025 – a slight decline from the 2.8 percent increase in FY 2024. The update would increase hospital payments by $2.9 billion, as well as increase payments to disproportionate share hospitals (DSHs) by $560 million and new medical technology payments by $94 million.

Other provisions in the proposed rule include: 

  • the establishment of a separate IPPS payment to support small independent hospitals in establishing and maintaining a six-month buffer stock of essential medicines for creating and maintaining access to essential medicines
  • the continuation of the low-wage index hospital policy for FY 2025
  • new incentives to encourage hospitals to offer new gene therapies for sickle cell disease
  • the creation of a new mandatory episode-based CMS Innovation Center model, the proposed Transforming Episode Accountability Model (TEAM), in which selected acute care hospitals would coordinate care for people with Traditional Medicare who undergo one of the surgical procedures included in the model and assume responsibility for the cost and quality of care from surgery through the first 30 days after the Medicare beneficiary leaves the hospital; selected hospitals must also refer patients to primary care services to support optimal long-term health outcomes
  • the distribution of new graduate medical education slots under Section 4122 of the Consolidated Appropriations Act of 2023
  • efforts to seek public comments on using Medicare IPPS payments for maternity care by other payment
  • changes to New Technology Add-On Payment (NTAP) policies
  • changes to CMS' quality reporting and value programs, including seven new measures for the inpatient quality reporting program

For more information, view related materials including a fact sheet, press release, TEAM model fact sheet and TEAM model infographic.

The proposed rule will be published in the Federal Register on May 2, 2024. Public comments are due by 5 p.m. ET on June 10, 2024. A final rule is expected on or around Aug. 1, 2024. Highlights of the proposed rule follow.

Payment and Coding Updates

IPPS Payment Rates: CMS proposed increasing operating payment rates for general acute care hospitals paid under the IPPS by approximately 2.6 percent ($3.2 billion). This reflects the projected market basket update of 3 percent minus a 0.4 percentage point productivity adjustment. CMS projected Medicare payments to DSHs and for uncompensated care to increase in FY 2025 by approximately $560 million compared with FY 2024. CMS also estimated that additional payments for inpatient episodes will increase by roughly $94 million in FY 2025, primarily due to the continuation of NTAP status for several technologies.

LTCH PPS Payment Rates: CMS proposed increasing the LTCH payment rate by approximately 2.8 percent, based on the proposed market basket update of 3.2 percent minus a 0.4 percent productivity adjustment. CMS proposed reducing the PPS rate by 2 percent to 0.8 percent for LTCHs that fail to submit quality reporting data. CMS projects that LTCH payments will increase by 1.2 percent ($26 million) due to an expected decrease in high-cost outlier payments. For FY 2025, CMS proposed rebasing the 2017 LTCH market basket to a 2022 base year in order to reflect the existing LTCH cost structure better. CMS is seeking comments on the proposed methodology for rebasing the LTCH market from 2017 to 2022.

NTAP Applications: CMS assessed 12 NTAP applications (view summaries) under the traditional pathway and 14 applications under alternative pathways (12 for technologies with or seeking Breakthrough Device designation and two for technologies with Qualified Infectious Disease Product designation). CMS proposed continuing NTAP payments for 24 technologies that are still considered to be new and discontinuing NTAP payments for the seven that are no longer considered new for FY 2025.

NTAP Newness Period Eligibility: CMS proposed to use Oct. 1 (the beginning of the fiscal year) instead of April 1 to determine whether a technology is within the newness period of two to three years. CMS proposed to implement this change beginning with technologies that are approved for NTAP in FY 2025 and those approved in FY 2026 and after. CMS is soliciting comments on the agency's proposal to change the April 1 cutoff to Oct. 1 for determining whether a technology would be within the newness period of two to three years when considering eligibility for NTAP, beginning in FY 2026, effective for those technologies that are approved for NTAP starting in FY 2025 or a subsequent year.

NTAP FDA Marketing Authorization Requirements: CMS is proposing, beginning with NTAP applications for FY 2026, to no longer consider a hold status to be an inactive status for the purposes of eligibility for the NTAP. Applications that are withdrawn and have Complete Response Letters or are the subject of a U.S. Food and Drug Administration (FDA) decision to refuse approval will still be considered inactive for eligibility for NTAP. CMS notes that because of the various circumstances for which technology may be in a hold status, they may reassess this policy for future years, if finalized, based on ongoing experience.

