Hospitals Face New Mandatory Payment Model, Payment Changes

The Centers for Medicare & Medicaid Services (CMS) released its final inpatient prospective payment system rule for fiscal year (FY) 2025. Access the full rule on the Federal Register. The rule is effective Oct. 1, 2024.

Payment updates

CMS final market basket update of 3.4% plus a negative 0.5% productivity adjustment results in a 2.9% net update.

For the FY 2025 outlier threshold, CMS finalizes a threshold of $46,152.

Medical severity diagnosis-related groups (DRGs)

To reflect more clinical resource use for concomitant left atrial appendage closure and cardiac ablation procedures, CMS finalizes creating a new base MS-DRG — MS-DRG 317.

For spinal fusion, CMS finalizes deleting MS-DRGs (453, 454, 455, 459, 460) and adding new MS-DRGs (402, 426, 427, 428, 429, 430, 447, 448, 450, 451). Some deleted MS-DRGs are renumbered. Further, CMS does finalize adding MS–DRGs 426, 427, 428, 447, and 448 to the list of MS-DRGs subject to the post-acute care and special payment policies.

Review the final rule for these and other MS-DRG changes.

New technology add-on payments (NTA)

In FY 2025, CMS will continue 24 NTA payments still considered within the window of being “new” and seven will lose NTA payments. CMS approves add-on payments for applications received through the tradition pathway, alternative pathway and breakthrough device designation. One of those is gene therapy to treat sickle cell.

CMS finalizes beginning with new technology add-on payments for FY 2026 to extend payments for an additional fiscal year when the three-year anniversary date of the product's entry into the U.S. market occurs on or after October 1 of that fiscal year.

CMS also finalizes, beginning with applications for FY 2026, it would no longer consider a hold status to be inactive for eligibility for the new technology add-on payment. CMS would consider an application to be inactive where it’s withdrawn, is the subject of a complete response letter, or is the subject of a final Food and Drug Administration decision to refuse approving the application.

Wage index

New Office of Management and Budget (OMB) delineations

CMS finalizes implementing revised OMB delineations as described in the July 21, 2023, OMB Bulletin No. 23–01, beginning with the FY 2025 inpatient prospective payment system (IPPS) wage index.

Connecticut

CMS implements Connecticut’s request to replace the eight counties with nine new planning regions. Planning regions now serve as county-equivalents within the core-based statistical area (CBSA) system. CMS provides a crosswalk for each hospital in Connecticut with the current and federal information processing system county and county-equivalent codes and CBSA assignments.

Urban counties to become rural

Under the new OMB delineations, a total of 53 counties (and county equivalents) and 33 hospitals once considered part of an urban CBSA would be considered rural beginning in FY 2025.

CMS says if a hospital loses urban status, its disproportionate share hospital (DSH) payment is adjusted to two-thirds of the difference between the urban DSH payments applicable to the hospital before its redesignation and the rural DSH payments applicable to the hospital after its redesignation.

In the second year after a hospital loses urban status, the hospital’s DSH payment is adjusted to one-third of the difference between the urban DSH payments applicable to the hospital before its redesignation and the rural DSH payments applicable to the hospital after its redesignation.

Rural counties to become urban

The CMS analysis shows a total of 54 counties (and county equivalents) and 24 hospitals located in rural areas would now be in urban areas under the revised OMB delineations.

CMS says due to the adoption of revised OMB delineations, some critical access hospitals (CAHs) previously located in rural areas may be in urban areas. Existing regulations allow affected CAHs a two-year transition period beginning from the date the redesignation becomes effective. The affected CAHs must reclassify as rural during this transition period to retain their CAH status after the two-year transition period ends.

CMS advises other special designations — Medicare dependent or sole community hospitals — that may lose rural status should apply for rural reclassification prior to October 1, 2024, to avoid status disruption.

