FFY 2025 IPPS Proposed Rule
On April 10, the Centers for Medicare & Medicaid Services (CMS) published the Federal Year (FY) 2025 Inpatient Prospective Payment System (IPPS) Proposed Rule (for discharges on or after October 1, 2024). Toyon is pleased to provide our take on the FY25 IPPS Proposed Rule, focused on areas directly impacting Medicare cost reporting and provider reimbursement. A summary of the key highlights is below, followed by an analysis and observations of the Proposed Rule. Comments to the Proposed Rule are due to CMS no later than 5 pm EDT on Monday June 10, 2024. The comment form for the Proposed Rule ("CMS-1808-P") may be accessed here.
Summary
The FY25 IPPS Proposed Rule increases payments to providers by approximately $3 billion (2.4%). Estimated changes impacting FY25 Medicare inpatient payments are primarily attributed to:
- $2.84B to national payments from net market basket update of 2.6% and other policy changes
- +$0.57B to national Uncompensated Care (UC) Disproportionate Share (DSH) payments
- -$0.26B from changes to the Low Volume Adjustment (LVA)1
- -$0.15B from the expiration of the Medicare Dependent Hospital (MDH)1 program
Additionally, CMS includes the following notable proposals for FY25:
- Revised Labor Market Areas for 195 counties
- 200 Additional Teaching Cap Slots
- Codified changes to Medicare's outlier reconciliation threshold2
- TEAM alternative payment five-year model3
Toyon’s Take
Provider Underpayments
The FY25 IPPS Proposed Rule does not restore Medicare’s 0.9412% underpayment related to ATRA | MACRA4. Toyon estimates IPPS providers are underpaid by $2.3B ($1.2B in FY25 and $1.1B in FY24) and recommends providers appeal for remediation of these payments with CMS. Please feel free to contact Lisa Ellis at lisa.ellis@toyonassociates.comwith questions or for assistance.
Market Basket
CMS’s market basket update does not adequately cover the additional costs incurred by providers since the COVID-19 Public Health Emergency (PHE). Recent data shows the cost per Medicare discharge increased by 5.7% from FY21 to FY225. Furthermore, Medicare's Payment Advisory Commission recommends a 1.5% increase to the FY25 market basket. An increase to the market basket would increase national FY25 DRG and UC DSH payments by millions of dollars to providers across the country. Therefore, Toyon recommends providers comment to CMS requesting at least a 1.5% increase to the proposed FY25 market basket.
Labor Market Changes
Toyon recommends providers evaluate if reimbursement is impacted from the proposed changes in labor markets. This is especially true for any rural hospital proposed to be in an urban area and visa-versa. Please contact Ryan Sader at ryan.sader@toyonassociates.com with any questions.
Listed in Section II below is detailed discussion of Toyon’s analysis and observations of the FY25 IPPS Proposed Rule. Toyon appreciates providing regulatory and reimbursement updates to the provider community. If you have any questions, please feel free to contact Fred Fisher at fred.fisher@toyonassociates.com.
Sincerely,
Toyon Associates, Inc.
FY25 IPPS Proposed Rule Analysis and Observations
Toyon’s analysis of the FY25 IPPS Proposed Rule discusses the following areas:
1. National Medicare IPPS Estimates
CMS estimates hospitals are projected to receive an overall change of $3.0 billion in IPPS payments, as compared to FY24. Notable proposed changes in payments include:
- +$570M to Uncompensated Care (UC) DSH
- +$3M Medicare share of buffer stock medicine cost (small independent hospitals)
- -$261M from Low Volume Adjustment (LVA) changes1
- -$151M from expiration of Medicare Dependent Hospital (MDH) status1
Table 1 - Proposed Market Basket Adjustment
Toyon’s Take
Toyon recommends providers request CMS increase the 2.6% market basket for more current and accurate depiction of increased hospital costs. Recent data shows the cost per Medicare discharge increased by 5.7% from FY21 to FY22. MedPAC's March 2024 Report to Congress recommends a 1.5% increase to CMS’s proposed FY25 market basket. In FY23, MedPAC stated CMS’s recent market basket updates are understated, highlighting the FY22 hospital price increase was 3% higher than CMS’s market basket.
