CMS Releases Fiscal Year 2025 Inpatient Prospective Payment System Final Rule

The Centers for Medicare & Medicaid Services (CMS) issued the final rule for fiscal year (FY) 2025 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) on Aug. 1, 2024. Provisions of the final rule typically take effect Oct. 1, 2024. The rule will increase Medicare IPPS rates by a net 2.9 percent in FY 2025 compared with FY 2024 for hospitals that are meaningful users of electronic health records (EHR) and submit quality measure data. CMS finalized an increase in hospital payments by $3.2 billion, along with a $200 million decrease in disproportionate share hospital (DSH) payments and $300 million increase in new medical technology payments.

Of significant note, the final rule includes a new Center for Medicare and Medicaid Innovation (CMMI) payment model, Transforming Episode Accountability Model (TEAM), that would encompass Part B drugs and biologics and be mandatory for selected acute care hospitals. CMS states that TEAM advances CMMI's prior work on episode-based alternative payment models, including the Bundled Payments for Care Improvement Advanced and Comprehensive Care for Joint Replacement models

The final rule also increases graduate medical education funding by $74 million to support 200 additional residency positions from 2026 to 2036. CMS said it intends to focus on bolstering clinician staffing in health professional shortage areas and training psychiatrists. CMS also developed an add-on payment to help small, independent hospitals maintain buffer stocks of essential medicines. The rule also bolsters the new technology add-on payment to improve access to gene therapies for sickle cell disease (SCD).

In addition, the rule extends the low-wage index hospital policy, which limits decreases to 5 percent through FY 2027. Without new legislation, however, the Medicare-dependent and low-volume hospital programs will expire on Dec. 31, 2024. CMS added seven new measures to the inpatient hospital quality reporting program (QRP), including post-operative respiratory failure and 30-day risk-standardized death rate among surgical patients. CMS also eliminated five quality measures.

To learn more about the Medicare Physician Fee Schedule Proposed Rule, review the following resources:

• Final Rule
• Press Release
• Fact Sheet

Key Takeaways

Notable finalized policies made by CMS in the rule include:

• the five-year mandatory episode-based payment model, TEAM, which will begin in January 2026
• a proposal to mitigate future drug shortages by providing a new additional IPPS payment for small, independent hospitals to establish and maintain buffer stocks of essential medicines
• $74 million in funding for graduate medical education to support 200 additional residency positions from 2026 through 2036
• a change to severity level designation of the seven ICD-10-CM diagnosis codes that describe inadequate housing and housing instability
• three policy changes for new technology add-on payment (NTAP) applications for FY 2025 and beyond
• continuation of the hospital low-wage index policy and updated labor market areas
• the continued calculation of disproportionate share hospital payments from three years of uncompensated care data
• summarized responses to CMS's request for information (RFI) on Medicare payment for maternal care services and notes that the comments will inform future agency action to reduce maternal health disparities

Acute Care Hospitals Payment Update

Acute care hospitals are estimated to experience an increase primarily driven by the changes in FY 2025 operating payments and capital payments and the expiration of the temporary changes in the low-volume hospital program and the expiration of the Medicare Dependent Hospital (MDH) program on Jan. 1, 2025. This increase is based on a 3.4 percent market basket update that is offset by a 0.5 percent multifactor productivity (MFP) adjustment. Overall, CMS projects an increase in hospital payments by $2.9 billion in FY 2025, including $3.2 billion in operating and capital increases, a $200 million decrease in DSH payments and $300 million in additional payments for inpatient cases involving new medical technologies.

Long-Term Care Hospitals (LTCH) Payment Update

CMS estimates LTCH PPS payments for discharges paid the LTCH standard payment rate are expected to increase by approximately 2 percent, or $45 million, due primarily to a projected 0.8 percentage point decrease in high-cost outlier payments as a percentage of total LTCH PPS standard federal payment rate payments.

DSH and Uncompensated Care

CMS will distribute roughly $5.7 billion in uncompensated care payments to hospitals in FY 2025. CMS projects Medicare uncompensated care payments to DSHs will decrease in FY 2025 by approximately $200 million.

