CMS Inpatient Payment Rule for 2024: Key Takeaway for Healthcare Organizations & Providers

The Centers for Medicare & Medicaid Services (CMS) recently issued a proposed rule that would update the Medicare inpatient prospective payment system (IPPS) and long-term care hospital prospective payment system (LTCH PPS) for fiscal year (FY) 2024. The proposed rule affects the payment rates and policies for acute care hospitals and LTCHs that provide services to Medicare beneficiaries.

Every year, CMS issues a proposed rule that updates the payment rates and policies for the IPPS and the LTCH PPS for the next fiscal year (FY), which runs from October 1 to September 30. On April 27, 2023, CMS issued a proposed rule that would update the IPPS and the LTCH PPS for FY 2024. The proposed rule affects the payment rates and policies for about 3,000 acute care hospitals and 360 LTCHs that provide services to Medicare beneficiaries. It will be open for public comment until June 28, 2023.

We discuss the key takeaways, including the projected increase in payment rates, changes in quality reporting and value-based purchasing programs, updates on new technology add-on payments and high-cost outlier cases, and proposals on graduate medical education and rural health.

What is the CMS Inpatient Payment Rule?

The CMS inpatient payment rule is a system that determines how much Medicare pays hospitals for treating patients who are admitted as inpatients. As we mentioned before, the rule is updated every year by the Centers for Medicare & Medicaid Services to reflect changes in the costs of providing care, the quality of care, and the use of technology. It also sets payment rates and policies for long-term care hospitals (LTCHs).

The CMS inpatient payment rule has multiple benefits, as it:

aims to ensure that patients receive high-quality, safe, and appropriate care at a reasonable cost,

rewards providers for improving their performance on quality measures, reducing hospital-acquired conditions, and adopting electronic health records (EHRs),

helps payers to control Medicare spending and align incentives with value-based care,

enables regulators to monitor and evaluate the impact of the payment system on health outcomes, access, and innovation.

The CMS inpatient payment rule affects millions of Medicare beneficiaries and thousands of hospitals across the country. In fiscal year (FY) 2024, CMS estimates that it will pay about $197 billion to about 3,200 acute care hospitals and $5.9 billion to about 360 LTCHs under the rule.

The rule also influences how other payers, such as private insurers and Medicaid, reimburse hospitals for their services. Moreover, it supports CMS’s strategic goals of empowering patients and doctors to make decisions about their health care; ushering in a new era of state flexibility and local leadership; supporting innovative approaches to improve quality, accessibility, and affordability; and improving the CMS customer experience.

How Much Will Hospitals Get Paid in 2024?

The answer depends on several factors, such as the type, location, size, and case mix of the hospital. According to the proposed rule, general acute care hospitals that successfully participate in the Hospital Inpatient Quality Reporting (IQR) program and are meaningful electronic health record (EHR) users will see a net increase of 2.8% in their payment rates for 2024.

This reflects a market basket update of 3.0%, which is an estimate of how much the prices of goods and services used by hospitals have changed, reduced by a productivity adjustment of 0.2%, which is an estimate of how much hospitals can improve their efficiency.

CMS projects that this increase will result in an additional $2.7 billion in total payments for inpatient hospitals in 2024.

However, not all hospitals will receive the same pay increase. The rates are also adjusted by other factors, such as:

The wage index accounts for the differences in labor costs across geographic areas.

CMS proposes to continue using the revised wage index methodology that was adopted in 2020, which increases the wage index values for low-wage hospitals and decreases them for high-wage hospitals to reduce disparities. CMS also proposes to apply a 5% cap on wage index decreases for 2024.

The budget neutrality factor ensures that the changes in payment rates do not increase or decrease Medicare spending beyond what is intended by law.

CMS proposes to apply a budget neutrality factor of 0.9999 to the payment rates for 2024.

The outlier threshold determines when a hospital can receive an additional payment for treating a case that is unusually costly.

The outlier threshold is proposed to be set at $31,900 for 2024, which is expected to increase outlier payments by 0.7 percentage points.

CMS also proposes to increase LTCHs payment rates by 2.9% for 2024. This reflects a market basket update of 3.1%, reduced by a productivity adjustment of 0.2%.