An increase to the market basket would materially increase both DRG and UC DSH payments. Therefore, Toyon recommends providers comment to CMS requesting at least a 1.5% increase to the proposed FY25 market basket.
For more information, please contact Fred Fisher at 888.514.9312 or fred.fisher@toyonassociates.com.
1In recent years, Congress has extended the altered LVA methodology and MDH program.
2Starting FY25, an outlier reconciliation is triggered when there is a 20 percent change in the hospital cost to charge ratio (as compared to the current threshold of 10 percentage points)
3Related to five surgical episodes: 1) Coronary Artery Bypass Graft (CABG); 2) Lower Extremity Joint Replacement (LEJR); 3) Major Bowel Procedure; 4) Surgical Hip/Femur Fracture Treatment (SHFFT); and 5) Spinal Fusion. Hospitals in 25% of randomly selected Core Based Statistical Areas (CBSA) would be required to participate.
4Taxpayer Relief Act of 2012 (ATRA) reduced Medicare Fee for Service (FFS) IPPS payments from FY14 through FY17 to collect $11 billion related to documentation and coding corrections, resulting from errors after CMS implemented MS DRGs in FY08. Section 414 of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) and the Cures Act (MACRA) was established to restore rates to market basket levels, spread over FY18 through FY23. In FY24 another 0.9412% adjustment to the standardized amount was needed, but not applied, to fully restore Medicare payments.
5Medicare 2552-10 cost report data per March 31, 2024 HCRIS release. Medicare cost per discharge is case mix adjusted.
2. Provider Rates
CMS proposes a net increase of 2.6% to hospital base rates for hospitals that comply with the CMS quality reporting program (QRP) and are Meaningful Electronic Health Record (EHR) Users. After budget neutrality adjustments6, the net increase to the base rate is 2.59% as compared to FY24 for QRP and EHR users. CMS reduces payments to hospitals that do not meet Hospital Inpatient Quality (IQR) or meaningful EHR requirements. Table 2 below compares Proposed FY25 Base Rates vs. FY24 for providers receiving the full update, and providers receiving the reduced update for QRP and EHR reporting.
Table 2 - Proposed FY25 IPPS Base Rates
DRG Weights
CMS updated FY25 rates using FY23 MEDPAR claims7 and cost report data from FY22 Healthcare Cost Report Information System (HCRIS) data. FY25 DRG weights are capped at no more than 10% reduction from FY24 weights.
Low Volume Adjustment (LVA)
Unless otherwise extended by law, providers will qualify and be reimbursed for the LVA under CMS’s original criteria under 42 CFR 412.101 (more than 25 miles from another subsection (d) hospital, less than 200 total discharges, and 25% payment adjustment). Hospitals have until September 1, 2024, to request the LVA to be effective October 1, 2024 (FY25). This is an annual election and not carried forward automatically from the prior fiscal year.
For more information, please contact Scott Besler scott.besler@toyonassociates.com.
Medicare Dependent Hospital (MDH) Status
Similar to LVA and unless extended by law, the MDH status is set to expire December 31, 2024. CMS encourages affected providers to evaluate qualification for Sole Community Hospital (SCH) status, and if applicable, apply for SCH status by December 2, 2024.
For more information, please contact Scott Besler at scott.besler@toyonassociates.com.
New Technology Payments
There are 13 technologies under review and comment related to newness, cost, and substantial clinical improvement criteria and 14 technologies under review and comment related to cost criteria. New technologies, supporting detail and vendor applications are available on the MEARIS website. For FY25 only, CMS proposes the New Technology Add-On Payment (NTAP) at a 75% increase (as opposed to 65%) for Sickle Cell Disease Gene Therapy
For more information, please contact Fred Fisher at fred.fisher@toyonassociates.com.
Buffer Stock of Essential Medicines
For FY25, CMS proposes to reimburse small independent hospitals for a six-month buffer stock of essential medicines. Small providers are proposed as hospitals with equal to or less than 100 staffed beds (Medicare Cost Report Worksheet E Pt A Line 4). Independent providers are proposed as hospitals not affiliated with a health system/corporate office (health system affiliation reported on Medicare Cost Report Worksheet S2, Lines 140, and 141 though 143). Qualifying providers would either receive lump sum, or biweekly payments for the buffer stock of essential medicines.