Consistent with the FY 2023 proposal, for FY 2024 and thereafter, CMS will use the three most recent fiscal years of data (for which audited data is available) of uncompensated care costs from Worksheet S-10 data to calculate Factor 3. Accordingly, for FY 2025, CMS will use hospitals' FY 2019, 2020 and 2021 cost reports for the distribution of these funds.

CMS will continue its supplemental payment for Indian Health Services and Tribal hospitals, along with Puerto Rico hospitals, finalized in FY 2023 to mitigate the discontinued use of low-income insured days as an alternative for uncompensated care costs. These hospitals are expected to receive approximately $79.88 million in supplemental payments in FY 2025, compared to $91.08 million as proposed.

CMS finalizes implementation of the new U.S. Office of Management and Budget (OMB) labor market area delineations for the FY 2025 wage index, as based on 2020 Decennial Census data (see Wage Index section of this summary for more detail), which will impact the calculation of Medicare DSH payment adjustments for certain hospitals. Based on this update, hospitals with less than 500 beds that are currently in urban counties would be considered rural (if they do not become rural referral centers or Medicare-dependent, small rural hospitals whose additional payments are set to end on Dec. 31, 2024, if not extended by legislation), meaning that these hospitals would be subject to a maximum DSH payment adjustment of 12 percent. Urban hospitals are subject to a maximum DSH payment adjustment of 12 percent only if they have fewer than 100 beds. Per existing regulation, if a hospital currently located in an urban county becomes rural under the new OMB delineations, the hospital may receive an adjustment to its rural federal payment amount for operating costs for two sequential fiscal years, with greater additional payments in the first year.

Hospital Low-Wage Index Policy Extended for 3 Years

The wage index measures a hospital's wage level in its geographic area relative to the national average. To determine a hospital's labor market area, CMS uses Core-Based Statistical Areas (CBSAs) defined by OMB. For FY 2025, CMS has finalized its proposal to use the CBSAs established in 2023 for wage index calculations with the aim of providing a more accurate reflection of wage differences across regions.

Continuation of the Low-Wage Index Hospital Policy

Under the FY 2020 IPPS/LTCH PPS final rule, CMS finalized a temporary policy to address wage index disparities affecting low-wage index hospitals, many of which are rural hospitals. This policy increased wage indexes for hospitals with a wage index below the 25th percentile by half the difference between the hospital's wage index and the 25th percentile wage index. Due to the COVID-19 public health emergency (PHE), most recent data has not been usable. Accordingly, CMS continues the low-wage hospital policy for at least three years beginning in FY 2025. As FY 2024 was the first full year of data following the end of the PHE, this would give CMS four years of usable data to evaluate the program, as originally intended. CMS will continue the policy's related budget neutrality adjustment. For FY 2025, the budget neutrality adjustment associated with this policy will be 0.997157.

TEAM

The rule advances the mandatory episode-based payment model proposed earlier this year, TEAM, which encompasses Part B drugs and biologics. See page 1,716 of the proposal. This is only the second mandatory model finalized by CMMI.

TEAM is finalized mostly as proposed, with a few notable changes. CMMI did not finalize a low volume (of episodes) threshold.

CMMI maintained that TEAM will be a five-year model and start in January 2026, despite feedback from stakeholders that requested a delay. Hospitals required to participate will be based on selected geographic regions and CBSAs across the United States that will be determined using a stratified random sampling method. CMMI adjusted the CBSA stratification such that CBSAs with at least one hospital participating in the Bundled Payments for Care Improvement (BPCI) Advanced or Comprehensive Care for Joint Replacement (CJR) model as of Jan. 1, 2024, and CBSAs in states that participate in the States Advancing All-Payer Health Equity Approaches and Development (AHEAD) model (except Maryland) are now in the strata with the lowest likelihood of selection for mandatory participation. For more information, see pages 1,867 and 1,884 of the final rule.

The finalized TEAM design includes a one-year glide path, which allows individuals to ease into full financial risk. TEAM includes three participation tracks: Track 1 (first payment year (PY) only) has no downside risk and lower levels of reward; Track 2 (PYs two to five) includes lower levels of risk and reward for certain hospitals, such as safety net hospitals; and Track 3 (PYs one to five) includes higher levels of risk and reward. CMMI revised the tracks such that safety net hospitals will be allowed to remain in Track 1 (upside only) for PYs one to three.