This increase will result in an additional $59 million in total payments for LTCHs in 2024.

However, not all LTCH cases are paid at the same rate. CMS uses two different payment rates for LTCH cases. The standard payment rate applies to cases that meet certain clinical criteria, such as having a prior intensive care unit stay or requiring prolonged mechanical ventilation. The site-neutral payment rate applies to cases that do not meet these criteria and are paid at a lower rate that is comparable to what general acute care hospitals would receive for similar cases.

CMS proposes to continue using these two payment rates for LTCH cases in 2024.

How Will Quality Reporting and Value-Based Purchasing Change in 2024?

Quality reporting and value-based purchasing programs are not only important for improving patient care but also for affecting provider’s Medicare payments.

The Hospital Inpatient Quality Reporting (IQR) program requires hospitals to report data on a set of quality measures to receive the full annual update to their payment rates. The IQR program also provides public reporting of hospital performance on Care Compare and Provider Data Catalog (PDC) websites.
The Hospital Value-Based Purchasing (VBP) program adjusts hospital payments based on their performance in four domains: clinical outcomes, person and community engagement, safety, efficiency, and cost reduction. The VBP program redistributes a portion of hospital payments from a withholding pool to reward higher-performing hospitals.

The Hospital-Acquired Condition (HAC) Reduction program reduces payments by 1% for hospitals that rank in the worst-performing quartile of hospitals with respect to HACs, such as infections and injuries.

The Hospital Readmissions Reduction Program (HRRP) reduces payments by up to 3% for hospitals that have excess readmissions for six conditions: acute myocardial infarction (AMI), heart failure (HF), pneumonia (PN), chronic obstructive pulmonary disease (COPD), elective primary total hip arthroplasty/total knee arthroplasty (THA/TKA), and coronary artery bypass graft (CABG) surgery.

For 2024, CMS proposes several changes to these programs:

Adding new measures and removing existing measures to align with CMS’s Meaningful Measures initiative and reduce the burden on hospitals.

The proposed new measures are:

COVID-19 Vaccine: Percent of Patients/Residents Who Are Up to Date.
CoreQ: Short Stay Discharge.
Discharge Function Score.

The proposed measures to be removed are:

Application of Percent of Long-Term Care Hospital Patients with an Admission and Discharge Functional Assessment and a Care Plan That Addresses Function.
Application of the IRF Functional Outcome Measures: Change in Self-Care Score for Medical Rehabilitation Patients.
Application of the IRF Functional Outcome Measures: Change in Mobility Score for Medical Rehabilitation Patients.

Updating the scoring methods and payment adjustments to reflect the latest data and methodologies. For example, CMS proposes to update the measure weights, achievement thresholds, benchmarks, floors, performance standards, payment adjustment factors, and budget neutrality factors for each program based on the most recent data available.

Implementing a health equity adjustment to the VBP program to account for social risk factors that may affect hospital performance. CMS proposes to stratify hospitals into five peer groups based on their proportion of dual-eligible patients (those who are eligible for both Medicare and Medicaid) and adjust their scores within each peer group. CMS expects that this adjustment will reduce disparities in payments among hospitals that serve different populations.

The impact of these changes on hospital outcomes, costs, and patient satisfaction will depend on various factors, such as:

The extent to which hospitals improve their performance on the quality measures over time.

CMS estimates that the proposed changes will result in a net increase of $2.3 billion in total payments for inpatient hospitals under the VBP program in 2024. However, this amount will vary by hospital depending on their relative performance compared to other hospitals.

The trade-offs between quality improvement and cost reduction.

Some quality measures may require additional resources or investments from hospitals to achieve better results, while others may help hospitals save money by reducing complications or readmissions. Hospitals will need to balance these trade-offs and prioritize their quality improvement efforts accordingly.

The feedback from patients and stakeholders.

Quality reporting and value-based purchasing programs aim to increase transparency and accountability for hospital performance and encourage patient engagement and choice. However, some patients and stakeholders may have different preferences or expectations for quality than what is measured or rewarded by these programs. Hospitals will need to communicate and educate their patients and stakeholders about the quality measures and programs and how they affect their care and satisfaction.