Calculation of the Inpatient NTAP for Gene Therapies Indicated for Sickle Cell Disease (SCD): CMS proposed increasing the NTAP percentage from 65 percent to 75 percent of the estimated costs of the new technology for gene therapies indicated and used for the treatment of sickle cell disease beginning in FY 2025 and ending at the conclusion of the newness period of the therapy. CMS notes that further facilitating access to these gene therapies for Medicare beneficiaries with SCD may have the potential to simultaneously improve the health of impacted Medicare beneficiaries and potentially lead to long-term savings in the Medicare program. The agency also notes that some gene therapies that treat SCD are among the costliest treatments to date and is concerned about a hospital's ability to sustain a potential financial loss to provide access to such treatments.

CMS is soliciting public comments on the agency's proposal to temporarily increase the NTAP percentage for a gene therapy that is indicated and used for the treatment of SCD, as described previously. The agency also seeks comment on whether it should make this proposed 75 percent add-on payment percentage available only to applicants that meet certain additional criteria, such as attesting to offering and/or participating in outcome-based pricing arrangements with purchasers (without regard to whether the specific purchaser availed itself of the outcome-based arrangements) or otherwise engaging in behaviors that promote access to these therapies at lower cost.

Medicare Severity Diagnosis-Related Groups (MS-DRGs): CMS proposed modifying several MS-DRG classifications. Proposed modifications include:

  • creating 10 MS-DRGs related to atrial appendage closure and cardia ablation, spinal fusion and acute leukemia
  • deleting three MS-DRGs related to spinal fusion
  • retitling six MS-DRGs related to cardiac defibrillator implant, spinal fusion and acute leukemia

DSH Payment Policies: For FY 2025, CMS proposes to distribute roughly $6.5 billion in uncompensated care payments, an increase of approximately $560 million from FY 2024. Consistent with the FY 2023 proposal, for FY 2024 and thereafter, CMS proposes to use the three most recent fiscal years of data (for which audited data are available) of uncompensated care costs from Worksheet S-10 data to calculate Factor 3. Accordingly, for FY 2025, CMS would use hospitals' FY 2019, 2020 and 2021 cost reports to distribute these funds. CMS proposes to continue its supplemental payment for Indian Health Services and tribal hospitals and Puerto Rico hospitals, finalized in FY 2023, to mitigate the discontinued use of low-income insured days as an alternative for uncompensated care costs. These hospitals are expected to receive approximately $91.08 million in supplemental payments in FY 2025.

CMS proposes implementing the new Office of Management and Budget (OMB) labor market area delineations for the FY 2025 wage index, based on the 2020 Decennial Census data (see the Wage Index section of this summary for more detail), which will impact the calculation of Medicare DSH payment adjustments for certain hospitals. Based on this update, hospitals with less than 500 beds that are currently in urban counties would become rural (if they do not become rural referral centers or Medicare-dependent, small rural hospitals, whose additional payments are set to end on Dec. 31, 2024, if not extended by legislation) if the adoption of the new OMB delineations is finalized, meaning that these hospitals would be subject to a maximum DSH payment adjustment of 12 percent. Urban hospitals are subject to a maximum DSH payment adjustment of 12 percent only if they have fewer than 100 beds. Per existing regulation, if a hospital currently located in an urban county becomes rural under new OMB delineations, the hospital may receive an adjustment to its rural federal payment amount for operating costs for two sequential fiscal years, with greater additional payments in the first year.

Separate IPPS Payment for Essential Medicines in Small, Independent Hospitals: In the FY 2024 IPPS proposed rule, CMS requested comments on the concept of providing payments to hospitals to help them maintain a buffer stock of 86 essential medicines, intending to make hospitals more resilient to shortages of essential drugs. The agency received multiple comments, including some calling for expanding the list of essential drugs and others asking for solutions that addressed the issue of quality management among drug manufacturers, which many believe to be the primary driver of the drug shortages. Additionally, many commenters were concerned that so many hospitals establishing buffer stocks could create shocks to the supply chain or encourage hoarding behavior. In the final rule, CMS said it would consider these comments for future rulemaking.