Episodes, finalized as proposed, begin with a hospital inpatient stay or a hospital outpatient procedure for one of the following surgical procedures:

• lower extremity joint replacement
• surgical hip femur fracture treatment
• spinal fusion
• coronary artery bypass graft
• major bowel procedure

Each episode ends 30 days after the individual leaves the hospital. Items and services for episodes include Part B drugs and biologicals except for those excluded under Section 512.525 (f).

CMMI finalized as proposed most participation requirements, including that participants will be selected acute care hospitals. Participants paid under IPPS will coordinate care for patients with traditional Medicare who undergo one of the surgical procedures included in the model and assume responsibility for the cost and quality of care from surgery through the first 30 days after the Medicare beneficiary leaves the hospital. However, CMMI determined in the final rule to not consider hospitals actively participating in the AHEAD model as a reason for exclusion from TEAM. It is possible that hospitals participating in other accountable care organizations (ACO) or value-based contracting models may still be required to participate in TEAM, though CMMI plans to address specifics in future rulemaking. For hospitals currently participating in BPCI Advanced and Comprehensive Care for Joint Replacement Model (CJR) models, CMMI finalized in this rulemaking that they are permitted to voluntarily opt into TEAM within specified time frames. CMMI finalized as proposed the requirement of participants to screen beneficiaries for certain social determinants of health metrics such as housing instability, transportation and food insecurity.

Under the TEAM model, CMMI will waive certain telehealth restrictions, such as the geographic and originating site Medicare telehealth requirements, for the duration of participation in the model.

Buffer Stock Incentive

CMS has finalized its policy, as proposed, to establish a separate payment under the IPPS to reimburse small, independent hospitals for maintaining six-month buffer stocks of 86 essential medicines identified by the Advanced Regenerative Manufacturing Institute (ARMI). This policy will take effect for cost-reporting periods beginning in FY 2025 (on or after Oct. 1, 2024). The payment will cover only the additional resource costs associated with maintaining the buffer stock, such as ventilation, managing expiration dates, etc., but not the cost of the drugs themselves. Hospitals will have the option to receive this payment either as a lump sum upon cost report settlement or through biweekly payments that will be reconciled at the time of cost report settlement. This policy is not budget-neutral.

To prevent potential disruptions to the supply chain, the payment will be available only to independent hospitals with 100 beds or fewer. CMS believes that these smaller, independent hospitals lack the resources available to larger hospitals or systems. A hospital's independent status will be determined based on whether it is identified as part of a "chain organization" on its cost report. CMS defines chain organization as two or more healthcare facilities controlled by a single organization. According to FY 2021 cost reports, 493 hospitals would be eligible for this payment, 249 of which are located in rural areas.

In response to concerns raised regarding the FY 2024 proposal about hospitals potentially hoarding essential medicines during shortages, CMS clarified that hospitals will not receive separate payments for establishing a buffer stock of drugs currently listed in the U.S. Food and Drug Administration (FDA) Drug Shortages Database. However, hospitals that already maintain a buffer stock of a drug in shortage will be eligible for the payment. Recognizing that some hospitals may lack the necessary space, equipment or staff to directly manage the buffer stock, CMS will allow payments for arrangements with pharmaceutical manufacturers, intermediaries or distributors to maintain the stock.

If a drug is added to the ARMI list, it will become eligible under this policy. Conversely, if a drug is removed from the list, it will no longer qualify for the payment.

The majority of public comments supported CMS' proposed policy, though some expressed concerns about potential unintended consequences, such as exacerbating existing or creating new shortages. Several commenters also requested that the eligibility criteria be broadened. In response, CMS disagreed that the policy would contribute to shortages due to the limited number of eligible hospitals and declined to expand the eligibility pool at this time for similar reasons.

CMS will consider expanding the program and making other revisions based on a future assessment of the program's impact.

