Summary of FFY 2025 Medicare Inpatient Prospective Payment System IPPS Proposed Rule

May 30, 2024
18 minutes

On April 10, 2024, the Centers for Medicare & Medicaid Services (“CMS”) published its annual proposed rule for the federal fiscal year (“FFY”) 2025 inpatient prospective payment system (“IPPS”) and long-term care hospital (“LTCH”) payment system. This Alert details key changes proposed by CMS on the following topics: A. base rate updates; B. wage index, and other changes impacting rural hospitals; C. adjustments in disproportionate share (“DSH”) uncompensated care hospital payments and proposed further retroactive change to DSH regulation relating to “covered” days; D. medical education payments; E. CMS’s focus on increasing health equity; F. performance and data reporting programs; G. the new mandatory Transforming Episode Accountability Model (“TEAM”); H. low-volume hospitals’ payment adjustment; I. the Medicare interoperability program; and J. proposed modified requirements relating to service on the Provider Reimbursement Review Board (“PRRB”). Notable proposed changes include a decrease of 3.29% in DSH payments and a new mandatory episodic payment model for acute care hospitals in certain areas to be selected by CMS.

Comments on these proposals are due to CMS by June 10, 2024. We recommend that you consider submitting comments on any provision potentially affecting your organization. Please feel free to reach out to your Ropes & Gray advisor with any questions about these proposals.


Market Basket Update. Overall, CMS proposes an increase of 2.6 percent to the IPPS payment rates for FFY 2025, 0.2 percent lower than the 2.8 percent increase that was enacted for FFY 2024. The FFY 2025 increase is the result of a 3.0 percent increase to the market basket percentage estimate, offset by a 0.4 percent decrease due to the productivity adjustment. CMS also proposes a 2.8 percent increase in the national standardized amount for long-term care hospitals for the next fiscal year. For the LTCH payment system, CMS proposes an increase of 2.8 percent as compared to 3.3 percent in FFY 2024. This increase is the result of a 3.2 percent increase to the market basket percentage estimate, offset by a 0.4 percent decrease due to the productivity adjustment. Hospital industry groups are displeased with the increased rates, citing them as inadequate during a time of heavy inflation and rising costs.

    1. Continuation of Low Wage Index Policy. CMS again proposes to continue its low wage index policy—which the agency has implemented since FFY 2020—to reduce the disparity between high and low wage index hospitals. Under this policy, CMS increases the wage index for hospitals below the 25th percentile wage index by half the difference between the otherwise applicable final wage index for that hospital and the 25th percentile wage index for the year across all hospitals. The proposed 25th percentile wage index value for FFY 2025 is 0.8879. While CMS indicated in FFY 2020 that it intended for the policy to only last four years, the agency cites the COVID-19 pandemic as having complicated its ability to evaluate the policy properly. Furthermore, CMS recognizes that its low wage index policy is “the subject of pending litigation,” and that the U.S. District Court for the District of Columbia in Bridgeport Hospital, et al., v. Becerra “found that the Secretary did not have the authority” under the Medicare statute “to adopt the low wage index hospital policy for [F]FY 2020.” Nevertheless, CMS notes that it has appealed the decision and plans to continue the policy for FFY 2025.
    2. Proposed Separate IPPS Payment for Establishing Access to Essential Medicines. CMS proposes a new separate payment for small, independent hospitals (hospitals with 100 beds or fewer that are not part of a chain organization). These payments support the Biden administration’s priority to strengthen the resilience of medical supply chains and support reliable access to products for public health. The payments provide an add-on payment for the labor and operating costs of establishing and maintaining 86 essential medicines taken from the Essential Medicines Supply Chain and Manufacturing Resilience Assessment released by HHS and the Advanced Regenerative Manufacturing Institute. Hospitals will acquire these medicines either directly or through contractual arrangements with a pharmaceutical manufacturer, distributor, or intermediary. The payments will be applied in a non-budget neutral manner under section 1886(d)(5)(I) of the Social Security Act (“SSA”) and would begin for cost reporting periods beginning on or after October 1, 2024.
    3. Extension of Medicare-Dependent Hospital Program. Section 307 of the Consolidated Appropriations Act of 2021 extended the Medicare-Dependent Hospital (“MDH”) program through December 31, 2024. Beginning January 1, 2025, the MDH program will no longer be in effect. Current MDH hospitals will no longer have MDH status and will be paid based on the IPPS federal rate. In advance of the expiration of the MDH program, hospitals may apply for status as Sole Community Hospitals (“SCHs”). To receive SCH status by January 1, 2025, current MDH hospitals must apply by December 2, 2024. If approved, qualifying hospitals will be granted SCH status effective upon expiration of the MDH program.
    4. Conditions of Participation Requirements for Hospitals and Critical Access Hospitals (“CAHs”) to Report Acute Respiratory Illnesses and Influenza Reporting Requirements. CMS proposes replacing the current COVID-19 and Seasonal Influenza reporting standards for hospitals and CAHs with a new standard. This new standard requires hospitals and CAHs to report information electronically about COVID-19, influenza, and—unlike previously—respiratory syncytial virus. CMS states it hopes this will help to enable quick mobilization in the event of another public health emergency akin to COVID-19 and cites how data from hospitals is a critical part in reducing respiratory infections. CMS notes that the exact details of the requirements would be determined by the Secretary of Health and Human Services. However, the agency states that the requirements would be “scaled back and tailored from the current post-COVID-19 PHE [Public Health Emergency] requirements” and that hospitals and CAHs would generally be required to report this data on a weekly basis. Furthermore, CMS proposes several special requirements in the event of a future Public Health Emergency, including that the Secretary may require hospitals to report data daily without going through notice-and-comment rulemaking. This provision is implied to be pursuant to 5 U.S.C. § 553(b)(3)(B), which allows government agencies to forego notice-and-comment procedures for good cause.