In this rule, CMS proposes creating a separate payment under IPPS to account for the additional cost of establishing and maintaining buffer stocks of essential medicines. This proposal would begin with cost reporting periods starting in FY 2025 (on or after Oct. 1, 2024). The payment would cover only the additional resource costs of maintaining the buffer stock, not the cost of the drugs themselves. The payment would be provided as either a lump sum upon cost report settlement or through biweekly payments that would be reconciled upon cost report settlement. The proposal is not expected to be budget-neutral.

To address concerns that the proposal could create shocks to the supply chain, this payment would be available only to independent hospitals with 100 beds or fewer. Independent hospital status would be determined by whether a hospital was identified as part of a chain organization on its cost report. CMS believes that these smaller, independent hospitals lack the resources available to larger hospitals or systems. CMS predicts 493 hospitals would qualify and cost $2.8 million (Medicare would pay approximately 11 percent of that, or $300,000). CMS seeks comment on the proposed eligibility criteria.

In response to concerns about hospitals hoarding essential medicines in the event of a shortage, CMS would not separately pay hospitals to establish a buffer stock for a drug that is currently in shortage, per the FDA Drug Shortages Database. Hospitals that maintain an already established buffer stock for a drug shortage would be eligible for a separate payment. Because hospitals may lack the space, equipment and staff necessary to maintain the buffer stock themselves directly, any arrangements with pharmaceutical manufacturers, intermediaries or distributors to maintain the stock would be eligible for payment under this proposal.

Hospital Classification Proposals

Revised Labor Market Area Delineations: CMS stated that using the revised delineations based on OMB Bulletin No. 23-01 will create a more accurate representation of current geographic variations in wage levels and increase the integrity of the IPPS wage index. Therefore, CMS proposed implementing the revised OMB delineations beginning with the FY 2025 IPPS wage index.

Low-Wage Index Hospital Policy: Under the FY 2020 IPPS/LTCH PPS final rule, CMS finalized a temporary policy to address wage index disparities affecting low-wage index hospitals, many of which are rural hospitals. This policy increased wage indexes for hospitals with a wage index below the 25th percentile by half the difference between the hospital's wage index and the 25th percentile wage index. Due to the COVID-19 public health emergency (PHE), most recent data has not been usable. Accordingly, CMS proposes to continue the low-wage hospital policy for at least three years beginning in FY 2025. FY 2024 was the first full year of data following the end of the PHE, and this would give CMS four years of usable data to evaluate the program, as initially intended. CMS proposes to continue the policy's related budget neutrality adjustment. For FY 2025, the budget neutrality adjustment associated with this policy would be 0.997498.

Rural Referral Centers (RRCs): CMS proposed that in addition to meeting other criteria, rural hospitals with fewer than 275 beds may qualify for initial RRC status for reporting periods beginning on or after Oct. 1, 2024, only if their FY 2023 CMI value met or exceeded either 1) the national, all-urban Case Mix Index (CMI) (1.7764) or 2) the median CMI for urban hospitals in the census region in which the hospital is located.

CMS also proposed that in addition to meeting other criteria, a hospital can qualify for RRC status for reporting periods beginning on or after Oct. 1, 2024, only if 1) its discharges either met or exceeded 5,000 (3,000 for osteopathic) or 2) the CMI is equal to or greater than the median CMI for all urban hospitals in its census region or the median CMI for all urban hospitals national (whichever is lower).

Payment Adjustment for Low-Volume Hospitals: The Consolidated Appropriations Act of 2024 extended temporary changes to low-volume hospital qualifying criteria and payment adjustment under the IPPS through Dec. 31, 2024. Beginning Jan. 1, 2025, the low-volume hospital qualifying criteria and payment adjustment will revert to the statutory requirements that were in effect prior to FY 2011 and the preexisting low-volume hospital payment adjustment methodology and qualifying criteria as implemented in FY 2005. Specifically, starting Jan. 1, 2025, a low-volume hospital must be more than 25 road miles from another eligible acute care inpatient hospital and have fewer than 200 discharges during the fiscal year.