Conditions of Participation

Further, CMS finalized the modification and permanence of its Conditions of Participation, requiring hospitals and critical access hospitals to report certain data on acute respiratory illnesses. Beginning Nov. 1, 2024, CMS will require hospitals and critical access hospitals (CAH) to electronically report data once per week on confirmed infections of COVID-19, influenza and respiratory syntactical virus among hospitalized patients, hospital capacity and limited patient demographic information, including age. 

Graduate Medical Education (GME)

Section 4122 of the Consolidated Appropriations Act, 2023 (CAA, 2023) mandates the allocation of an additional 200 Medicare-funded residency positions to train new physicians, at least 100 of whom are earmarked for psychiatry or its subspecialties. Accordingly, the final rule boosts graduate medical education funding by $74 million to support 200 additional residency positions from 2026 through 2036. At least half of these positions will be within psychiatry or psychiatry subspecialty residents. To qualify for an increase in residency slots, hospitals must demonstrate a "likelihood" of filling these positions within the first five years of the proposed increase. Accordingly, CMS has finalized its proposal requiring hospitals to prove that their current full-time equivalent (FTE) resident caps are insufficient to accommodate new or expanded programs.

Additionally, at least 10 percent of the total residency slots must be allocated to specific types of hospitals, including rural hospitals, those exceeding standard resident limits, hospitals in states with new medical schools or additional campuses, and hospitals serving Health Professional Shortage Areas (HPSAs). Furthermore, each qualifying hospital that submits a timely application will receive at least one residency position (or a fraction thereof) before any hospital is awarded more than one slot. In line with statutory deadlines, CMS plans to notify hospitals of the first residency slot awards by Jan. 31, 2026, with the positions becoming effective on July 1, 2026.

CMS did not finalize its proposed definition of "new residency program." Instead, CMS is issuing a new RFI to gather further input on defining residency newness in order to foster consensus on this issue. To be deemed "new" and eligible for these slots, a previously nonteaching hospital must guarantee new residents, a new program director and new teaching staff. In the proposed rule, to ensure appropriate creation of newly funded cap slots, CMS proposed that for a program to qualify as "new" and eligible for additional direct GME and/or Indirect Medical Education (IME) cap slots, at least 90 percent of individual resident trainees (not FTEs) must have no prior training in the same specialty. If more than 10 percent of trainees (not FTEs) transferred from another program at a different hospital/sponsor in the same specialty, the program would be disqualified from receiving new cap slots.

Health Equity, Social Determinant of Health Code Adjustments

Aligned with Biden Administration efforts to recognize the impacts of social determinants of health, the finalized rule also includes a change to severity level designation of the seven ICD-10-CM diagnosis codes that describe inadequate housing and housing instability.

Additionally, the model includes certain flexibilities, such as allowing safety net hospitals to participate in a track with lower levels of risk and reward and a pricing methodology that includes adjustments to account for underserved individuals. The agency stated that it will continue to finalize other elements not addressed in the final rule through subsequent rulemaking. For more information, see the model's new webpage.

Programmatic Changes

The final rule includes adjustments to several programs including the Hospital Inpatient Quality Reporting Program, Medicare Promoting Interoperability (PI) Program, PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program, Hospital Readmissions Reduction Program, Hospital-Acquired Condition (HAC) Reduction Program, Hospital Value-Based Purchasing (VBP) Program and the Long-Term Care Hospital Quality Reporting Program (LTCH QRP).

Under the Hospital Inpatient Quality Reporting Program, CMS introduced seven new quality measures, as proposed, including two new electronic clinical quality measures (eCQMs) for hospital harm events, a claims-based measure for surgical inpatient complications and healthcare-associated infection measures specifically stratified for oncology locations. In addition, two structural measures are being adopted – one for patient safety and another for age-friendly practices. Modifications are also being made to two existing measures – the Global Malnutrition Composite Score and Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) Survey measure – to enhance their applicability and relevance.

Additionally, CMS removed five existing quality measures, including four payment-related measures and the CMS PSI-04 measure (Death Among Surgical Inpatients with Serious Treatable Complications) to streamline reporting and focus on more comprehensive metrics. The agency also increased the number of mandatory eCQMs reported by hospitals over the next three years, with a gradual increase from six to 11 measures by the calendar year (CY) 2028 reporting period.