CMS has been required by statute (42 U.S.C. § 1395ww(r)) since FFY 2014 to use three factors to determine the amount of those payments to hospitals. These factors represent CMS’s estimate of 75% of the amount of Medicare DSH payments that would have been paid under the pre-2014 system, an adjustment to that amount to account for changes in the national uninsured rate, and each eligible hospital’s estimated uncompensated care amounts relative to total uncompensated care for all eligible hospitals. CMS proposes to pay a total of $6.498 billion in DSH uncompensated care payments to hospitals, marking a decrease of 3.29% from the $6.712 billion in payments for FFY 2024, due mainly to a decline in the estimated uninsured rate for FFYs 2024 and 2025. CMS arrived at these figures by applying the same methodology for each of the three factors as it did in FFY 2024. The same as the last few years, Factor 2 uses the same data from CMS’s Office of the Actuary to estimate that the ratio of the nationwide uninsured fell from 14% in Calendar Year (“CY”) 2013 to an average of 8.8% in CY 2025 (up from 8.5% in CY 2023), which by statute further reduced the pool of available funds to the proposed amount of $6.498 billion. To calculate Factor 3, CMS proposes to continue using the three most recent years (FFY 2019, FFY 2020, and FFY 2021) of audited data on uncompensated care costs from Worksheet S–10 of the cost reports. 

CMS also proposes implementing the new Office of Management and Budget (“OMB”) labor market area delineations for the FFY 2025 wage index, taken from the 2020 census data, which would result in an increase in DSH uncompensated care payments. CMS believes that implementing the new OMB labor market area delineations would result in wage index values being more representative of the actual current costs of labor in a given area, but it also recognizes that these new delineations may have a negative financial impact on some hospitals. Under Section 1102(b) of the Social Security Act, CMS is required to prepare a regulatory impact analysis for any proposed or final rule that may have a significant impact on the operations of a substantial number of small rural hospitals. If the OMB labor market area delineations are adopted, hospitals would be subject to a maximum DSH uncompensated care payment adjustment of 12 percent. This DSH uncompensated care payment adjustment will apply to urban hospitals with fewer than 100 beds, and rural hospitals with fewer than 500 beds that are not rural referral centers (RRCs). CMS’s analysis estimates that DSH uncompensated care payments will increase by $560 million in 2025 as a result of the payment adjustment.

