CMS Issues IPPS and LTCH Final Rule for FY 2023

King & Spalding

On August 1, 2022, CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System Final Rule for FY 2023 (the Final Rule). In the Final Rule, CMS updated the IPPS and LTCH payment rates, modified the payment rules for direct graduate medical education (DGME) to comply with a recent federal court decision, imposed a permanent 5% cap on year-to-year wage index losses, and adopted a new supplemental payment for tribal hospitals and hospitals located in Puerto Rico. This article provides an overview of the policies implemented in the Final Rule.

Payment Rates Overview

CMS increased the operating payment rates for acute care hospitals by 4.3%. This reflects a FY 2023 hospital market basket update of 4.1% reduced by a 0.3 percentage point productivity adjustment and increased by a 0.5 percentage point adjustment as required by statute. This update reflects the most recent data available, including a revised outlook regarding the U.S. economy and, as a result, is 1.1 percentage point higher than the proposed update for FY 2023.

For FY 2023, CMS expects LTCH PPS payments to increase by approximately $71 million. LTCH PPS payments for FY 2023, for discharges paid at the LTCH standard payment rate, are expected to increase by approximately 2.3% due primarily to the annual standard federal rate update (that is, the productivity-adjusted market basket increase) for FY 2023 of 3.8% and a projected decrease in high-cost outlier payments.

Cap on Decreases in MS-DRG Rates

In the Final Rule, CMS implemented a permanent 10% cap on annual decreases in MS-DRG relative weights. The stated objectives of this policy are to mitigate the financial impacts of significant year-to-year changes and increase predictability and stability for Medicare payments so that hospitals are afforded adequate time to adjust to significant changes in relative weights. CMS will apply an adjustment to the standardized amount to budget-neutralize this policy. This policy will limit declines in relative weights for 27 MS-DRGs in FY 2023.

Many commenters expressed concern that a 10% cap still leaves room for sizable reductions for high-cost MS-DRGs and requested a 5% cap instead. The agency acknowledged that a 5% cap would limit declines in relative weights for more MS-DRGs (approximately 92), but that would also result in a larger budget neutrality adjustment to the standardized amount. CMS also considered a higher cap of 20% but found that would limit declines in too few MS-DRGs (approximately 5). Accordingly, CMS decided that a 10% cap achieved the right balance of mitigating the financial impact of sharp declines in MS-DRGs without imposing a significant budget-neutrality adjustment.

Medicare Wage Index

In the Final Rule, CMS adopted a permanent 5% cap on reductions to hospital wage index values from the preceding fiscal year. Under this policy, a hospital’s wage index in any given year cannot be less than 95% of its final wage index from the prior year (i.e., the wage index that the hospital had as of the last day of the previous fiscal year), regardless of the reason for the decline. CMS stated this policy would increase the predictability of IPPS payments for hospitals and mitigate the instability and significant negative impacts to hospitals resulting from changes to the wage index.

CMS adopted similar temporary caps in FYs 2020 and 2021. But unlike those prior caps, CMS has made this year’s cap permanent. Furthermore, whereas the prior caps were based on the wage index from the beginning of the preceding fiscal year, without regard to any changes that might have occurred during the year (for example, rural reclassification), the new cap is based on the hospital’s wage index on the last day of the preceding fiscal year. This means that if a hospital reclassifies as rural during a year, its 5% cap in the following year will be based on the rural wage index from the preceding year.

CMS also announced in the Final Rule that, in response to federal court litigation, it is terminating its policy of excluding the wage data of reclassified rural hospitals from the calculation of the state rural floor. CMS first adopted this policy in FY 2020 to prevent what it referred to as “inappropriate payment increases under the rural floor due to reclassifications.” King & Spalding represented 32 hospitals in federal court litigation challenging CMS’s policy of excluding the data of reclassified rural hospitals from the rural floor. Earlier this year, the D.C. District Court issued a decision in that case holding that the statute forecloses CMS’s policy. Citrus HMA, LLC d/b/a Seven Rivers Regional Medical Center v. Becerra, No. 1:20-cv-00707 (D.D.C.). In the Final Rule, CMS explained that following its review of the Citrus decision, it is reverting to the policy that existed prior to FY 2020. That is, in FY 2023 and onward, CMS will include reclassified rural hospitals in the calculation of the state rural floor.

