This week, our In Focus section continues analysis and insights from Health Management Associates (HMA) and its affiliate The Moran Company on recent Medicare payment and policy developments. Today, we review the policy changes that the Centers for Medicare & Medicaid Services (CMS) released August 1, 2023, for the fiscal year (FY) 2024 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Acute Care Hospital (LTCH) final rule (CMS-1788-F).

This year’s IPPS final rule includes several important policy changes that will alter hospital margins and change administrative procedures beginning October 1, 2023. More specifically, the IPPS rule increases payments to hospitals, enhances the wage index policy for rural hospitals, reduces Medicare disproportionate share payments, and modifies the New Technology Add-on Payment (NTAP) program.

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

We highlight four policies that will significantly affect Medicare beneficiaries, hospitals, health systems, payers, and manufacturers:

1. The annual inpatient payment update
2. Medicare disproportionate share hospital (DSH) payments
3. Hospital wage index adjustments
4. NTAP policy changes

Hospital market basket update and the inpatient standardized amount

CMS’s Medicare 2024 IPPS final rule will increase payments to acute care hospitals by an estimated $2.2 billion from 2023. The primary driver of this increase is CMS’s 3.1 percent increase in the annual update to inpatient operating payment rates. The update is the sum of the hospital market basket update of 3.3 percent and a statutorily required 0.2 percentage point reduction for productivity growth.

HMA/Moran analysis: Between the time CMS released the 2024 proposed IPPS rule and the final rule, the inpatient payment update for 2024 increased to 3.1 percent from 2.8 percent. This spike occurred because of the effects of an increase in estimated inflation on the cost of a standard basket of hospital goods (hospital market basket) throughout 2022 and 2023. Although economy-wide inflation slowed in mid-2023, inflation was higher in late 2022 and early 2023—the period in which the market basket is measured for the final rule.

For beneficiaries, increasing payment rates eventually will lead to a higher Medicare inpatient deductible and greater out-of-pocket costs for many other services. For hospitals and healthcare systems, payers, and manufacturers, a payment increase of 3.1 percent falls below economy-wide inflation (5−6 percent in recent months).

Despite the publicized 3.1 percent payment update for 2024, after factoring in various policy adjustments the actual change between 2023 and 2024 to inpatient payments per case will be roughly 2 percent. The primary reason per-case payments will increase only 2 percent is a budget-neutrality adjustment that CMS finalized for 2024 to account for hospital wage index reclassifications. This adjustment will reduce payments to all hospitals by more than 1 percent to neutralize the added program spending associated with payments to hospitals that choose to reclassify into higher paying wage index areas. The final rule states, “[T]he geographic reclassification budget neutrality adjustment is significantly larger than in prior years.”

Medicare Disproportionate Share Hospital Payments

CMS finalized two Medicare disproportionate share hospital (DSH)-related policies for 2024. First, DSH payments and Medicare uncompensated care payments combined will decrease in FY 2024 by approximately $957 million. Second, CMS finalized its proposal to limit the number of patient days included in the Medicare DSH calculation to only those days when the patient’s Medicaid Section 1115 Demonstration health insurance covers inpatient hospital services or the patient’s premium assistance program covers 100 percent of the premium cost for patients who buy health insurance that covers inpatient hospital services, if the patient is ineligible for Medicare Part A.

HMA/Moran analysis: CMS’s $957 million reduction in DSH and uncompensated care payments stems from the agency’s estimate of the percentage of individuals without insurance in the United States. Between the 2024 proposed and final rules, CMS estimates the percentage of individuals without insurance will decline from 9.3 percent to 7.7 percent in 2023 and from 9.2 percent to 8.5 percent in 2024. As a result, the pool of uncompensated care dollars available to hospitals for 2024 was reduced from roughly $6.7 billion to $5.9 billion.