For more information, please contact Fred Fisher at fred.fisher@toyonassociates.com.
Calculation Change for Additional Payment High Percentage of End Stage Renal Disease (ESRD) Beneficiary Discharges
Under current regulations for qualifying hospitals, the ESRD add-on payment is based on the average direct cost of furnishing dialysis services from data used to establish the ESRD composite rate. The last time CMS updated the composite rate was in the CY 2013 ESRD PPS Final Rule (77 FR 67454), which was the final year of the blend of the composite rate and the ESRD PPS. CMS proposes to update the rate using the current ESRD PPS base rate. The average weekly cost determination remains the same at three times per week multiplied by the ESRD PPS base rate. This rate will be updated annually for the calculation of the add-on payment.
For more information, please contact Scott Besler at scott.besler@toyonassociates.com.
Value Based Purchasing (VBP) Adjustment
CMS did not make any significant changes to the VBP reimbursement methodology for FY25. All IPPS hospitals will continue to contribute 2 percent to the VBP pool, and this payment pool is estimated to be $1.7B. The proxy VBP adjustment factors are available in “Table 16A” on CMS's FY25 Proposed Rule website, and the final VBP adjustments will be posted as “Table 16B” towards the end of Calendar Year 2024. Toyon recommends reviewing the VBP adjustment factors to share with the Quality team and other affected areas within the hospital.
For more information, please contact Scott Besler at scott.besler@toyonassociates.com.
Hospital Readmissions Reduction Program (HRRP)
CMS did not make any significant changes impacting reimbursement in FY25. CMS published the proxy FY25 HRRP adjustment factors in the file “FY 2025 Proposed Rule Impact File” on CMS's FY25 Proposed Rule website. The final HRRP adjustments for FY25 will be posted later this fall after the issuance of the FY25 IPPS Final Rule in August.
For more information, please contact Scott Besler at scott.besler@toyonassociates.com.
Hospital Acquired Condition Reduction (HAC) Program
CMS did not make any significant changes to the methodology for determining those hospitals in the bottom quartile of HAC scores. These hospitals will have their inpatient payments reduced by 1% for all inpatient payments. The final FY25 HAC scores will be made publicly available here later this fall and after the FY25 IPPS Final Rule is issued in August. Toyon recommends reviewing the domain scores for FY24 and sharing with the Quality team and other affected areas within the hospital.
For more information, please contact Scott Besler at scott.besler@toyonassociates.com.
6Budget neutrality adjustment factors related to MS-DRG recalibrations and cap adjustments, wage index adjustments for the reclassifications, lowest quartile and 5% cap loss, RCH demonstration and operating outlier adjustments.
7Medicare Provider Analysis and Review (MEDPAR): Data on Medicare beneficiaries using hospital inpatient services at https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/MedicareFeeforSvcPartsAB/MEDPAR
3. Uncompensated Care (UC) DSH
CMS proposes to increase Medicare UC DSH payments by $570M, to $6.6B in FY25. In FY25 CMS uses an average of UC Costs from FY19, FY20 and FY21 to determine each DSH hospital’s portion of the fund (i.e., Factor 3). UC costs from the December 2025 HCRIS update were reported in the Proposed Rule. For the Final Rule, CMS intends to use the March 2024 HCRIS update.
Hospitals have until Friday, June 7, to notify CMS of any discrepancies due to Medicare auditor mishandling of UC cost data and/or issues related to UC costs at merged providers8. Please see CMS's file named "FY 2025 IPPS Proposed Rule Medicare DSH Supplemental Data File" at CMS's FFY 2025 Proposed Rule website. Providers may contact CMS at Section3133DSH@cms.hhs.gov to request corrections.
Table 3 - Trend of National UC DSH Funding
Toyon’s Take
As providers are refining UC reporting in the Medicare cost report, corrections to prior year UC costs reported on Worksheet S-10 may be discovered. FY26 UC DSH reimbursement will use UC Costs from FYs 20, 21 and 22 (FY22 UC costs are currently under MAC review). Therefore, if corrections related to FYs 20 and 21 are required, Toyon recommends 1) notifying your MAC as soon as possible; and 2) and amending the respective cost report so that UC costs reported on Worksheet S-10 are corrected in the December 2025 HCRIS dataset.
