This week, our In Focus section reviews the policy changes proposed by the Centers for Medicare & Medicaid Services’ (CMS) on April 10, 2023, for the Fiscal Year (FY) 2024 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) Proposed Rule (CMS-1785-P). This year’s IPPS Proposed Rule includes several important policy changes that will alter hospital margins and change administrative procedures, beginning as soon as October 1, 2023.

Key provisions of the FY 2024 Hospital IPPS and LTCH Proposed Rule

For FY 2024, CMS proposes to make modifications to several hospital inpatient payment policies. We highlight six proposed policies that are among the most impactful for Medicare beneficiaries, hospitals and health systems, payors, and manufacturers:

1. the annual inpatient market basket update,
2. hospital wage index adjustments,
3. New Technology Add-on Payment (NTAP) program policy changes,
4. the agency’s call for input on how to best support Safety Net Hospitals,
5. graduate medical education payments at rural emergency hospitals, and
6. changes to many cardiovascular-related MS-DRGs.

Stakeholders will have until June 9, 2023, to submit comments to CMS on the contents of this regulation and request for information

1. Market basket update

Proposed Rule: Overall CMS’s Medicare 2024 Hospital Inpatient Proposed Rule will increase payments to acute care hospitals by an estimated $3.3 billion from 2023 to 2024; however, recent trends in economy-wide inflation may alter this estimate by the time the agency releases the Final Rule version of this regulation in August 2023. The primary driver of the estimated $3.3 billion increase in inpatient payments to hospitals is CMS’s proposed 2.8 percent increase in the annual update to inpatient operating payment rates.

HMA/Moran analysis: CMS’s 2.8 percent increase is largely based on an estimate of the rate of increase in the cost of a standard basket of hospital goods, the hospital market basket. For beneficiaries, increasing payment rates will eventually lead to a higher standard Medicare inpatient deductible and increased beneficiary out-of-pocket costs for many other services. For hospitals and health systems, payors, and manufacturers the proposed payment increase (2.8 percent) falls below economy-wide inflation (5-6 percent in recent months) and hospitals are already saying it is insufficient.[1] For this Proposed Rule, data from the third quarter of 2022 was used to calculate the 2.8 percent increase. Importantly, for the FY 2024 Final Rule, CMS will use data through the first quarter of 2023, which we know to include additional growth in economy-wide inflation. As a result, we anticipate the proposed 2.8 percent increase in payment rates may increase slightly by the time rates are finalized later in the year.

2. Hospital Wage Index Adjustments:

Proposed Rule: CMS proposes two wage index policies for FY 2024. First, CMS proposes to continue temporary policies finalized in the FY 2020 IPPS/LTCH PPS final rule to address wage index disparities affecting low-wage index hospitals, which includes many rural hospitals. Second, CMS proposes to include geographically urban hospitals that choose to reclassify into rural wage index areas in the calculation of state-level rural wage index and the calculation of the state-level wage index floor for urban hospitals (referred to as the rural floor policy).

HMA/Moran analysis: The two wage index policies proposed by CMS for FY 2024 will support rural hospitals. The first policy, to continue the low-wage index policy for an additional year beyond the original 4-year plan will allow hospitals with low wage indexes to boost their wage index and their payment rates across all MS-DRGs. Specifically, hospitals with wage indexes below 0.8615 (the 25^th percentile across all hospitals) will automatically receive an increase in their wage index by CMS. This policy will bring additional millions of dollars to individual rural hospitals in FY 2024. The second policy, to include the labor data of geographically urban hospitals that choose to reclassify into rural wage index areas within the calculation of the state-level rural wage index and the state-level rural floor will largely benefit rural hospitals. In recent years several large geographically urban hospitals in several markets have chosen to reclassify into rural wage index areas to benefit their Medicare payments. In the past, CMS has not included the labor costs of these hospitals, which tend to have higher than average labor costs in their calculation of the state rural wage index or the rural floor wage index. In making this change, to include the labor costs of the geographically urban hospitals in these calculations, CMS will very likely increase the state-wide rural wage index. This will have the effect of increasing the wage index of many rural hospitals around the country. The overall impact of both proposed wage index policy changes for FY 2024 will be to increase inpatient payment rates to rural hospitals.

3. New technology add-on payments (NTAP):

Proposed Rule: Citing the increased number of applications over the past several years and noting the need for CMS staff to have time to fully review and analyze the applications, CMS proposes two changes to the NTAP application requirements.  First, CMS proposes to require all applicants to have a complete and active FDA market authorization request in place at the time of NTAP application submission (if not already FDA approved).  In addition, CMS proposes to move the FDA approval deadline from July 1 to May 1, beginning with applications for FY 2025.

HMA/Moran Analysis: CMS’ proposals to change the NTAP application process aim to ameliorate the problem of manufacturers withdrawing applications because they miss the FDA approval deadline. These withdrawals increase CMS’ workload, as the agency reviews some applications multiple times. However, while these proposals provide CMS with more time to review applications, they increase the amount of time some applicants will not receive NTAP payments, depending on the timing of the FDA approval process. The annual NTAP approval cycle and FDA approval deadline create difficulties for manufacturers with products that miss the deadline, which many stakeholders argue creates barriers to access for new technologies. Stakeholders have proposed a variety of potential solutions to these barriers, such as biannual or quarterly NTAP decisions, or extending the conditional approval pathway currently used for certain antibiotic products to all NTAP applications.

