Medicare Payment and Reimbursement

5 things to know about Medicare’s FY24 final rule for inpatient payments as hospitals foresee adverse impacts

The payment update and provisions affecting disproportionate share hospital payments have drawn criticism from hospital advocacy groups.

August 2, 2023 4:52 pm

The FY24 final rule for Medicare inpatient payments didn’t bring hospitals the type of rate update they sought, and for some organizations a bigger concern is changes to uncompensated care (UC) payments and disproportionate share hospital (DSH) payments.

Here are five big points about the regulations, which take effect Oct. 1 and also cover Medicare payment and policy updates for long-term care hospitals.

1. Disappointment with the payment update

The final rule establishes a 3.1% increase in operating payment rates for hospitals that meet quality-reporting requirements and fulfill the criteria to be designated as meaningful users of electronic health records.

Although the increase represents a raise from the FY24 proposed rule, which was published in April and included a 2.8% update, hospitals say it doesn’t keep pace with costs.

For example, Kaufman Hall’s latest monthly report on hospital finances, presenting data from June, showed expenses continuing to creep up: Total expense per calendar day was up 2% from May and 4% year-over-year.

“As margins continue to stabilize on the surface [at 1.4% YTD], the gap between high-performing hospitals and those struggling in this new ‘new normal’ is widening,” the report states.

In that context, hospital advocates criticized the FY24 update for falling short.

CMS “continues to finalize rate increases that are not commensurate with the near decades-high inflation and increased costs for labor, equipment, drugs and supplies that hospitals across the country are experiencing,” Ashley Thompson, senior vice president for public policy analysis and development with the American Hospital Association, said in a written statement.

Hospital aggregate payments are projected to rise by about $2.2 billion in FY24. The figure is derived from an estimated $2.6 billion increase in combined operating and capital payments and a $364 million reduction in new-technology add-on payments.

The NTAP adjustment stems largely from the expiration of payments for several technologies, including the cell-based gene therapies Abecma and Tecartus for treatment of blood cancers.

2. Variation in the payment impact

The 3.1% update will differ by hospital category. For example, rural hospitals as a group are projected to see a 3.5% update when accounting for approved geographic reclassifications that start in FY24 (Medicare’s reclassification policy allows hospitals to be assigned to a nearby higher wage area).

Estimated regional variations in the payment update are significant and stem in large part from the effects of reclassification and of the rural floor, a policy that ensures urban hospitals do not have a lower wage index than rural hospitals in the same state.

In a change for FY24, hospitals with rural reclassification are included in the computation of the rural floor, thereby increasing the wage index for some states. Accompanying budget neutrality provisions will detrimentally affect hospitals in states that do not benefit as much from the change in methodology.

That distinction helps explain why urban hospitals in the Pacific Region are projected to gain a 6.4% update, on average, compared with 0.5% for those in the New England Region. Hospitals in the latter area also are affected by updates to the raw wage data as determined by FY20 cost-report information (see the table on page 2025 of the rule).

As part of a push to improve health equity, CMS also is projecting how payment will be affected for hospitals serving beneficiaries with different characteristics. The table on page 2035 of the rule shows the projected change in payment from FY23 based on the prevalence of different demographics or beneficiary categories in a hospital’s patient population.

3. A big hit to uncompensated care payments

The UC payment subcategory within Medicare DSH payments will total $5.9 billion for nearly 2,400 hospitals. That’s down by more than $950 million from FY23.

The biggest difference from the proposed rule, which estimated only a $115 million decrease, is a change in the projected uninsured rate. CMS’s Office of the Actuary had put the rate at 9.2% next year. But using updated data from the National Health Expenditure Accounts, the new projection is 7.7% in 2023 and 8.5% in 2024 (each year factors into the equation on a weighted basis since the fiscal year straddles both).

CMS noted the precise payment impact on individual hospitals will vary based largely on a hospital’s share of uncompensated care relative to the amount provided by all DSH hospitals. Still, the net percentage decrease is expected to be in double figures for almost all categories and regions (see the table on page 2060 of the rule).