Finally, CMS proposes changes purportedly in response to the Supreme Court’s decision in Becerra v. Empire Health Foundation, for Valley Hospital Medical Center, 597 U.S. 424 (2022). Even though CMS did not actually amend the relevant regulation text in the FFY 2005 IPPS rule, CMS proposes to “formally withdraw 42 C.F.R. § 412.106 as it existed prior to the effective date of the [F]FY 2005 IPPS final rule to the extent it included only covered days in the SSI fraction.” Under the proposal, CMS states that it would apply this change to any properly pending DSH appeal or open cost report to which that withdrawn regulation would otherwise have applied.

  1. Revising Part C Nursing and Allied Health Payments. CMS proposes to calculate the nursing and allied health education (“NAHE”) Medicare Advantage (“MA”) rates for CY 2023 using data from cost reports ending in the FFY 2021 Healthcare Cost Report Information System (“HCRIS”). This proposal is a continuation of the methodology adopted in the FFY 2023 IPPS final rule. Using the methodology established in FFY 2023, for FFY 2025, CMS proposes to calculate the pool and the direct graduate medical education (“GME”) MA percent reduction by projecting Part A direct GME payments and MA direct GME payments for CY 2023, based on the HCRIS best available cost report data. Then, CMS proposes to increase these payments using the increases allowed under § 1886(h) of the Act. CMS’s proposed CY 2023 direct GME projections are based on the FFY 2021 data from the fourth quarterly HCRIS update of 2023, adjusted for Consumer Price Index and increasing MA enrollment. The proposed NAHE MA pass-through rate for CY 2023 is $281,138,358.
  2. Graduate Medical Education Payments. Section 1886(h)(10)(A) of the SSA, which covers payment to hospitals for inpatient hospital services, states that for FFY 2026, the Secretary shall initiate an application round to distribute 200 new residency positions, with a minimum of 100 of the positions distributed for psychiatry or psychiatry subspecialty residency training programs. CMS proposes a method of distribution that would award all qualifying hospitals that submit timely applications up to one full-time employee. If, after this distribution, any slots remain, CMS proposes to use the same Health Professional Shortage Area (“HPSA”) distribution methodology that it finalized for the Section 126 distribution, allowing hospitals with the highest HPSA scores to receive priority. CMS estimates that this will result in $740 million in additional funding from FFY 2026 through FFY 2036.
  1. Request for Information on Improving Maternity Care. CMS seeks information on differences between hospital resources required to provide inpatient pregnancy and childbirth services to Medicare patients as compared to non-Medicare patients. CMS also seeks information on the extent to which non-Medicare payers or other commercial insurers may be using the IPPS to determine their payment rates for inpatient pregnancy and childbirth services, as well as the effect of any such use on maternal health outcomes.
  2. Request for Information on Obstetrical Services. CMS seeks information on a potential proposal by the agency to establish baseline health and safety standards for obstetrical services in future rulemaking, including obstetrical services conditions of participation (“CoPs”) for participating hospitals. The goal of such CoPs would be to address maternal morbidity, mortality, and access to improve maternal health care outcomes, address disparities in care, and address access to care issues.
  3. Technology Add-On Payments for Sickle Cell Disease Treatment. Noting that sickle cell disease (“SCD”) has historically been difficult to treat, CMS plans to increase technology add-on payments for cell and gene therapies to treat the disease. Specifically, CMS is proposing to increase temporarily the new technology add-on payment percentage to 75 percent for gene therapies that are used to treat SCD. CMS believes that providing more access to SCD therapies for Medicare beneficiaries may lead to long-term savings for the Medicare program.
  4. Proposed Changes for Z Codes. CMS proposes to change the severity level designation for certain social determinants of health diagnosis codes, specifically, Z codes Z55-Z65, describing inadequate housing and housing instability from “non-complication or comorbidity” to “complication or comorbidity.” In doing so, CMS says it attempts to recognize inadequate housing and housing instability as indicators of increased resource utilization in the acute inpatient hospital setting. CMS states that, like homelessness, inadequate housing and housing instability can impede patient cooperation and management of care. Such patients may also require an extended length of stay. CMS also seeks feedback on how the agency can further foster the documentation and reporting of the diagnosis codes describing social and economic circumstances.