 4. Safety Net Hospital Request for Information:

Proposed Rule: CMS is seeking public input on the unique challenges faced by safety-net hospitals and the patients they serve, and potential approaches to help safety-net hospitals meet those challenges.

HMA/Moran Analysis: In the 2024 Proposed Rule CMS poses a variety of questions to the public about how safety net hospitals and their patients can be better supported by the Medicare program, both in terms of payment and infrastructure investment. The agency specifically asks stakeholders their opinion on measures that could be used to define safety net hospitals and potentially make differential or additional payments to safety net hospitals. CMS names the safety net index (SNI) developed by the Medicare Payment Advisory Commission (MedPAC) in recent years and the Area Deprivation Index (ADI) developed by the National Institutes for Health (NIH) as the two leading options for defining and potentially reimbursing safety net hospitals. These two methods have several significant differences, including that the SNI is a hospital-level measure based in-part on the volume of cases at a given hospital associated with Medicare beneficiaries that are fully or partially eligible for Medicaid and the ADI is a geographic measure that correlates local socioeconomic factors with medical disparities. HMA has modeled the SNI for hospital stakeholders in the last year and has identified hospitals that would be potential winners and losers if an SNI approach were implemented by CMS.

5. Graduate Medicare Education Training in Rural Emergency Hospitals:

Proposed Rule: CMS proposed to allow Graduate Medical Education (GME) payments for training Rural Emergency Hospitals. Rural Emergency Hospitals are a new provider type established by the Consolidated Appropriations Act, 2021, to address the growing concern over closures of rural hospitals. If finalized, this proposal would allow hospitals converting to REH status and other hospitals newly designated as REHs to receive Medicare GME payments even though they do not have an inpatient facility.

HMA/Moran analysis: If finalized, the proposed policy to allow REHs to offer GME training and to be paid for GME training will enhance access to care in rural areas and will enable hospitals that convert to REHs to expand their capabilities. CMS’s proposal to allow REHs to receive payment based on 100 percent of the reasonable costs for GME training costs allows REHs to operate training programs and to focus new training programs on rural care and outpatient care. This policy, if finalized, will bring additional revenues to hospitals that decide to convert to REHs (thereby relinquishing their inpatient capacity) and will improve access to care for beneficiaries living in rural areas.

6. MS-DRG weights:

Proposed Rule: To set MS-DRG weights for FY 2024 inpatient cases, CMS proposed to use FY 2022 data, which is consistent with pre-pandemic CMS methods. In previous years, CMS had modified its MS-DRG weight calculation to account for high volumes of COVID cases. However, for FY 2024, CMS has returned to its longstanding method of using a single year of data to set MS-DRG weights. In addition, among the various changes CMS has proposed as a part of the 2024 MS-DRG weight setting process CMS has proposed significant changes to many MS-DRGs in the category for diseases and disorders of the circulatory system (Major Diagnostic Category 5).

HMA/Moran analysis: CMS’s return to using a single year of data without COVID modification will be welcomed by many stakeholders, but particularly for those with an interest in short-stay surgical cases. The modifications CMS proposes to make to the MS-DRGs within Major Diagnostic Category 5, which includes numerous cardiovascular MS-DRGs, are likely to be disruptive for many stakeholders initially but over the long term are likely to make CMS coding more consistent with standard clinical practice and per case resource use. For example, CMS is proposing to consolidate five cardiac defibrillator MS-DRGs into three, consolidate three Thrombolysis MS-DRGs into two, and overhaul the family of stenting MS-DRGs. We anticipate that these changes and other proposed by CMS may result in initial coding confusion for hospitals, but that they will slowly adapt throughout 2024.

HMA and The Moran Company work collaboratively to monitor legislative and regulatory developments in the inpatient hospital space and assess the impact of inpatient policy changes on the hospital sector. HMA’s Medicare experts interpret and model inpatient policy proposals and use these analyses to assist clients in developing their strategic plans and comment on proposed regulations. Moran annually replicates the methodologies CMS uses in setting hospital payments and models alternative payment policies to help support its clients’ comments to the rule. Moran also assists clients with modeling for DRG reassignment requests and to support NTAP applications. Typically, these projects run through the summer, to ensure readiness for October deadlines. Finally, many clients find it useful to model payments for different types of cases under different payment scenarios. For example, a client may be interested in how payments for COVID-19 cases may change after the expiration of the Public Health Emergency, and which hospitals will face the biggest payment cuts. Moran is available to help with these and other payment modeling questions—and works on many of these issues in tandem with HMA’s Medicare experts.

For more information or questions about the policies described below, please contact Zach Gaumer, Amy Bassano, Kevin Kirby or Clare Mamerow.

[1] https://www.aha.org/news/headline/2023-04-10-cms-issues-hospital-ipps-proposed-rule-fy-2024