Graduate Medical Education (GME)

Proposed Distribution of Slots Under Section 4122 of the Consolidated Appropriations Act of 2024 (CAA), 2023: Through Section 4122, Congress authorized 200 additional Medicare-funded Graduate Medical Education (GME) positions. Four categories of qualifying hospitals are eligible for awards: rural hospitals or hospitals treated as rural, hospitals that are over the GME cap, hospitals in states with new medical schools or branch campuses, and hospitals that serve geographic Health Professional Shortage Areas (HPSAs). At least half of the positions must go to psychiatry or psychiatry subspecialty programs, and no hospital may receive more than 10 positions through Section 4122 distributions. Because of statutory text, CMS has proposed a distribution methodology that would award all qualifying hospitals that submit timely applications to receive an award of up to one full-time employee (FTE). If slots remain, CMS has proposed to use the same HPSA distribution methodology that it finalized for the Section 126 distribution, meaning hospitals with the highest HPSA scores would receive prioritization. Awards through Section 4122 will be effective July 1, 2026. CMS estimates that this additional funding will total approximately $74 million from FY 2026 through FY 2036.

Modified Criteria for New Residency Programs: CMS proposes that for a program to be considered "new" and eligible for additional direct GME and/or Independent Medical Education (IME) cap slots, at least 90 percent of the individual resident trainees (not FTEs) within the program must lack previous training in the same specialty. If more than 10 percent of the trainees (not FTEs) transferred from another program at a different hospital/sponsor in the same specialty, even during their first year of training, CMS proposes this would disqualify the entire program from receiving new cap slots. To fully inform the definition of a "new" program, CMS solicits comments on the scope of a "small" program, criteria for determining whether a faculty and program director are new, appropriate commingling among residents from existing programs with those from hospitals eligible for FTE cap increases due to new program training and scenarios where hospitals may prefer training residents in separately accredited programs within the same specialty.

Updates to CMS Programs

TEAM: CMS proposed a mandatory five-year, episode-based alternative payment model for select acute care hospitals that would start in calendar year (CY) 2026 and run through CY 2030 for certain surgeries including:

  • lower extremity joint replacement
  • surgical hip femur fracture treatment
  • spinal fusion
  • coronary artery bypass graft
  • major bowel procedure

Model policies will be finalized via rulemaking prior to launch. Notably, the start of TEAM in CY 2026 will coincide with the conclusion of similar care coordination and bundled payment models (Comprehensive Care for Joint Replacement Model, Bundled Payments for Care Improvement Advanced Model) set to expire in CYs 2024 and 2025, respectively.

Through the model, selected acute care hospitals would coordinate FFS Medicare beneficiaries who undergo one of the aforementioned surgical procedures included in the model and assume responsibility for the cost and quality of care, beginning with surgery through the first 30 days after the beneficiary departs the hospital. Participating hospitals will be evaluated based on Medicare fee-for-service spending for episodes relative to the target price and their performance on three quality measures: hospital readmission, patient safety and patient-reported outcomes. Notably, CMS proposes to include all items and services paid under Medicare Part A and Part B during the performance period, including Part B drugs and biologics (except those excluded under Section 512.525 (f) as proposed). To provide flexibility to participating hospitals, CMS has proposed three separate tracks that allow a hospital to determine how quickly full risk is assumed within the five-year model period.

CMS has proposed choosing acute care hospitals for participation based on inclusion in core-based statistical areas across the U.S. that CMS would select for model implementation. CMS proposes that the model offer safety net hospitals certain flexibilities to participate in a track with lower levels of risk and reward and a pricing methodology that would include adjustments to account for underserved individuals.

In the proposed rule, CMS outlines multiple methodological options for identifying safety net providers in the model, including the Medicare Safety Net Index (MSNI) and Area Deprivation Index (ADI), but proposes to use the CMS Innovation Center Strategy Refresh Safety Net definition for identifying safety net hospitals. CMS seeks comment on its proposal to identify safety net hospitals using the definition found in the CMS Innovation Center's Strategy Refresh. To further promote health equity, participants could voluntarily submit a health equity plan to CMS in the first performance year, then be required to submit the plan in subsequent years. Participants would identify and monitor health disparities in their beneficiary populations through these plans. Participants would also be required to submit health-related social needs data. In addition to these provisions, CMS seeks to comment on the potential of providing upfront infrastructure payments to safety net hospitals to further support their care delivery transformation efforts.

Expiration of the Medicare-Dependent Rural Hospital (MDH) Program: The CAA extended the MDH program through the end of CY 2024. Therefore, starting Jan. 1, 2025, the MDH program will no longer be in effect, and all MDH hospitals will no longer have MDH status and will be paid based on the IPPS federal rate. In anticipation of the expiration of the MDH program, hospitals can apply for Sole Community Hospital (SCH) status. To receive SCH status by Jan. 1, 2025, current MDH hospitals must apply by Dec. 2, 2024.