CMS also announced in the Final Rule that it is continuing the low wage index hospital policy that it first adopted in FY 2020. Under this policy, CMS makes upward adjustments to the wage indices of hospitals with a wage index value below the 25th percentile. The adjustment for each eligible hospital is equal to half of the difference between the otherwise applicable final wage index value for the hospital and the 25th percentile wage index value for all hospitals that same year. For FY 2023, the 25th percentile wage index will be 0.8427. As in past years, CMS is applying an adjustment to the standardized amount to budget-neutralize this policy.

CMS acknowledged that a recent decision of the D.C. District Court, issued in March 2022, ruled that CMS did not have authority to adopt the low wage index policy. Bridgeport Hospital v. Becerra, No. 1:20-cv-01574 (D.D.C.). Commenters urged CMS to terminate the policy in light of the Bridgeport decision. The agency responded that the decision pertained only to FY 2020 and that it is still subject to appeal.

Graduate Medical Education

CMS also finalized several changes and updates to Graduate Medical Education (GME) payment policies for FY 2023. First, the agency finalized its proposed changes to the formula for calculating Direct Graduate Medical Education (DGME) payments in accordance with the D.C. District Court’s decision in Milton S. Hershey Medical Center v. Becerra, 2021 WL 1966572 (D.D.C. 2021). In that case, the court found that CMS’s current DGME payment formula is contrary to the statute because it applies a weighting factor to fellows that is lower than the factor prescribed by the statute. King & Spalding represented 32 of the hospitals in that case.

The Final Rule remedies the flaw in the DGME payment formula by allowing hospitals to claim the lesser of their weighted full-time equivalent (FTE) count or their unweighted FTE cap in a cost reporting period. The Final Rule also permits hospitals to adjust the FTE counts from the prior and penultimate years in the same way. The same policy also will apply to the Section 422 FTE cap adjustments. The agency projects that this change will increase DGME payments to hospitals by approximately $170 million in FY 2023.

CMS also announced a new policy permitting hospitals that are participating in rural track programs to enter GME affiliation agreements with other hospitals participating in the same rural track program. Until now, CMS has not permitted hospitals to share rural track FTE cap slots with other hospitals.

CMS also finalized updates to the statistics that it will use to calculate managed care DGME and nursing and allied health payments for calendar years 2020 and 2021. The Medicare statute requires CMS to reduce managed care DGME payments to hospitals to finance the payment of managed care nursing and allied health payments. In the Final Rule, CMS states that it will reduce managed care DGME payments by 3.71 and 3.22% in calendar years 2020 and 2021, respectively.

Medicare DSH

In the Final Rule, CMS decided not to finalize its proposal to modify the regulatory formula for the Medicaid fraction of the Medicare Disproportionate Share Hospital (DSH) payment. Historically, CMS has interpreted its regulatory DSH formula to bar hospitals from including the patient days of individuals who are “regarded” as “Medicaid eligible” because they receive medical assistance in the form of payments distributed to hospitals from uncompensated care pools approved under a Section 1115 waiver. But two federal court decisions, including the D.C. Circuit in Bethesda Health, Inc. v. Azar, held that both the statute and the regulation require CMS to include Section 1115 days in the Medicaid fraction. King & Spalding represented the hospitals in Bethesda.

Notwithstanding the two court decisions, in its FY 2023 proposed rule, CMS proposed modifying the formula to specify that a patient who receives inpatient benefits pursuant to a Section 1115 demonstration project cannot be included in the Medicaid fraction unless the patient receives health insurance under the waiver or purchases such insurance with the use of premium assistance (equal to at least 90% of the cost of health insurance) provided by a section 1115 demonstration. This revision, according to the agency, would foreclose hospitals from claiming patient days of patients whose care was covered in part by a section 1115 uncompensated care pool. King & Spalding submitted comments on behalf of hospitals opposing CMS’s proposed change.