Adjustments to the Medicare PI Program include the separation of Antimicrobial Use and Resistance (AUR) into two measures, addition of two new eCQMs and increase of the performance-based scoring threshold to 70 points for the CY 2025 reporting period. CMS is also finalizing the proposal, with modification, to increase the total number of mandatory eCQMs reported by hospitals to increase the total number reported over three years. CMS has also adjusted the definitions of certified EHR technology and Meaningful EHR User under the PI Program.

PPS-Exempt Cancer Hospital Quality Reporting Program

CMS finalized the following actions:

• implementing the Patient Safety Structural measure, with some modifications, starting with the CY 2025 reporting period/FY 2027 program year
• updating sub-measures for the HCAHPS Survey measure, also beginning with the CY 2025 reporting period/FY 2027 program year
• modifying the public display date for hospital performance on the Hospital Commitment to Health Equity measure to January 2026 or as soon as it becomes feasible

Changes to NTAP for FY 2025

CMS finalized all three NTAP policies as proposed including:

• increasing the NTAP percentage from 65 percent to 75 percent for certain gene therapies approved for NTAPs when indicated and used specifically for the treatment of SCD, beginning in FY 2025 and concluding at the end of the two- to three-year newness period for each such therapy; this contrasts with CMS' current FY 2024 policy where NTAPs are generally limited to the lesser of 65 percent of the costs of the technology or 65 percent of the amount by which the costs of the case exceed the standard Medicare Severity Diagnosis Related Group (MS–DRG) payment with the only exceptions being for Qualified Infectious Disease Product (QIDP) or products approved under the FDA's Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD), which has an NTAP percentage of 75; CMS determined that for FY 2025, these new payment amounts would apply only to Casgevy and Lyfgenia when indicated and used specifically for the treatment of SCD. CMS indicated it will continue to assess the policy and may propose changes in the future
• proposing to use the start of the fiscal year, Oct. 1, instead of April 1, to determine whether a technology is within its two- to three-year newness period; this change will be effective beginning FY 2026
• no longer considering a hold status to be an inactive status for purposes of NTAP eligibility beginning with NTAP applications for FY 2026; applications that are withdrawn and have Complete Response Letters or are the subject of an FDA decision to refuse approval will still be considered inactive for eligibility for NTAP

For 2025, CMS will continue NTAPs for 24 technologies and discontinue NTAPs for seven technologies. Under the traditional pathway, CMS is approving five new technologies for NTAP for FY 2025. The agency is approving 12 NTAPs for 11 technologies (one applicant received approval for two separate NTAPs). Of these 11 technologies, 10 had Breakthrough Device designation and one had QIDP designation.

Maternity Care Services RFI

In the proposed rule, CMS included an RFI on payment for maternal care services. Specifically, CMS requested information on whether inpatient pregnancy and childbirth hospital resources differ between Medicare and non-Medicare patients. Additionally, the agency seeks insights into how non-Medicare payers use IPPS rates for payment determination and their impact on maternal health outcomes. CMS also sought public input on potential strategies, within the framework of hospital Conditions of Payment (CoPs), to address documented concerns regarding maternal morbidity, mortality, disparities and access to maternity care in the U.S.

Comments primarily focused on three key areas:

1. Several commenters pointed out that payment rates for maternity care services are inadequate across all payers, highlighting structural issues within the payment system. Many emphasized the critical role of DSH payments, Uncompensated Care payments and adequate Medicare payments in supporting hospitals that provide maternity care services. Medicaid payments were also noted as essential.
2. Resource Use. Commenters widely acknowledged differences in the resources required to treat Medicare versus non-Medicare beneficiaries. Some raised concerns that the current MS-DRG structure and that weights do not accurately reflect the resource needs for maternity care.
3. Strategies to Improve Maternal Health Outcomes. Many commenters suggested implementing value-based care arrangements, standardizing quality reporting and providing support programs for mental health and substance use disorders. They also emphasized the importance of addressing social determinants of health, such as housing and food security, to improve maternal health outcomes.

The final rule does not make any final rulemaking around the recommendations received; however, CMS indicates that it will continue to consider this topic in future rulemaking.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.