The Centers for Medicare & Medicaid Services (“CMS”) released the 2025 Inpatient Prospective Payment System (“IPPS”) Final Rule (“Final Rule”) on August 1, 2024. Taking effect on October 1, 2024, the Final Rule confirms CMS will adopt updated market area delineations based on the 2020 census. The Final Rule is scheduled to be published in the Federal Register on August 28, 2024. Hospitals and stakeholders operating in affected market areas should assess any potential impact on Medicare reimbursements, especially for those hospitals the Medicare program requires to be located in a rural area (“Special Rural Status”), which include critical access hospitals (“CAH”), sole community hospitals (“SCH”), rural referral centers (“RRC”) and Medicare-dependent, small rural hospitals (“MDH”).
Background on Rural and Urban Delineations
Medicare classifies hospitals by rural and urban status for a variety of payment purposes. An “urban area” is defined as an area within a Metropolitan Statistical Area (“MSA”). An MSA is a type of Core Based Statistical Area (“CBSA”), which can also include Micropolitan Statistical Areas. An MSA is a CBSA comprised of a county or counties associated with at least one core area of at least 50,000 population, including adjacent counties with a high degree of social and economic integration with the core area, as measured through commuting observations. A “rural area” is defined as any area outside of an urban area. The Medicare program also has an in-between status called “Lugar status.” These “Lugar counties” would otherwise be rural, but, because of their proximity and commuting patterns to one or more MSAs, are treated as urban for some purposes and rural for others.
CBSAs, MSAs and Lugar status are typically adjusted and redefined every 10 years based on the national census, which may cause some hospitals to change from urban to rural or from rural to urban for IPPS based on the county in which they are located. Effective October 1, 2024, the Final Rule will update CBSAs based on 2020 census data.
Updated Labor Market Area Delineations
The Final Rule confirms that 53 counties will convert from urban to rural, 54 counties will convert from rural to urban and 72 counties in CBSAs will change to a different CBSA. Many other CBSAs will change names, split apart or merge with other areas. A common consequence of these updated labor market delineations includes changes to the wage index applicable to hospital reimbursement. As hospitals enter and leave various labor markets, the area wage index for a given market will change, and such changes could have a positive or negative impact on bottom-line reimbursement.
In the 2020 IPPS Final Rule, CMS finalized a policy of a 5% cap on any decrease hospitals may experience in their wage index from the prior fiscal year. Hospitals negatively impacted by the Final Rule’s updates will be protected by this policy if their wage index would otherwise decrease by more than 5% from FFY 2024.
Special Rural Status hospitals are especially affected by the updated labor market delineations as the Medicare program requires these hospitals to be located in a rural area. CMS allows CAHs in counties changing from rural to urban a 2-year grace period to reclassify as rural in order to maintain their CAH status. CMS does not have a similar provision for SCHs, RRCs or MDHs, so these hospitals could lose their Special Rural Status unless they act before October 1, 2024. These hospitals can often reclassify from urban to rural in order to maintain their Special Rural Status but should ensure doing so will not result in other reimbursement consequences. Depending on a Special Rural Status hospital’s particular payment characteristics, it is possible that changing to an urban area is more advantageous for such hospitals than the status itself.
Practical Takeaways
- Hospitals with Special Rural Status located in a county that will change from rural to urban, or rural to Lugar, should consider steps to maintain its Special Rural Status, after determining if that is indeed advantageous.
- CMS allows CAHs 2 years from the date the Final Rule becomes effective to reclassify from urban to rural to maintain Special Rural Status, but other Special Rural Status hospitals must apply for rural reclassification before the effective date of the new delineations, which is October 1, 2024, to maintain status.
- Hospitals in counties that will change from urban to rural can consider determining eligibility for Special Rural Status.
- Hospitals in counties affected by the updated labor market delineations, including those in counties changing to another CBSA, can assess whether new geographic reclassification opportunities are available.
A PDF of the Final Rule as published in the Federal Register can be found here. The list of counties that will change from urban to rural begins on page 69257; the list of counties that will change from rural to urban begins on page 69259; and the list of counties that will change to a different CBSA begins on page 69262.
If you have any questions on this topic or would like additional information as to any aspect of the Proposed Rule, please contact:
- David Snow at (414) 721-0447 or dsnow@hallrender.com;
- Joseph Krause at (414) 721-0906 or jkrause@hallrender.com;
- Lori Wink at (414) 721-0456 or lwink@hallrender.com;
- Benjamin Fee at (720) 282-2030 or bfee@hallrender.com;
- Zeke Shen at (414) 721-0912 or zshen@hallrender.com; or
- Your primary Hall Render contact.
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