For more information, please contact Fred Fisher at 888.514.9312 or fred.fisher@toyonassociates.com.
8*60 days from the date of public display of this FY25 IPPS proposed rule in the Federal Register is June 9th, a Sunday. Toyon therefore recommends providers file by Friday June 7th as a conservative approach.
4. Empirical DSH
Due to the Supreme Court ruling in Becerra v. Empire Health Foundation, for Valley Hospital Medical Center, 597 U.S. 424 (2022) (Empire Health), CMS proposes to formally withdraw 42 CFR 412.106 “as it existed prior to the effective date of the FY 2005 IPPS final rule to the extent it included only covered days in the SSI ratio.” CMS does not believe this change is retroactive rule making and states the Agency is applying the plain meaning of the statute.
CMS also proposes to “phase-in” the impact to any newly designated rural hospital with less than 500 beds affected by OMB labor market changes (discussed in further detail in the next section). In year 1, Medicare DSH payments would be 66% urban and 33% rural (DSH payment factor capped at 3%). In year 2, DSH payments would be 33% urban and 66% rural (DSH payment factor capped at 3%). In year 3, DSH payments would be 100% rural (DSH payment factor capped at 3%).
Toyon’s Take
Any newly rural hospital with less than 500 beds should evaluate qualification and impact for Rural Referral Center (RRC) status under CFR 412.96. RRCs are not subject to the 3% cap on DSH payments.
For more information, please contact Dylan Chinea at dylan.chinea@toyonassociates.com.
5. Wage Index and New Labor Markets
New Labor Markets
In FY25 CMS proposes to group providers by updated Core Based Statistical Areas (CBSAs) per OMB BULLETIN NO. 23-01. Throughout the Wage Index section of the FY25 IPPS Proposed Rule, CMS provides tables related to county/CBSA changes, changes to Lugar counties, hospitals and counties with geographic wage index reclassifications affected by the new CBSA delineations, and county equivalent “Planning Regions” in Connecticut.
CMS encourages providers with special designation to evaluate potential impacts to reimbursement. CMS states SCHs, MDHs, and RRCs apply for rural reclassification status under 42 CFR 412.103 prior to October 1, 2024, to “ensure no disruption in status.” For Critical Access Hospitals (CAH), CMS states affected providers follow the “two-year” transition plan discussed in CFR 412.103(a)(6); 485.610 (b)(5); and 79 FR 50162 through 50163.
Table 4 below summarizes counties and provider types impacted by the change in labor markets.
Table 4 - Summary of Labor Market Updates
National Average Hourly Wage (AHW)
The proposed FY25 national AHW is $54.739 representing an 8.7% increase from FY24. Therefore, a CBSA’s AHW needed to increase by 8.7% or more to maintain or experience a wage index increase from FY24 to FY25. As displayed in Table 5 below, the 8.7% increase to the national AHW is significantly higher than in previous years.
Table 5 - National AHW Trend
Wage Index Provisions
In FY25, CMS continues to apply the following adjustments to wage indices of certain providers:
“5% Cap” – No provider’s wage index can decrease 5% or more as compared to FY24.
“Rural Floor” Wage Index – Calculation considers all urban-to-rural reclassified hospitals (42 CFR 412.103) when determining a state’s rural floor wage index
“High-Low Adjustment” – Reduction of wage index high-to-low disparities by increasing the values for low wage index hospitals below the 25th percentile
Calendar Year (CY) 2022 Occupational Mix Survey
For FY25 (through FY27) CMS is applying the results of the CY22 occupational mix survey to the wage index. The prior occupational mix survey from CY19 was applied to the wage index for FY22 through FY24.
Important Dates
June 7 202410 - Rural redesignation “lock-in" date providers seeking rural status under 42 CFR 412.103 must notify CMS to be considered in the respective state’s rural floor wage index calculation.