Urban counties moving to different CBSA, urban areas subsumed by another CBSA, and counties changing CBSA

Under the new delineations, some counties would shift between existing and new CBSAs, changing the constituent makeup of the CBSAs. In another change, some CBSAs have counties that would split off to become part of or to form entirely new labor market areas. There are 73 counties in this situation. 

Wage index policies

CMS will use FY 2021 wage data for FY 2025.

Per its policy, CMS applies the 5% cap for any provider experiencing a wage index change. Use of a wage index transition code will occur for some as well.

CMS finalizes a three-year extension of the low wage index hospital policy. For FY 2025, the 25th percentile wage index value across all hospitals is set at 0.9007. See note on court case.

Medicare disproportionate share hospital (DSH) payments

The final Factor 1 is approximately $10.509 billion for FY 2025.

Final Factor 2 is 54.29%. The final FY 2025 uncompensated care amount is equivalent to Factor 1 multiplied by proposed Factor 2, which is $5.705 billion.

For Factor 3, CMS uses the same methodology as FY 2024 —the most recent three years of audited cost reports, from FYs 2019, 2020, and 2021. 

Covered days in the SSI ratio

CMS formally withdraws its policy as it existed prior to the effective date of the FY 2005 IPPS final rule to the extent it included only covered days in what’s called the supplemental security income (SSI) ratio. This is due to the U.S. Supreme Court ruling in Becerra v. Empire Health Foundation. CMS will apply the statute as understood by the Supreme Court in Empire Health instead of the pre-FY 2005 regulation, to any properly pending claim in a DSH appeal or open cost report to which that regulation would otherwise have applied. 

CMS states it does not believe this is retroactive rulemaking but applying the statute’s plain meaning. CMS also says withdrawing the regulation will not serve as a basis to reopen a CMS or contractor determination, a contractor hearing decision, a CMS reviewing official decision, or a decision by the Provider Reimbursement Review Board or the administrator. 

Graduate medical education (GME) 

Under the Consolidated Appropriations Act (CAA), 2021, Congress authorized Medicare payments for 1,000 additional GME resident slots. Then the CAA, 2023 required the distribution of additional residency positions to hospitals. The law required that for FY 2026, HHS must initiate an application round to distribute 200 residency positions, of which 100 are distributed for psychiatry or psychiatry subspecialty residency training programs. The application deadline is March 31, 2025, for FY 2026. CMS finalizes its distribution methodology for slots to all qualifying hospitals submitting timely applications for up to one full-time equivalent.

IPPS payment for buffer stock of essential medicines

Based on those comments and consideration, CMS finalized as proposed a separate payment under the IPPS to small, independent hospitals for the estimated additional resource costs of voluntarily establishing and maintaining access to six-month buffer stocks of essential medicines.

CMS indicates “small” means hospitals with fewer than 100 beds and “independent” means the hospital is not part of a chain organization. Only these small, independent hospitals will be eligible.

CMS finalizes the estimated additional resource costs of voluntarily establishing and maintaining access to six-month buffer stocks either directly or through contractual arrangements with pharmaceutical manufacturers, intermediaries, or distributors would be eligible for additional payment under this policy. These costs do not include the cost of the medicines themselves.

The costs associated with directly establishing and maintaining a buffer stock may include utilities like cold chain storage and heating, ventilation, and air conditioning; warehouse space; refrigeration; management of stock including stock rotation, managing expiration dates, and managing recalls; administrative costs related to contracting and record-keeping; and dedicated staff for maintaining the buffer stock.

This begins with cost reporting periods on or after October 1, 2024.

Mandatory TEAM model

CMS finalizes a new model called the transforming episode accountability model (TEAM). The model is designed to bring specialists into the agency’s move toward value-based payments and builds on other procedure models like the comprehensive care for joint replacement (CJR) mandatory model.