  1. New and Modified Measures for Hospital Inpatient Quality Reporting (IQR) Program. CMS proposes the addition of seven new measures, the removal of five measures, and the modification of two existing measures to improve quality reporting and safety practices across hospitals. The seven new measures are: (1) Patient Safety Structural measure beginning with the CY 2025 reporting period/FFY 2027 payment determination; (2) Age-Friendly Hospital measure beginning with the CY 2025 reporting period/FFY 2027 payment determination; (3) Catheter-Associated Urinary Tract Infection (CAUTI) Standardized Infection Ratio Stratified for Oncology Locations beginning with the CY 2026 reporting period/FFY 2028 payment determination; (4) Central Line Associated Bloodstream Infection (CLABSI) Standardized Infection Ratio Stratified for Oncology Locations beginning with the CY 2026 reporting period/FFY 2028 reporting period; (5) Hospital Harm – Falls with Injury electronic clinical quality measure (“eCQM”) beginning with the CY 2026 reporting period/FFY 2028 payment determination; (6) Hospital Harm – Postoperative Respiratory Failure eCQM beginning with the CY 2026 reporting period/FFY 2028 payment determination; and (7) Thirty-day Risk Standardized Death Rate among Surgical Inpatients with Complications (Failure-to-Rescue) measure beginning with the July 1, 2023 – June 30, 2025 reporting period/FFY 2027 payment. CMS is also proposing to adopt the Patient Safety Structural measure beginning with the CY 2025 reporting period/FFY 2027 payment determination. The Patient Safety Structural measure is a new attestation-based measure that assesses whether hospitals demonstrate a structure, culture, and leadership commitment that prioritizes safety. CMS is adopting this rule to drive action and improvements in safety across hospitals. 
  2. Hospital Value-Based Purchasing (VBP) Program. CMS is proposing to adopt the updated Hospital Consumer Assessment of Healthcare Providers and Systems (“HCAHPS”) Survey measure beginning with the FFY 2030 program year. These changes align with CMS’s stated goal to bring patient voices to the forefront by incorporating feedback from patients and caregivers. The updated HCAHPS Survey measure will add three new survey dimensions, remove one existing survey dimension, and modify one existing survey dimension. The three new items are: the multi-item “Care Coordination” sub-measure, the multi-item “Restfulness of Hospital Environment” sub-measure, and the “Information About Symptoms” single-item sub-measure. The “Care Transition” sub-measure is removed, and the “Responsiveness of Hospital Staff” sub-measure is updated to include more questions for patients about how responsive hospital staff were to their needs. 
  3. PPS-Exempt Cancer Hospital Quality Reporting (PHCQR) Program. CMS proposes moving up the start date for publicly displaying hospital performance on the Hospital Commitment to Health Equity measure from July 2026 to January 2026 or as soon as feasible thereafter. CMS aims to publicly recognize hospitals that have been committed to health equity. Like the IQR program, CMS proposes adopting the Patient Safety Structural measure beginning with the CY 2025 reporting period/FFY 2027 program year. 
  4. Long-Term Care Hospital (LTCH) Quality Reporting Program (QRP). CMS is proposing the following three changes to the LTCH QRP: (1) add four items to the Local Coverage Determinations (“LCDS”) beginning with the FFY 2028 LTCH QRP; (2) modify one item on the LCDS beginning with the FFY 2028 LTCH QRP; and (3) extend the admission assessment window for the LCDS beginning with the FFY 2028 LTCH QRP. The four new items are Living Situation (one item); Food (two items); and Utilities (one item). The modified item would be Transportation, which would be changed to ask the patient if they experienced a lack of reliable transportation for daily living in the last 12 months. Finally, the admission assessment window would be changed from three days to four days. These changes to the quality reporting program are designed to standardize post-acute care data to improve Medicare beneficiary outcomes.

