Inpatient Prospective Payment System Proposed Rule

On April 18, 2022, the Centers for Medicare and Medicaid Services (CMS) published the proposed Federal Fiscal Year (FFY) 2023 inpatient prospective payment system (IPPS) rules for discharges beginning on or after October 1, 2022 through September 30, 2023.

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

Payment Rate Update

CMS is proposing a net 3.2% increase in payments for FFY 2023 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 $1.6 billion for FFY 2023.

Wage Index

As part of the FFY 2020 final inpatient rule, CMS implemented several policy changes that impacted the 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% cap transition policy on wage index decreases into the FFY 2021 and FFY 2022 final rules.

As part of the FFY 2023 IPPS proposed rules, CMS is proposing to make the 5% cap on wage index decreases permanent.

Medicare DSH

CMS is proposing that the FFY 2023 uncompensated care payments (UCP) portion of the Medicare DSH payments will total $6.5 billion. This represents an estimated decrease of $654 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 proposing to use hospitals’ longest cost report period for FFY 2018 and FFY 2019.

For FFY 2024 and after, CMS is proposing 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 proposing 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 proposing 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.”

CMS is proposing 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 states 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. However, CMS is proposing that states must provide at least 90% in premium assistance towards the purchase of health insurance that provide 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 provide inpatient hospital benefits for the Medicaid eligible days in order to be included in the Medicaid fraction.

CMS is also proposing to amend the regulations to exclude Medicaid eligible days from the Medicaid fraction for days associated with uncompensated/undercompensated care pools. CMS reasons 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 hospital’s weighted full time equivalent (FTE) counts exceed their direct GME FTE cap.

CMS did not appeal this ruling, and, as such, CMS is proposing going back 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, is still within the three year reopening period, or the cost report is not settled, CMS will apply the revised calculation.

The proposed 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.


Eric Wetherell, CPA: Principal and Healthcare Advisory Group Lead

Marc Levy: Senior Manager

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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