In the Final Rule, CMS opted not to move forward with its proposal “in light of the “numerous, detailed comments” it received. However, the agency said that it expects to revisit its treatment of section 1115 days in future rulemaking.

Uncompensated Care Payments

Under the Affordable Care Act, since FY 2014, hospitals have received 25% (as estimated by CMS) of the DSH payment they would have received under the payment methodology that existed prior to FY 2014. The remaining 75% (Factor 1) is reduced by the change in national uninsured rates (Factor 2) and divided among eligible hospitals based on their proportionate share of Uncompensated Care (UCC) (Factor 3). For each hospital, the product of these three factors represents its additional payment for UCC for the applicable fiscal year.

To calculate Factor 1, CMS used the most recently available projections of Medicare DSH payments for the fiscal year, as calculated by CMS’s Office of the Actuary (OACT) using the most recently filed Medicare hospital cost reports with Medicare DSH payment information and the most recent Medicare DSH patient percentages and Medicare DSH payment adjustments provided in the IPPS Impact File. The OACT estimate for FY 2023 is approximately $13.949 billion. Therefore, Factor 1 for FY 2023, after a 25% reduction is $10.461 billion.

CMS calculated Factor 2 by multiplying Factor 1 by 1 minus the change in the percent of individuals who are uninsured in 2013 to the rate of uninsured in the most recent period for which data is available. The OACT estimates that the uninsured rate for the historical, baseline year of 2013 was 14% and that the uninsured rate for CYs 2022 and 2023 is 8.9% and 9.3%, respectively. Using this data, CMS has calculated a Factor 2 of 65.71%. Thus, the UCC payment pool, after applying Factors 1 and 2, is $6.874 billion.

To calculate Factor 3 in FY 2023, CMS finalized its proposal to use the average of the data from Worksheet S-10 of the FY 2018 and FY 2019 cost reports. CMS also notes that FY 2024 will be the first year that three years of audited S-10 data will be available. Accordingly, CMS has decided to begin using three years of audited S-10 data to calculate Factor 3 in FYs 2024 and onward. CMS is adopting these proposals to address concerns from stakeholders about the potential year-to-year fluctuations in uncompensated care payments.

Changes to Medicare Advantage Nursing and Allied Health Payment Rates

CMS finalized its proposal to issue the add-on rates for nursing and allied health Part C days rates for CYs 2020 and 2021 based on Healthcare Cost Report Information System (HCRIS) data. For these rates, CMS used HCRIS data from cost reports ending in FY 2018 (the fiscal year that is two years prior to CY 2020) and FY 2019 (the fiscal year that is two years prior to CY 2021).

As background, Medicare has historically paid providers for Medicare’s share of the costs that providers incur in connection with approved nursing and allied health (NAH) educational activities. The costs of these programs are excluded from the definition of inpatient hospital operating costs. Instead, they are identified as “passed through” and paid on a reasonable cost basis. Hospitals that operate approved NAH education programs and receive Medicare reasonable cost reimbursement for these programs also receive additional payments from Medicare Advantage organizations. In a 2000 rulemaking, CMS stated that updates to the Medicare Advantage add-on payments for NAH will be made through annual IPPS rulemakings. Instead, however, CMS has updated those rates through informal Change Request transmittals that exist outside of the annual rulemaking process. Prior to this update, CMS last updated these rates for CY 2019.

New Supplemental Payment for Tribal and Puerto Rico Hospitals

CMS finalized its proposal to establish a new supplemental payment for Puerto Rico hospitals and Indian Health Service (IHS)/Tribal hospitals. CMS implemented the new supplemental payment to mitigate the effect of CMS’s decision to discontinue the use of low-income insured days as a proxy for their uncompensated care costs for purposes of determining Factor 3 of the uncompensated care payment methodology. To calculate the supplemental payment, CMS will take the difference between the amount of the uncompensated care payment determined for the hospital using Worksheet S-10 data and an approximation of the amount the hospital would have received if we had continued to use low income insured days as a proxy for uncompensated care.