Thompson’s statement referred to the projected drop in the uninsured rate as “an inexplicable assumption” amid the ongoing disenrollment of Medicaid beneficiaries who had been continuously enrolled during the public health emergency. She noted that total disenrollment is estimated to be as much as 15 million, only a third of whom are projected to be eligible for subsidies to buy Affordable Care Act marketplace insurance.

4. A change to a DSH formula input

Another drawback for DSH hospitals is a change to the calculation of the disproportionate patient percentage (DPP). CMS finalized a proposal to clarify that the Medicaid fraction numerator in a hospital’s DPP includes patients covered by a Section 1115 waiver that provides either insurance covering inpatient care or fully subsidized premium assistance used to purchase such insurance.

But for hospitals in a state with an applicable Section 1115 demonstration that does not cover 100% of premium costs, patients in any such demonstration cannot be included in the numerator. That’s likely to affect the DPP of hospitals in a large majority of states.

States in which Section 1115 subsidies do cover 100% of the premium cost to patients — meaning covered patients can be included in the numerator — include Arkansas, Connecticut, Massachusetts, Oklahoma, Rhode Island, Tennessee, Utah and Vermont. Aug. 3 update: The 1115 demonstration in Massachusetts covers 100% of premiums for some beneficiaries but a lesser amount for others. Only patients in the first group can be included in the Medicaid fraction numerator.

“This is a change to how some hospitals may report Medicaid days for purposes of the DSH calculation and may have some impact on their Medicaid fraction and DSH payment adjustment,” CMS wrote, adding that it could not determine the financial impact due to a lack of specificity in the template for hospital cost reports.

In addition, patients whose care is subsidized by uncompensated/undercompensated care pools established by a Section 1115 demonstration cannot be included in a hospital’s Medicaid fraction numerator. States affected are Florida, Kansas, Massachusetts, New Mexico, Tennessee and Texas, CMS said.

To gauge the impact, CMS examined unaudited figures in a relevant 2020 court case, Bethesda Health, Inc. v. Azar. After crunching the numbers, CMS calculated that $2,477 per bed was at issue in the plaintiffs’ arguments.

Extrapolating that rate across the six states, CMS roughly estimates an aggregate payment reduction of more than $348 million.

5. Tweaks to two key programs

Among various changes to Inpatient Quality Reporting program metrics, CMS is updating the Vaccination Coverage Among Healthcare Personnel measure effective Oct. 1. The change encompasses the CDC’s definition of up to date in the context of vaccination.

Measures being added or modified for 2024 include:

  • Screening for Social Drivers of Health and Screen Positive Rate for Social Drivers of Health (both changing from voluntary to mandatory reporting)
  • Cesarean Birth and Severe Obstetric Complications perinatal electronic clinical quality measures, or eCQMs (changing from voluntary to mandatory reporting)
  • Hospital Harm — Opioid-Related Adverse Events eCQM
  • Global Malnutrition Composite Score eCQM

Total eCQMs to be reported are increasing from four to six, including three mandatory and three self-selected measures.

Measures being removed from 2024 reporting include:

  • Exclusive Breast Milk Feeding
  • Admit Decision Time to Emergency Department Departure Time for Admitted Patients
  • Discharged on Statin Medication eCQM

The Promoting Interoperability Program, through which hospitals achieve the designation of meaningful user of electronic health records, will implement a few changes in 2024. One is a requirement that hospitals attest “yes” to having conducted an annual self-assessment of all nine Safety Assurance Factors for EHR Resilience (SAFER) Guides.

CMS previously announced other changes taking effect in the program next year, among them:

  • An increase in the EHR reporting period from a minimum 90-day continuous period to at least 180 consecutive days
  • The addition of an Antimicrobial Use and Resistance (AUR) Surveillance measure, to be reported under the Public Health and Clinical Data Exchange Objective


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