On August 28, 2023, the Centers for Medicare and Medicaid Services (CMS) issued a final payment rule for inpatient and long-term care hospitals (“LTCH”) that builds on the Biden-Harris Administration’s priorities to provide support to historically underserved and under-resourced communities and to promote the highest quality outcomes and safest care for all individuals. 

The fiscal year 2024 Inpatient Prospective Payment System (FY 2024 IPPS) and LTCH Prospective Payment System (LTCH PPS) final rule updates Medicare payments and policies for hospitals as required by statute. The rule adopts hospital quality measures to foster safety, equity, and reduce preventable harm in the hospital setting.

Under the rule, acute care hospitals and long-term care hospitals will see total payment increases of $2.2 billion and $6 million respectively. Additionally, the rule focuses on health equity and rural hospital access by recognizing higher costs to treat underserved populations.

Background on the IPPS and LTCH PPS

There are two payment systems involved in this rule: (1) CMS pays acute care hospitals – with a few exceptions specified in the law – for inpatient stays under the IPPS, and (2) long term care hospitals are paid under the LTCH PPS. Under these systems, CMS sets base payment rates prospectively for patient stays generally based on the patient’s diagnosis, the services or treatment provided, and the severity of illness. Subject to certain adjustments, a hospital receives a single payment for each case depending on the payment classification assigned at discharge.

The law requires CMS to update payment rates for IPPS hospitals annually and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for several factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area.

Similarly, CMS updates LTCH payment rates annually according to a separate market basket based on LTCH-specific goods and services.

Changes to Payment Rates Under IPPS

The increase in operating payment rates for general acute care hospitals that are paid under the FY 2024 IPPS, successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record users is 3.1 percent. This reflects a projected FY 2024 IPPS hospital market basket update of 3.3 percent, reduced by a statutorily required 0.2 percentage point productivity adjustment. The update reflects the most recently available forecasts of the price proxies underlying the market basket, including projected increases in compensation.

Hospitals may be subject to other payment adjustments under the FY2024 IPPS, including:

  • Payment reductions for excess readmissions under the Hospital Readmissions Reduction Program.
  • Payment reduction (1 percent) for the worst-performing quartile under the Hospital Acquired Condition Reduction Program.
  • Upward and downward adjustments under the Hospital Value-Based Purchasing Program.

The increase in operating and capital IPPS payment rates will generally increase hospital payments in FY 2024 by $2.2 billion. In addition, CMS projects Medicare disproportionate share hospital payments and Medicare uncompensated care payments combined will decrease in FY 2024 by approximately $957 million. This change reflects the CMS Office of the Actuary’s use of updated estimates and data in its projections. CMS also estimates that additional payments for inpatient cases involving new medical technologies will decrease by $364 million in FY 2024, primarily driven by the expiration of new technology add-on payments for several technologies.

Changes to Payment Rates Under LTCH PPS

For FY 2024, CMS expects the LTCH standard payment rate to increase by 3.3 percent and LTCH PPS payments for discharges paid the LTCH standard payment rate to increase by approximately 0.2 percent, or $6 million, due primarily to a projected 2.9 percent decrease in high-cost outlier payments as a percentage of total LTCH PPS standard federal payment rate payments. After consideration of public comments, CMS made modifications to the methodology used to determine the LTCH PPS high-cost outlier threshold for discharges paid the LTCH standard federal payment rate and finalized a threshold that is notably lower than in the proposed rule.

Health Equity Impacts

The rule also advances one of the goals of the CMS Framework for Health Equity 2022-2032 – to more explicitly measure the impact of our policies on health equity. For example, CMS added 15 new health equity hospital categorizations for the FY 2024 IPPS payment impacts.

With the new rule, CMS recognizes the higher costs that hospitals incur when treating people experiencing homelessness, when hospitals report social determinants of health codes on claims. CMS is also finalizing health equity adjustments in the Hospital Value-Based Purchasing Program by providing incentives to hospitals to perform well on existing measures and to those who care for high proportions of underserved individuals, as defined by dual-eligibility status.

Additionally, CMS with the new rule is finalizing a policy to recognize the higher costs that hospitals incur when treating people experiencing homelessness when hospitals report social determinants of health codes on claims, meaning that hospitals will generally receive higher payments when a patient is experiencing homelessness. 

Finally, CMS is finalizing the policy that allows rural emergency hospitals to be designated as graduate medical education training sites, which will build upon the Biden-Harris Administration’s commitment to supporting care in rural and other underserved communities by enhancing the health care workforce opportunities in these areas.

Reed Smith will continue to follow developments involving Medicare payment systems. If you have any questions, please reach out to the health care lawyers at Reed Smith.