How Will New Technology Add-On Payments and High-Cost Outlier Cases Be Updated in 2024?

New technology add-on payments (NTAPs) are additional payments that CMS makes to hospitals for using new medical technologies that meet certain criteria, such as demonstrating substantial clinical improvement over existing technologies and exceeding a cost threshold. NTAPs are intended to encourage the adoption of new technologies that improve patient care and reduce costs in the long run. NTAPs are paid on top of the standard payment rates for the diagnosis-related groups (DRGs) that the cases are assigned.

High-cost outlier cases are cases that have unusually high costs compared to the average costs of treating similar cases. CMS recognizes that some cases may incur exceptionally high costs due to factors such as patient complexity, severity, or comorbidities. To account for these cases, CMS makes additional payments to hospitals for cases that exceed a certain cost threshold, which is calculated based on a fixed-loss amount and the DRG payment rate. High-cost outlier payments are intended to protect hospitals from large financial losses due to treating high-cost cases.

What Are the Proposals on Graduate Medical Education and Rural Health?

For 2024, CMS proposes several proposals on GME and rural health programs, such as:

Implementing new funding sources for GME from the Consolidated Appropriations Act of 2021 (CAA), which provides $1.5 billion over five years to distribute 1,000 new FTE resident slots to qualifying hospitals.

CMS proposes to distribute these slots based on criteria such as hospital size, location, specialty mix, health professional shortage area designation, and prior receipt of RRPD grants.

Expanding the RTT program to allow urban hospitals to establish separate FTE caps for training residents in rural areas.

CMS proposes to remove the requirement that RTT programs must be separately accredited from their urban counterparts and allow urban hospitals to partner with multiple rural hospitals or clinics for RTT training.

Updating the payment methodologies for GME and rural health programs to reflect the latest data and policies.

For example, CMS proposes to update the national per-resident amount for direct GME payments based on the most recent cost report data available. CMS also proposes to update the wage index adjustment for indirect GME payments based on the revised wage index methodology adopted in 2020.

Seeking public comments on potential future changes to GME and rural health programs to advance health equity and support underserved communities.

For example, CMS solicits feedback on how to measure and address disparities in GME funding distribution, how to prioritize rural residency training opportunities, how to align GME payments with quality improvement goals, and how to leverage telehealth and other technologies for rural training.

How to Prepare for the CMS Inpatient Payment Rule for 2024?

Understanding the changes and updates introduced in the CMS inpatient rule is important for healthcare organizations and providers, as they can have significant impacts on hospital outcomes, costs, and patient satisfaction.

To prepare for the CMS inpatient payment rule for 2024, we encourage you to take action and:

Review the final rule and its supporting documents to learn more about the details and rationale of the changes and updates

Analyze how the changes and updates will affect your hospital performance and payments based on your specific characteristics and circumstances

Identify areas of improvement and opportunities for innovation based on the quality measures and programs that apply to your hospital

Develop strategies and action plans to improve your performance on the quality measures and programs that apply to your hospital

Communicate and educate your staff, patients, and stakeholders about the changes and updates and how they affect your hospital performance and payments

Monitor and evaluate your outcomes and impacts of the changes and updates on your hospital performance and payments

Here are some links or resources for further reading:

FAQs about CMS Inpatient Payment Rule for 2024

When will the CMS inpatient payment rule for 2024 be finalized?

The CMS inpatient payment rule for 2024 is expected to be finalized by August 1, 2023. However, this date may change depending on public comments and other factors.

How can I comment on the CMS inpatient payment rule for 2024?

You can comment on the CMS inpatient payment rule for 2024 by submitting your feedback online or by mail by June 9, 2023. You can find more details on how to comment on the CMS website.

How can I estimate my hospital's payment rate under the CMS inpatient payment rule for 2024?

You can estimate your hospital's payment rate under the CMS inpatient payment rule for 2024 by using the online tools provided by CMS. You can access these tools on the CMS website.

How can I improve my hospital's quality reporting and value-based purchasing performance under the CMS inpatient payment rule?

You can review the requirements and expectations for each program and measure, monitor, and analyze your hospital's data, implement evidence-based practices, engage your staff and patients in quality improvement efforts, and leverage technology and innovation to support quality improvement.