Suppression of and Changes to Quality Measures

To mitigate the potentially penalizing effects of the COVID-19 pandemic on hospitals’ quality measure data, CMS finalized its proposal to suppress or otherwise change several measures beginning in FY 2023.

Hospital Readmission Reduction Program (HRRP). The HRRP is a Medicare value-based purchasing program that reduces payments to hospitals with excess readmissions. While this measure will remain suppressed in FY 2023, CMS will resume the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate (RSRR) following Pneumonia Hospitalization measure (NQF #0506) beginning with the FY 2024 program year. CMS also modified this measure to exclude COVID-19 diagnosed patients from the measure denominators, beginning with the FY 2024 program year and modified all six condition/procedure specific readmissions measures to include a covariate adjustment for history of COVID-19 within one year preceding the index admission, beginning with the FY 2024 program year.

Hospital Value-Based Purchasing (VBP) Program. Under the Hospital VBP Program, CMS makes value-based incentive payments to hospitals based on their performance on measures established for a performance period. In the Final Rule, CMS has paused the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) and five Hospital Acquired Infection (HAI) measures, for the FY 2023 Program Year and will update the baseline periods for certain measures for the FY 2025 Program Year.

CMS also modified the scoring and payment methodology for the FY 2023 Program Year such that hospitals would not receive Total Performance Scores (TPSs). Instead, each hospital would receive a payment incentive multiplier that results in a value-based incentive payment that is equal to the amount withheld for the fiscal year (2%). CMS finalized this policy upon belief that it could not reliably score less than half of the VBP measures due to COVID-19.

Hospital Acquired Condition Reduction Program. Under the HAC Reduction Program, CMS provides an incentive to hospitals to reduce the incidence of hospital-acquired conditions (HAC). As explained more fully in the Final Rule, CMS will:

  • Suppress the CMS PSI 90 measure and the five CDC NHSN HAI measures from the calculation of measure scores and the Total HAC Score, to avoid penalizing any hospital under the HAC Reduction Program FY 2023 Program Year;
  • Report CDC NHSN HAI measure results, but will not calculate or report measure results for the CMS PSI 90 measure for the HAC Reduction Program FY 2023 Program Year;
  • Suppress CY 2021 CDC NHSN HAI measures data from the FY 2024 HAC Reduction Program Year;
  • Update the measure specification to the minimum volume threshold for the CMS PSI 90 measure beginning with the FY 2023 Program Year; and
  • Update the measure specifications to risk-adjust for COVID-19 diagnosis in the CMS PSI 90 measure beginning with the FY 2024 HAC Reduction Program Year.

Hospital Inpatient Quality Reporting (IQR) Program. Under the IPPS, hospitals are required to report data on measures selected by the HHS Secretary for a fiscal year in order to receive the full annual percentage increase. CMS finalized several proposed changes to the Hospital IQR Program, including the adoption of 10 new quality measures.

CMS also finalized its proposal to refine the following two current measures beginning with the FY 2024 payment determination: (1) Hospital‐Level, Risk‐Standardized Payment Associated with an Episode-of-Care for Primary Elective THA/TKA; and (2) Excess Days in Acute Care (EDAC) After Hospitalization for Acute Myocardial Infarction (AMI) (NQF #2881). Finally, CMS finalized changes to its current policies related to eCQMs and hybrid measures.

PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program. The PCHQR Program is a voluntary quality reporting program for the eleven cancer hospitals that are statutorily exempt from the IPPS (PCHs), CMS finalized its policy to begin public display of the 30-Day Unplanned Readmissions for Cancer Patients Measure (PCH-36) and the four end-of-life measures (PCH-32, PCH-33, PCH-34, and PCH-35). CMS adopted its proposal to codify a patient safety exception into the measure removal policy.

The Final Rule is available here, and a CMS fact sheet is available here. The Final Rule is expected to be published in the Federal Register on August 10, 2022.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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