CMS’s estimated decline in the rate of uninsured beneficiaries is somewhat surprising given the common projection that Medicaid enrollment will drop following the end of Medicaid’s COVID-19 related continuous coverage policy. However, HMA/Moran colleagues believe state-level Medicaid enrollment changes will vary in the year ahead. Consequently, hospitals located in states where levels of Medicaid enrollment are sustained will benefit from CMS’s uninsured rate estimates and hospitals in states where Medicaid enrollment drops will not.

With regard to the Section 1115 demonstration related DSH policy, hospitals located in states that have not expanded Medicaid under the Accountable Care Act and instead rely on Section 1115 Demonstrations to expand health coverage, are likely to receive lower DSH payments. In addition to the Medicare DSH payment adjustments, reductions in the Medicaid DSH program are scheduled to begin October 1, 2023. The $8 billion reduction in FY 2024 is the first time CMS has planned to make cuts in the program.

Hospital Wage Index Adjustments

CMS finalized two wage index policies for FY 2024. First, CMS will extend the low-wage index hospital policy, which boosts the wage index of hospitals in geographic areas with low wages relative to other areas. Second, CMS finalized a policy to begin including labor data from urban hospitals that choose to reclassify as providers in rural areas to maximize their payment into the calculation of rural wage index areas.

HMA/Moran analysis: These two wage index policies for FY 2024 will increase payment to rural hospitals. Under the first policy, hospitals with wage indexes below 0.8667 (the 25^th percentile across all hospitals) will automatically receive an increase in their wage index and therefore their payment rates for inpatient cases. Under the second policy, the inclusion of labor data for geographically urban hospitals that choose to reclassify into rural wage index areas within the calculation of state-level rural wage indexes and the state-level rural floor will increase payments to rural hospitals in many states. The overall impact of both proposed wage index policy changes for FY 2024 will be an increase in inpatient payment rates for rural hospitals.

New Technology Add-On Payments (NTAP)

Citing the increased number of applications for NTAP over the past several years and noting the need for CMS staff to have time to review and analyze the applications, CMS finalized two changes to the NTAP application requirements. First, CMS will require that all applicants have a complete and active U.S. Food and Drug Administration (FDA) market authorization request in place at the time of NTAP application submission, if not already FDA approved. The FDA’s acceptance letter will serve as proof of a full and complete application. 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: The stated aim of these CMS policy changes is to “increase transparency, facilitate public input, and improve the review process.” As a result of these modifications, products will need to be on the market longer before the NTAP payment begins, and fewer products will be eligible for the three full years of NTAP payments. Taken together, hospitals will have a shorter NTAP payment window for most products. The further tightening of FDA application and approval requirements runs counter to the efforts of various stakeholders to establish more flexible or additional NTAP application windows.

HMA and The Moran Company collaborate 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 help clients develop their strategic plans and their comments on proposed regulations. Moran replicates the methodologies CMS uses in setting hospital payments and models alternative payment policies to help support stakeholder comment letters and strategies. Moran also assists clients with modeling diagnosis-related group reassignment requests and to support innovative NTAP applications.

For more information or questions about the policies described above, contact Zach Gaumer ([email protected]), Amy Bassano ([email protected]), Clare Mamerow ([email protected]), or Kevin Kirby ([email protected]).

This week, our In Focus section is the second in a summer series of analysis and insights from Health Management Associates (HMA) on recent Medicare payment and policy developments. This week we dig deeper into the potential changes to the Medicare Shared Savings Program (MSSP) that were included in the 2024 Medicare Physician Fee Schedule proposed rule released earlier this month. Specifically, we highlight the impact these modifications could have on financial and operational decisions across the healthcare industry.