June 14, 2024 - Deadline for providers to terminate or withdraw wage index reclassifications with the Medicare Geographic Classification Review Board (MGCRB). For FY25, CMS proposes to change this deadline to “within 45 days of the public display of the annual notice of proposed rulemaking on the website of the Office of the Federal Register, or within 7 calendar days of receiving a decision of the Administrator in accordance with § 412.278 of this part, whichever is later.” Reclassified hospitals are not eligible to receive an out-migration factor adjustment, so hospitals that are expected to receive a rural floor wage index (imputed or Statewide rural floor) should consider reclassification withdrawal to secure an outmigration adjustment.
Toyon’s Take
Providers, especially those with CAH, SCH, MDH, RRC and/or Lugar status, should evaluate if and how they are impacted by the new labor markets. Providers that may lose “special” status because of the new labor markets should consider commenting to CMS requesting “grandfathered” designation. It is important to note there is no loss to the 30% cap increase for rural hospitals impacted by new labor markets (i.e., rural to urban)11.
Providers geographically located in, or reclassified to, a CBSA impacted by the labor market changes should evaluate Table 2 of the CMS's FFY 2025 Proposed Rule website to ensure CMS placed your hospital in the optimal post-reclassified CBSA. CMS notes if a hospital is dissatisfied with its proposed geographic reclassification assignment, it may request a change to that assignment no later than May 24, 2024 (45 days from date of the IPPS Proposed Rule displayed in the Federal Register). A hospital may also request reassignment to an alternate CBSA, provider the hospital meet’s CMS’s reclassification proximity criteria (42 CFR 412.230) "that contains one or more counties (or county-equivalents) from the CBSA to which they are currently reclassified." All requests must be sent directly to wageindex@cms.hhs.gov.
For more information, please contact Ryan Sader at ryan.sader@toyonassociates.com.
9Toyon estimates the final FY25 national AHW at $54.91 from the CMS April 2024 Wage Index Public Use File
1060 days from the date of public display of the FY25 IPPS proposed rule in the Federal Register is June 9th, which is a Sunday. Toyon therefore, recommends providers file by Friday, June 7th as a conservative approach.
1142 CFR 412.105 - Effective October 1, 2014, if a rural hospital is redesignated as urban due to the most recent OMB standards for delineating statistical areas adopted by CMS, the redesignated urban hospital may retain any existing increases to its FTE resident cap that it had received prior to when the redesignation became effective
6. Graduate Medical Education (GME)
Notable areas affecting GME in the FY25 Proposed Rule include the areas discussed below.
Available FTE Slots from Hospital Closures (ACA Section 5506)
July 9, 2024, Deadline via MEARIS™
Teaching providers have until July 9, 2024, to apply for:
14.93 Indirect Medical Education (IME) and 14.93 Direct Graduate Medical Education (DGME) FTE slots from McLaren St. Luke’s Hospital (Toledo, OH CBSA; Provider Number: 36-0090).
67.64 IME and 74 DGME FTE slots from South City Hospital (St. Louis, MO-IL CBSA; Provider Number: 26-0210)
Change to Rounds 4 & 5 of the CAA, 2021, Section 126 Priority
Per the Consolidated Appropriations Act of 2021 (CAA, 2021), Section 126, at least 10% of the 1,000 slots awarded (or 100 slots) must go to each of the 4 categories of applicants:
Hospitals in rural areas (or treated as being in a rural area under the law);
Hospitals training residents in excess of their GME cap;
Hospitals in states with new medical schools or branch campuses; and
Hospitals that serve areas designated as health professional shortage areas (HPSAs).
Through Round 2, CMS has not awarded enough FTEs to Category 4 hospitals (hospitals where residents rotate at least 50% of their time to sites physically located in a HPSA). Therefore, for Rounds 4 and 5, CMS will prioritize Category 4 applicants regardless of HPSA scores. Remaining slots will be awarded per original Section 126 rules, prioritized based on HPSA scores.
Consolidated Appropriations Act of 2023 (CAA, 2023)
March 31, 2025 - Application Deadline
There are 200 additional available FTE slots per the CAA, 2023 (unrelated to Section 126 of CAA, 2021). A minimum of 100 slots must go towards psychiatry and psychiatric subspecialty programs and all qualified applicants will receive up to 1.0 FTE (prorated evenly). The remaining slots (if any) are prioritized to hospitals based on HPSA scores. Awarded FTEs are capped at 10 total FTEs to any one hospital and hospitals will be notified by January 31, 2026, with awarded FTEs effective July 1, 2026.