Prospective Payment System-Exempt Cancer Hospital Quality Reporting (PCHQR) Program: CMS proposed adopting the Patient Safety Structural Measure for both the PCHQR and Hospital Inpatient Quality Reporting Program. Additionally, CMS proposed to modify the Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey measure for the PCHQR program, Hospital Inpatient Quality Reporting Program and Hospital Value-Based Purchasing Program. Finally, CMS proposed accelerating the public reporting start date of the Hospital Commitment to Health Equity measure to January 2026.

Long-Term Care Hospital Quality Reporting Program (QRP): CMS proposed several changes to the LTCH Program. First among those is the adoption of four new items to be collected as data elements for the LTCH QRP: Living Situation (one item), Food (two items) and Utility (one item). Second, CMS proposed extending the assessment window for LTCHs to administer the LTCH Continuity Assessment and Record of Evaluation Data Set from three to four.

CMS also issued two requests for information (RFI). The first RFI is for introducing measure concepts related to the composite of vaccinations, pain management and depression. The second RFI is for creating an LTCH star rating system that would differentiate care offered by providers. CMS is seeking information on specific criteria it should use to select measures and how it should present star rating information in a most useful way to consumers.

Enhanced Data Reporting Requirements for Respiratory Illness: CMS proposes updates to the Conditions of Participation (CoPs) for hospital and critical access hospital (CAH) infection prevention and control and antibiotic stewardship programs to extend certain COVID-19 and influenza data reporting requirements. This proposal aims to balance the need for comprehensive data for virus surveillance and the burden it places on facilities and staff.

The proposed update would replace the COVID-19 and seasonal influenza reporting standards with a new standard focused on acute respiratory illnesses. Starting Oct. 1, 2024, hospitals and CAHs would be required to electronically report specific data elements related to COVID-19, influenza and respiratory syncytial virus (RSV). This includes confirmed infections of respiratory illnesses among hospitalized patients, hospital bed census and capacity, and limited patient demographic information such as age. Outside of a PHE, hospitals and CAHs would need to report this data on a weekly basis.

Additionally, CMS acknowledges the need for additional reporting categories for acute respiratory illnesses during a national PHE. These may include facility structure and infrastructure operational status, hospital/emergency department (ED) diversion status, staffing and shortages, supply inventory shortages, and relevant medical countermeasures and therapeutics.

Medicare Promoting Interoperability Program: CMS proposed separating the Antimicrobial Use and Resistance Surveillance Measure into two distinct measures (Antimicrobial Use Surveillance measure and Antimicrobial Resistance Surveillance measure) to encourage reporting of information if a hospital does not have sufficient data for one of them.

CMS also proposed adding two Electronic Clinical Quality measures (eCQMs) for the CY 2026 reporting period: 1) the Hospital Harm – Falls with Injury eCQM and 2) the Hospital Harm – Postoperative Respiratory Failure eCQM. If finalized, these eCQMs would be available for eligible hospitals and CAHs to select as one of their three self-selected eCQMs.

Additionally, CMS proposed increasing the minimum scoring threshold for eligible hospitals and CAHs from 60 points to 80 points due to 98.5 percent of hospitals hitting the 60-point threshold. CMS proposed a modification to the Global Malnutrition Composite Score eCQM to include a cohort of patients ages 18 to 64 in addition to the current 65-plus cohort. CMS proposed to add the Hospital Harm – Pressure Injury eCQM and the Hospital Harm – Acute Kidney Injury eCQM to the mandatory eCQM list for CY 2027. Finally, CMS requested several RFIs related to the Clinical Data Reporting Objective.

Maternal Health RFI

CMS requests information on whether inpatient pregnancy and childbirth hospital resources differ between Medicare and non-Medicare patients. Additionally, the agency seeks insights into how non-Medicare payers use IPPS rates for payment determination and their impact on maternal health outcomes. CMS also invites public input on potential strategies, within the framework of hospital CoPs, to address documented concerns regarding maternal morbidity, mortality, disparities and access to maternity care in the U.S. Specifically, the agency seeks feedback on the structure and requirements of a potential obstetrical services CoP.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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