The Centers for Medicare & Medicaid Services (“CMS”) will publish the 2025 Inpatient Prospective Payment System (“IPPS”) Final Rule (“Final Rule”) in the Federal Register on August 28 with an effective date of October 1, 2024. Along with increasing IPPS payments for FY 2025, the Final Rule introduces a new alternative payment model, funds additional graduate medical education positions, provides an additional payment to maintain access to essential medicines and requires hospitals to report additional quality measures.
Increases to IPPS Payment Based on Market Basket Update
CMS finalized an increase to inpatient payments based on the market basket for FY 2025 by 3.4%—reduced by a productivity adjustment of 0.5% for a total increase of 2.9%. Hospitals that do not submit quality information under the Inpatient Quality Reporting (“IQR”) Program and that are meaningful EHR users will receive a 2.05% increase; hospitals submitting quality information but identified as not meaningful EHR users will receive a 0.35% increase; and hospitals unable to meet either metric will receive a 0.5% reduction to their inpatient payments.
In FY 2025, acute care hospitals are estimated to experience a $3.2 billion increase in payments attributable to the market basket update, as well as other increases in operating and capital payments.
New Payment for Essential Medicines; Add-On Payments for New Technology
The Final Rule establishes a new IPPS payment for hospitals to stock a buffer of essential medicines. This payment is available to independent hospitals with 100 or fewer beds, so they can establish and maintain a six-month supply of up to 86 essential medicines. CMS additionally finalized add-on payments for two new technologies to treat sickle cell. These add-on payments are estimated to amount to an additional $38 million in spending in FY 2025. By FY 2027, these changes will increase IPPS spending by $459 million.
Relatedly, CMS published a Final Notice on August 12, 2024, that provides guidance on the process and procedures for traditional Medicare coverage of emerging technologies.
Transforming Episode Accountability Model
The Final Rule creates a new alternative payment model called the Transforming Episode Accountability Model (“TEAM”). Under the authority of 1115A of the Social Security Act, TEAM bundles payment for items and services for five specific episodes of care, including coronary artery bypass graft, lower extremity joint replacement, major bowel procedure, surgical hip/femur fracture treatment and spinal fusion. It is anticipated that this alternative model may reduce costs for an episode of care while maintaining or improving the quality of care. Additional information on TEAM can be found in our Hall Render alert.
Additional Graduate Medical Education Residency Slots
The Final Rule implements Section 4122 of the Consolidated Appropriations Act (“CAA”) of 2023 which provided 200 additional medical residency slots. At least 100 of these slots will be distributed for psychiatry or psychiatry subspecialty training and at least 10% of all slots will be distributed to rural or rural-designated hospitals, those hospitals exceeding their resident caps, hospitals with new medical schools and those hospitals in designated Health Professional Shortage Areas.
An applicant hospital will receive at least one residency position to expand an existing residency program. These additional slots will pay hospitals for Medicare’s share of the direct costs to operate the hospital’s approved medical residency program, as well as indirect costs associated with residency programs for IPPS hospitals. Additional information on the implementation of residency slots under Section 4122, as well as other Final Rule GME changes, can be found in our Hall Render alert.
Continuation of the Low Wage Index Hospital Policy
CMS intends to mitigate growing wage index disparities between hospitals in high and low-wage areas. Thus, CMS will continue its policy adopted in 2020 rulemaking to increase wage index values for hospitals located in low-wage areas. The wage index adjustment will continue through the end of FY 2027. To read more about CMS’s wage index policies for FY 2025 consult this Hall Render alert.
Uncompensated Care Payment to DSH Hospitals
The Final Rule confirmed CMS will continue the current methodology used to determine Factor 3 of the uncompensated care payment to DSH hospitals. The current methodology uses a 3-year average of audited data on uncompensated care costs from Worksheet S-10, from FY 2019-2021 cost reporting years, to calculate Factor 3 for FY 2025. The Final Rule confirms supplemental payments to IHS and Tribal hospitals and for hospitals located in Puerto Rico.
The Final Rule saw CMS retract its earlier proposal to use three years of discharge data to calculate the per-discharge amount of uncompensated care payments for FY 2025. Instead, CMS will calculate the per-discharge amount for FY 2025 using the average of the most recent two years of historical discharge data. For interim uncompensated care payments for FY 2026 and subsequent fiscal years, CMS will return to its previous policy of calculating the per-discharge amount based on an average of the most recent three years of available historical discharge data.
Hospital Value-Based Purchasing Program
For purposes of the value-based payments made to hospitals based on their performance on certain measures, CMS will modify how it scores the Person and Community Engagement Domain for FY 2027-2029 and will adopt the updated Hospital Consumer Assessment of Healthcare Providers and Systems (“HCAHPS”) Survey measure and its scoring beginning in FY 2030. CMS estimates the amount available for value-based incentives at approximately $1.67 billion.
Hospital IQR Program
CMS adopted seven new measures for the IQR Program and the Cancer Hospital Quality Reporting Program, including a Patient Structural Measure, Age Friendly Hospital Measure and modifications to the HCAHPS Survey beginning in CY 2025. Additionally, cancer hospitals will be required to report on new measures in CY 2026, including Catheter-Associated Urinary Tract Infection Standardized Infection Ratio and Central Line-Associated Bloodstream Infection Standardized Infection Ratio.
Extension of the Medicare-Dependent, Small Rural Hospital Program and Temporary Changes to the Low-Volume Hospital Payment Adjustment
Add-on payments for Medicare-Dependent, Small Rural Hospitals (“MDHs”) and the low-volume hospital (“LVH”) payment adjustment were set to expire beginning October 1, 2024, but this was extended through December 31, 2024, under Section 307 of the 2024 CAA. CMS estimates this extension will result in $137 million in additional payments to IPPS hospitals.
Practical Takeaways
- Hospitals should monitor compliance with the IQR Program and meaningful EHR usage to ensure eligibility for the maximum market basket increase to IPPS payments.
- Teaching hospitals or those planning to open a residency program should consider applying for additional GME slots under Section 4122.
- TEAM represents a new alternative payment model hospitals can consider implementing to reduce costs for an episode of care while improving the quality of care.
- MDHs and LVHs should be aware that payment adjustments are set to expire on December 31, 2024.
If you have any questions on this topic, please contact:
- Sue Andersen at sandersen@hallrender.com or (301) 785-3996;
- Heather Mogden at hmogden@hallrender.com or (414) 721-0457;
- Liz Elias at eelias@hallrender.com or (317) 977-1468;
- Zeke Shen at zshen@hallrender.com or (414) 721-0912; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