CMS proposes a new mandatory payment model – the Transforming Episode Accountability Model – to be implemented by CMS’s Center for Medicare and Medicaid Innovation (“Innovation Center”) under the authority of § 1115A of the SSA. TEAM would be a mandatory model, requiring participation of all acute care hospitals, with limited exceptions, located in certain Core-Based Statistical Areas to be selected by CMS. The model is intended to improve, through financial accountability, patient care in coronary artery bypass grafts, lower extremity joint replacements, major bowel procedures, surgical hip/femur fracture treatments, and spinal fusions. Providers would bill Medicare FFS as usual but would receive target prices for episodes prior to each performance year. TEAM performance would be assessed by comparing TEAM participants’ actual Medicare FFS spending to their reconciliation target price, as well as by assessing three quality measures. TEAM would be tested for five years, from January 1, 2026, to December 31, 2030, over which time CMS projects a net cost to hospitals of over $400 million. As with other Innovation Center models, TEAM participants would have very little administrative or judicial review of agency actions. Accordingly, it is essential for hospitals to review the program details and submit comments to CMS.

  1. Low-Volume hospitals’ payment adjustment 

Beginning with FFY 2025 discharges occurring on or after January 1, 2025, CMS proposes to revert the definition of “low-volume hospital” and the corresponding payment adjustment methodology back to those adopted under the statutory requirements in effect prior to FFY 2011. The Consolidated Appropriations Act of 2024 (“CAA 2024”) extended the temporary changes to the low-volume hospital qualifying criteria and payment adjustment for a portion of FFY 2025. In particular, section 306 of the CAA 2024 extended the modified definition of “low-volume hospital” (15 road miles from another subsection (d) hospital and with fewer than 3,800 discharges during the fiscal year) and the methodology for calculating the payment adjustment under the IPPS for low-volume hospitals (determined using a continuous linear sliding scale ranging from 25 percent for low-volume hospitals with 500 or fewer discharges to 0 percent for low-volume hospitals with greater than 3,800 discharges) through the end of CY 2024. Due to the temporary nature of the CAA 2024, CMS proposes to revert back to the original text of § 1886(d)(12) of the Act, requiring the Secretary to develop an empirically justifiable adjustment based on the relationship between the standardized cost-per-case for such hospital and the total number of discharges of such hospitals and the amount of the additional incremental costs (if any) associated with the number of such charges. CMS proposes a payment adjustment of 25 percent. Additionally, beginning January 1, 2025, a “low-volume hospital” must be more than 25 road miles from another subsection (d) hospital and have fewer than 200 discharges during the fiscal year. Consistent with last year, CMS proposes that hospitals must submit written requests for low-volume hospital status to their Medicare contractor by September 1, 2024, and include sufficient documentation to establish that they meet the applicable mileage and discharge criteria.


CMS proposes separating the Antimicrobial Use and Resistance (“AUR”) Surveillance measure into two distinct measures: (1) Antimicrobial Use (“AU”) Surveillance and (2) Antimicrobial Resistance (“AR”) Surveillance, beginning with the EHR reporting period in CY 2025, to encourage reporting of information if a hospital does not have sufficient data for one of them. CMS also proposes adding an exclusion for eligible hospitals or CAHs that lack discrete electronic access to data elements that are required for AU or AR Surveillance reporting. Additionally, CMS proposes modifying the applicability of the existing exclusions for the AUR Surveillance measure to apply to the proposed AU Surveillance and AR Surveillance measures, respectively. CMS also sets forth two new proposed eCQMs for the CY 2026 reporting period: (1) The Hospital Harm – Falls with Injury eCQM and (2) The Hospital Harm – Postoperative Respiratory Failure eCQM. Finally, CMS proposes increasing the minimum scoring threshold for eligible hospitals and CAHs from 60 points to 80 points due to 98.5% of hospitals reaching the 60-point threshold and changing to the Global Malnutrition Composite Score eCQM to include a cohort of patients ages 18 to 64 in addition to the current 65-plus cohort. 


CMS proposes severalmodifications to PRRB requirements, including (1) requiring that all Board Members be knowledgeable in the field of payment to providers under Medicare Part A, (2) permitting Board Members to serve no more than three consecutive terms, an increase from two consecutive terms allowed under current regulations, and (3) permitting a Board Member who is designated as Chairperson in their second or third consecutive term to serve a fourth consecutive term to continue leading the Board as Chairperson.