TEAM begins January 1, 2026, and ends December 31, 2030. It is an episode-based pricing methodology for Medicare beneficiaries related to five surgical episode categories:

• Coronary artery bypass graft (CABG)
• Lower extremity joint replacement (LEJR)
• Major bowel procedure
• Surgical hip/femur fracture treatment (SHFFT)
• Spinal fusion

TEAM is mandatory for hospitals paid under the IPPS in select CBSAs. CMS provides more details on the methodology for selecting CBSAs and the full list of 188 included CBSAs. Reach out to CLA for details.

In addition, CMS decides to finalize a voluntary opt-in policy for hospitals that participate in either the Bundled Payments for Care Improvement – Advanced or Comprehensive Care for Joint Advanced Replacement models and are not in one of the mandatory CBSAs. CMS finalizes 188 CBSAs for mandatory participation. There are XXX hospitals within those CBSAs. 

As an episode-based model, it will trigger on an “anchor” hospitalization or procedure and last 30 days post-op. The hospital is held financially accountable for that episode. Only eligible hospitals can be “TEAM participants” but CMS allows many others to be “TEAM collaborators.” 

The model also includes quality measures for a composite quality score.

Tiered options

CMS has three tracks with differing financial risk and quality adjustment: 

• Track 1 — Available only in performance year (PY) one for all TEAM participants and would have only upside financial risk with quality adjustment applied to positive reconciliation amounts. Available in PY 2-3 for safety net hospitals. 
• Track 2 — Available in PYs two through five to a limited set of TEAM participants, including safety net hospitals, and would have two-sided financial risk with quality adjustment to reconciliation amounts. Certain types of hospitals could participate in Track 2 in PY two through five — safety net hospitals, rural hospitals, among others.
• Track 3 —Available in PYs one through five for all TEAM participants and would have two-sided financial risk with quality adjustment to reconciliation amounts. 

• LEJR episodes — A hip, knee, or ankle replacement under MS–DRG 469, 470, 521, or 522 or through the OPPS under HCPCS code 27447, 27130, or 27702
• SHFFT episodes — A hip/femur episode under MS–DRG 480–482 
• CABG episodes — Any coronary revascularization procedure under MS– DRG 231–236, including both elective CABG and CABG procedures performed during initial acute myocardial infarction treatment (AMI)
• Spinal fusion episodes — Any episode under MS–DRG 402, 426-430, 447-448, 450-451, or 471-473, or through the outpatient prospective payment system (OPPS) under HCPCS codes 22551, 22554, 22612, 22630, or 22633.
• Major bowel episodes — Any episode under MS– DRG 329-331

Target prices

CMS would use three years of baseline data, trended forward to the PY to calculate target prices at the level of MS-DRG/HCPCS episode type and region. Target prices for all TEAM participants will be regional target prices based on Census Division of the TEAM participant hospital CMS will also use a normalization factor. Like other models, CMS applies a discount factor (either 1.5% or 2%)  based on episode type.

For reconciliation, CMS will use various risk adjustments--beneficiary age group, hierarchical condition category count (a measure of clinical complexity), social risk and hospital-level factors—and adjusts the reconciliation amount by the composition quality score. 

The model allows for voluntary healthy equity plans in the first PY. Waivers and beneficiary incentives are also available.

Addressing climate concerns 

Finally, CMS finalizes a voluntary opportunity to participate in a decarbonization and resilience initiative within TEAM. This will assist hospitals in addressing climate related matters. 

The voluntary initiative would have two elements: technical assistance for all interested TEAM participants and a voluntary reporting option.

Reporting acute respiratory illnesses

CMS revises the hospital and CAH infection prevention and control and antibiotic stewardship programs conditions of participation (CoPs). This action would extend a modified form of the current COVID-19 and influenza reporting requirements and reduce the frequency of reporting for hospitals and CAHs. These proposed requirements would take effect on November 1, 2024. 

CMS required data elements include:

• Confirmed infections of respiratory illnesses, including COVID-19, influenza, and RSV, among hospitalized patients
• Hospital bed census and capacity — both overall and by hospital setting and population group (adult or pediatric)
• Limited patient demographic information, including age

Hospital value-based purchasing program (VBP) 

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