Inpatient Prospective Payment System Final Rule

On August 1, 2022, the Centers for Medicare and Medicaid Services (CMS) published the final Federal Fiscal Year (FFY) 2023 inpatient prospective payment system (IPPS) rule for discharges beginning on or after October 1, 2022 through September 30, 2023.

There are many updates, discussions and changes in the final rule.  The information summarized below focuses on areas that have a direct cost report impact.

Payment Rate Update

CMS is finalizing a net 4.3 percent increase in payments for FFY 2023 (they had proposed a 3.2 percent increase) for hospitals that report quality data and are meaningful users of Electronic Health Records (EHR).  CMS estimates that hospitals will see a total increase of about $2.6 billion for FFY 2023 (the proposed rule had an increase of approximately $1.6 billion).

Wage Index

As part of the FFY 2020 final inpatient rule, CMS implemented several policy changes that impacted wage indexes. Due to the overall impact on the wage index, CMS adopted a transition policy to limit any decrease in a hospital’s wage index to a 5 percent cap.  This meant that a hospital’s wage index for FFY 2020 could not decrease by more than 5 percent over that of FFY 2019.

CMS carried the 5 percent cap transition policy on wage index decreases into the FFY 2021 and FFY 2022 final rules.

As part of the FFY 2023 IPPS final rule, CMS is finalizing its proposed plans to make the 5 percent cap on wage index decreases permanent.

Wage Index Rural Floor

CMS has, based on the decision in the Citrus HMA, LLC, d/b/a Seven Rivers Regional Medical Center v. Becerra, No. 1:20-cv-00707 (D.D.C.) case, decided not to finalize their proposed rural floor wage index policy.  The proposed policy would have excluded § 412.103 urban to rural reclassified hospitals from the rural floor calculation, and from the calculation of “the wage index for rural areas in the State in which the county is located.”

CMS is instead going to revert back to the rural floor policy that was in place before FFY 2020.   For FFY 2023 and subsequent years, CMS finalized a policy that will include the wage date of hospitals that have reclassified from urban to rural (i.e., § 412.103 hospitals) and who have not received an additional geographical wage index reclass (Medicare Geographic Classification Review Board or Lugar) in the calculation of the rural floor, and to include their wage data in the calculation of “the wage index for rural areas in the State in which the county is located.”

Medicare Disproportionate Share Hospitals (DSH)

CMS is finalizing their proposal that the FFY 2023 uncompensated care payments (UCP) portion of the Medicare DSH payments will total $6.874 billion, which is an increase over the proposed rule amount of $6.5 billion.  This represents an estimated decrease of $317 million from FFY 2022.

Factor 3 of the UCP calculation currently utilizes the audited Medicare cost report worksheet S-10 uncompensated care totals (S-10, line 30). For FFY 2022, CMS utilized the FFY 2018 audited worksheet S-10 data.

For FFY 2023, CMS is finalizing the rule to use hospitals’ longest cost report period for FFY 2018 and FFY 2019.

For FFY 2024 and after, CMS is finalizing their proposal to use hospitals’ three most recently audited cost report worksheet S-10 schedules for factor 3 (i.e., for FFY 2024, CMS proposes to use hospitals’ FFY 2018, 2019 and 2020 data).

CMS is finalizing its proposal to codify in the Code of Federal Regulations (CFR) what constitutes a Medicaid DSH day under each state’s Social Security Act Section 1115 demonstration program.

CMS is not moving forward with its proposal to modify the regulations “to explicitly state our view that ‘regarded as eligible’ for Medicaid only includes patients who receive health insurance through a Section 1115 demonstration where state expenditures to provide the insurance may be matched with funds from Title XIX.”

Their decision to not move forward with the above also means that CMS is not finalizing their proposal to include in the Medicaid fraction of the Medicare DSH calculation only the days of patients regarded as eligible for Medicaid who receive health insurance through a state’s Section 1115 demonstration program that provides essential health benefits (EHB).

CMS had stated in their proposed rule that patients receiving premium assistance from a state’s Section 1115 demonstration program to purchase health insurance can be considered eligible for Medicaid and included in the Medicaid fraction. CMS had also proposed that states must provide at least 90% in premium assistance towards the purchase of health insurance that provides EHB in order for the patient to be classified as Medicaid eligible.

The current regulation only requires that a state’s Section 1115 demonstration program provides inpatient hospital benefits for the Medicaid eligible days in order to be included in the Medicaid fraction.

CMS is also not finalizing its proposal to amend the regulations to exclude Medicaid eligible days from the Medicaid fraction for days associated with uncompensated/undercompensated care pools. CMS had reasoned that these pools do not provide health insurance and, as such, do not entitle any patient to a specific health benefit.

Graduate Medical Education (GME)

On May 17, 2021, the U.S. District Court for the District of Columbia ruled against CMS’ method of calculating direct GME payments to teaching hospitals when the hospitals’ weighted full time equivalent (FTE) counts exceed their direct GME FTE cap.

CMS did not appeal this ruling and, as such, CMS is finalizing its proposal that will apply to any eligible cost report periods beginning on or after October 1, 2001 to current in order to change the calculation. This does not mean that CMS is going to recalculate the cost reports from this date.  However, if a hospital has an appeal on this issue, or the cost report is not settled, CMS will apply the revised calculation.

The final modified policy would address situations for applying the FTE cap when a hospital’s weighted FTE count is greater than its FTE cap, but would not reduce the weighting factor of residents that are beyond their initial residency period (IRP) to an amount less than 0.5.

CMS states that where a hospital’s unweighted allopathic and osteopathic FTE count exceeds its FTE cap, they propose to add a step to also compare the total weighted allopathic and osteopathic FTE count to the FTE cap.  If the total weighted allopathic and osteopathic FTE count is equal to or less than the FTE cap, then no adjustments would be made to the respective primary care and obstetrics and gynecology (OB/GYN) weighted FTE counts, or to the other weighted FTE counts. If the total weighted allopathic and osteopathic FTE count exceeds the FTE cap, then CMS would adjust the respective primary care and OB/GYN weighted FTE counts, or the other weighted FTE counts, to make the total weighted FTE count equal the FTE cap. The formula to calculate these adjustments is as follows:

  • [((Primary Care and OB/GYN Weighted FTEs ÷ Total Weighted FTEs) x FTE Cap)) + ((Other Weighted FTEs ÷ Total Weighted FTEs) x FTE Cap))]

The result of the above formula would be the current year total allowable weighted FTE count, which would be reported on Worksheet E-4, line 9, column 3 of the Medicare Cost Report.


Marc Levy, Senior Manager, Healthcare Advisory Group

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

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