“New” Medical Residency Programs and Request for Comments
CMS proposes to refine its determinations of what qualifies as a New Program using “concrete standards.” CMS proposes residency programs are new when
Residents are new – CMS proposes “Overwhelming Majority” whereby 90% of residents (individuals, not FTEs) do not have prior training in the specialty of the new program.
Program Director is new
Teaching Staff are new – CMS Proposes a maximum of 50% of the new program faculty may come from an existing program of the same specialty. CMS also proposes that new program faculty come from different previous programs.
CMS requests that hospitals provide feedback on:
“Small Residency Program” - Due to challenges for small rural providers, CMS requests comment if a “small residency program” should be established when accredited for 16 positions or less.
New Faculty Definition - CMS requests comments if 10 years, 5 years (or other period) of not teaching in the respective program is a suitable time to be considered “new” faculty.
Comingling of Residents - Issue when a new program for cap adjustment rotates residents to a hospital with a rural cap adjustment. CMS is concerned comingling allows an existing program to increase residents even though it is not new.
One Hospital Sponsoring Two Programs in the Same Specialty - CMS is seeking information as to why hospitals may do this, and the impact on FTE caps for new residency programs that may not truly be “new” for hospitals with a rural designation (e.g., Section 412.103).
Toyon’s Take
Teaching providers operating over their respective program caps should evaluate applying for additional slots through hospital closures (especially teaching providers in Toledo, OH and St. Louis, MO-IL CBSAs). Teaching providers across the country located in HPSA Shortage Areas (regardless of HPSA score) should consider applying for remaining CAA, 2021, Section 126 rounds 4 and 5, as well as remaining slots (after distribution to psychiatric teaching providers) per CAA, 2023.
For more information, please contact Tom Hubner at tom.hubner@toyonassociates.com or Scott Besler at scott.besler@toyonassociates.com.
7. Outlier Reconciliation Changes
Change Request 13566 finalized additional criteria for triggering Medicare outlier payment reconciliations. Previously, if outliers exceeded $500K in a cost reporting period and the provider’s operating cost-to-charge ratio (CCR) changed +/- 10 percentage points from the interim payment CCR, this triggered the outlier reconciliation process. Effective for FY25 cost reports (beginning on/after), the MAC will also perform an outlier reconciliation when outliers exceed $500K and a provider’s CCR changes by +/- 20% from the interim CCR. For example, if the actual CCR dropped to 0.15 from 0.12 in the interim rate (3 percentage points), this represents a 20% decrease and would be subject to outlier reconciliation.
Toyon’s Take
Toyon recommends providers review current CCRs calculated from FY24 cost reports and estimate the change to FY25 CCRs for chargemaster increases and expense changes. If there is a projected change of +/- 20%, Toyon recommends reserving the potential impact of an outlier reconciliation.
8. "TEAM" Episode-Based Payment Models
CMS proposes a new mandatory 5-year episode-based payment system called “Transforming Episode Accountability Model (TEAM).” TEAM focuses on Medicare’s cost of care (total payments for services) for the following five surgical episodes:
Coronary Artery Bypass Graft (CABG)
Lower Extremity Joint Replacement (LEJR)
Major Bowel Procedure
Surgical Hip/Femur Fracture Treatment (SHFFT)
Spinal Fusion
IPPS hospitals in 25% of randomly selected CBSAs would be required to participate. In the first Performance Year (PY) for Track 1, CMS proposes a 10% stop-gain limit (no downside in PY1) for all participating hospitals. In PY2 through PY5 under Track 2, CMS would limit the stop-gain and stop-loss to safety net, rural, MDHs, SCHs and Essential Access Community Hospitals (EACH). For all other providers in PY2 though PY5 under Track 3, the upside/downside risk is 20%. Alternatively, providers could elect to initially move into Track 3 for all performance years. CMS is also considering whether any other hospital not in a selected CBSA could have an option to participate in the TEAM model.
Toyon’s Take
With multiple years of data since the COVID-19 PHE, CMS is re-focused on reducing fragmentation of care to improve quality and reducing Medicare spending. Toyon recommends providers establish regular communication with interdisciplinary teams to better understand, prepare, and succeed in these programs.