The proposed rule builds on the changes CMS finalized last year with the goal of increasing participation in the MSSP. The recommended changes are designed to appeal to more clinicians who treat a high proportion of underserved individuals. CMS estimates that the proposal will increase participation in MSSP by 10−20 percent. These changes are technical in nature and include:

• Expanding the physician lookback window for beneficiary assignment (also known as the pre-step) for primary care service to 24 months from 12 months
• Adding a third step to the claims-based beneficiary assignment methodology to recognize the role of nurse practitioners (NPs), physician assistants (PAs), and clinical nurse specialists (CNSs) in delivering primary care services
• Modifying the definition of “assignable beneficiary” to reflect the changes above

The overall impact of these modifications, which augment the existing methodology, is to increase the number of beneficiaries assigned to accountable care organizations (ACOs) under MSSP. More assignable beneficiaries could mean:

• More ACOs will meet minimum beneficiary requirements.
• Changes in assignable population may affect the hierarchical condition category (HCC) risk scores for the national assignable population, as well as the factors used to normalize risk scores and other risk adjustments.
• Changes in population distribution within regions that result in adjustments to ACO market share, benchmark trends, and update factors.

For ACOs participating in multiple programs, expanded assignment rules for MSSP, combined with the MSSP superseding other programs in assignment, may have downstream effects on programs in terms of assignment and performance.

Following is a more detailed explanation of the proposed changes.

24-Month Lookback for Primary Care Services

Extending the lookback for primary care services with a physician to 24 months from 12 will allow providers to capture additional primary care services codes related to the COVID-19 public health emergency (PHE) for benchmark and performance years. If the assignment window for a benchmark or performance year includes any month(s) during the PHE, then the additional primary care services codes must apply to all months in that window.

Three-Step Assignment Process

CMS plans to update its current two-step claims-based beneficiary assignment process to a three-step process, which would be effective for performance years beginning January 1, 2025. The proposed third step only would apply to beneficiaries who do not meet the pre-step requirement contingent upon whether they received at least one primary care service during the expanded window for assignment from an ACO-participating primary care or specialist physician or received at least one primary care service from a non-physician ACO healthcare professional during the 12-month assignment window.

Assignable Beneficiary Definition

The proposed rule includes updates to the definition of an assignable beneficiary to reflect the expanded 24-month lookback window for assignment and the new third step of a primary care service within the 12-month assignment window from a non-physician ACO professional (i.e., NP, PA, CNS).

The table below compares the current and proposed assignment processes.

Comparison of the Two- and Three-Step Processes

Financial Considerations

The proposed rule outlines that the expenditure lookback will remain 12 months. With a 24-month primary care service window and a 12-month expenditure lookback, ACO revenues could change. As a result, minimum savings rates could drop and the per-member per-month amount might change. In addition, the extended lookback could affect the regional average risk-adjusted spending, expenditure thresholds, and more.

Enhanced MSSP Track

CMS is seeking comment on a new track in MSSP with a higher level of risk and potential reward (e.g., somewhere between 80−100 percent). The purpose of the new MSSP track is to encourage ACOs that would not have otherwise participated in MSSP because of limitations on upside rewards. Higher potential rewards may also incentivize ACOs to develop new strategies, focus on specialty care integration, and reduce healthcare fragmentation to achieve savings.

CMS is seeking comment on the following:

• Policy/model design elements that could be implemented so that CMS could offer a higher risk track without increasing program expenditures
• Approaches to protect ACOs that serve high-risk beneficiaries from expenditure outliers and reduce incentives for ACOs to avoid high-risk beneficiaries
• The impact that higher risk sharing could have on care delivery redesign, specialty integration, and ACO investment in healthcare providers and practices

The HMA Medicare and value-based care experts will continue to analyze these proposals alongside other policy and reimbursement changes that affect Medicare providers. We have the depth and breadth of expertise to assist with tailored analysis, to model policy impacts, and to support clients that intend to draft comment letters on this proposed rule. For more information or questions about these policies and other changes in the 2024 Medicare physician fee schedule proposed rule, contact Amy Bassano ([email protected]), Andrea Maresca ([email protected]), and Melissa Mannon ([email protected]).