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2025 IPPS Proposed Rule: Highlights for Hospitals

April 17, 2024

On April 10, 2024, the Centers for Medicare and Medicaid Services (CMS) issued the fiscal year (FY) 2025 Medicare hospital inpatient prospective payment system (IPPS) proposed rule. While these provisions are not final, they do give current insight into the agency’s thinking in terms of a host of issues concerning the inpatient hospital setting, including reimbursement issues. Let’s take a look at some of the highlights.

Payment Rates

The proposed increase in operating payment rates for general acute care hospitals paid under IPPS [that successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record (EHR) users] is projected to be 2.6 percent. Hospital executives and lobbying organizations were quick to point out that this is the smallest increase since 2019 and is insufficient to meet the increasing costs that hospitals currently face. To add to these concerns, hospitals may be subject to certain payment “adjustments,” i.e., payment reductions, including the following:

  • Payment reductions for excess readmissions under the Hospital Readmissions Reduction Program (HRRP).
  • Payment reduction (one percent) for the worst-performing quartile of hospitals under the Hospital Acquired Condition (HAC) Reduction Program.
  • Upward or downward adjustments under the Hospital Value-Based Purchasing (VBP) Program.

Payment for Essential Medicines

Many hospitals have experienced drug shortages, from antibiotics to crash cart drugs. In an effort to address this problem, CMS is proposing a separate payment under IPPS for “small, independent hospitals” to establish and maintain a buffer stock of essential medicines for use during future shortages. These hospitals are particularly vulnerable to supply disruptions during shortages because they lack the resources of hospitals that are larger and/or are part of a chain organization. This proposed policy would foster access to a more reliable, resilient supply of these medicines for patients of these hospitals.

Updated Labor Market Areas  

The law requires that Medicare adjust its inpatient hospital payment for area differences in the cost of labor—an adjustment known as the wage index. The proposed rule revises the labor market areas used for the wage index based on the most recent core-based statistical area delineations issued by the Office of Management and Budget (OMB) based on 2020 Census data.

Low-Wage Hospital Policy

The proposed rule would extend a temporary policy finalized in the FY 2020 IPPS final rule that addresses wage index disparities affecting low-wage index hospitals, which includes many rural hospitals. Specifically, the policy would be effective for at least three more years, beginning in FY 2025. CMS believes it is necessary to wait until the low wage index hospital policy has been in place for a sufficient time period after the end of the COVID-19 public health emergency (PHE) to evaluate its effects before making any decision to modify or discontinue the policy.

GME Residency Slots

Section 4122 of the Consolidated Appropriations Act (CAA), 2023, requires the distribution of an additional 200 Medicare-funded residency positions (or “slots”) to train physicians. The law requires CMS to notify hospitals receiving residency positions under section 4122 by January 31, 2026. In order to meet that deadline, CMS is proposing to implement policies that will govern the application and award process in a manner consistent with the statutory requirements. CMS is also proposing, to the extent slots are available, to focus on health professional shortage areas to help bolster the healthcare workforce in rural and underserved areas.

Social Determinants of Health

After review of its data analysis of the impact on resource use generated using claims data, CMS is proposing to change the severity designation of the seven ICD-10-CM diagnosis codes that describe inadequate housing and housing instability from non-complication or comorbidity (NonCC) to complication or comorbidity (CC), based on the higher average resource costs of cases with these diagnosis codes compared to similar cases without these codes. The proposed policy, if finalized, would more accurately reflect each healthcare encounter for hospitals that take care of persons who have inadequate housing or have housing instability, and also improve the reliability and validity of the coded data including in support of efforts to advance health equity.

New Technology Add-on Payment

CMS is proposing to increase the New Technology Add-on Payment (NTAP) percentage from 65 percent to 75 percent for a gene therapy that is indicated and used specifically for the treatment of SCD, beginning in FY 2025 and concluding at the end of the two- to three-year newness period of any such gene therapy.

To improve flexibility for applicants for NTAP, CMS is proposing to use the start of the fiscal year, October 1, instead of April 1, to determine whether a technology is within its newness period. This change would be effective starting in FY 2026 for new applicants for NTAP and when extending NTAP for an additional year for technologies initially approved for NTAP in FY 2025 or subsequent years.

Beginning with applications for NTAP for FY 2026, CMS is proposing to no longer consider an FDA marketing authorization hold status to be an inactive status for the purpose of the NTAP application eligibility.

For a full treatment of the 2025 IPPS proposed rule, please view a fact sheet published by CMS at FY 2025 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Proposed Rule – CMS-1808-P Fact Sheet | CMS.

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