Final rule for Medicare inpatient payments brings a big rate increase but falls short of what hospitals sought

• The final rule for Medicare inpatient payments to acute care hospitals includes a 4.3% increase, up by more than a percentage point from the proposed rule.
• Hospital advocates say the increase still should have been bigger to help cover the ongoing spike in costs, especially for labor.
• Payments made through several supplementary programs will decrease considerably.

Dealing with high costs of labor and supplies amid prolonged inflation, hospitals received a significant payment raise in the FY23 final rule for Medicare inpatient payments.

Payments to hospitals that meet quality-reporting requirements and are “meaningful users” of electronic health records will increase by 4.3%, driven by a market basket update of 4.1% and statutory adjustments resulting in a 0.2% gain.

The proposed rate change had been 3.2%, drawing protests from hospital advocates who said payments needed to better cover surging costs. Newly available economic forecasting data spurred a higher market basket update in the final rule.

“We now have an updated forecast of the price proxies underlying the market basket that incorporates more recent historical data and reflects a revised outlook regarding the U.S. economy (including the more recent historical CPI [Consumer Price Index] growth, impacts of the Russia/Ukraine war, current expectations regarding changes to Federal Reserve interest rates and tight labor markets),” CMS wrote.

CMS said the final rate change represents the biggest increase since 1998.

“This final rule aligns hospital payments with CMS’s vision of ensuring access to healthcare for all people with Medicare and maintaining incentives for our hospital partners to operate efficiently,” Chiquita Brooks-LaSure, CMS administrator, said in a news release.

Is it high enough?

Stakeholders who submitted comments on the proposed rule had recommended even higher rate increases, including several requests for an 8% increase. The methodology justifying such an increase draws from FY19 and FY20 cost-report data showing trends in allowable Medicare costs per risk-adjusted discharge.

Medicare cost-report data “are a more accurate projection of the cost inflation anticipated by hospitals during FY23 than the forecasted IGI [IHS Global Inc.] data used in the proposed rule,” according to CMS’s summation of the comments.

One concern expressed by commenters was the infrequency with which CMS rebases or revises the annual market basket update. Because revisions typically are made once every four years, using cost-report data would better account for annual changes in volume and acuity, “thus resulting in a more accurate proxy.”

CMS opted not to consider any such change to the methodology, saying the latest market basket revision — which occurred for FY22 using 2018 cost reports — “adequately reflects the average change in the price of goods and services hospitals purchase in order to provide [inpatient] medical services.”

The Employment Cost Index (ECI) as released by the U.S. Bureau of Labor Statistics comprises 53% of the market basket. Commenters pointed out that a big issue with relying on the ECI is its inability to capture inflation in compensation for contract labor.

CMS’s response was that in 2020, the latest year for which complete data are available, contract-labor hours accounted for only about 3% of hospitals’ total compensation hours. Compensation price growth for FY23 is projected to be 4.8%, according to IGI, and that increase factors into the market basket update.

Using data collected directly from hospitals, Premier calculated a 16.6% increase in hospital labor compensation between Q4 2020 and Q1 2022. But CMS declined to use its statutory “exceptions and adjustments” authority to bring the FY23 payment rate more in line with such projections.

The final payment update “falls woefully short of reflecting the rising labor costs that hospitals have experienced since the onset of the pandemic,” Soumi Saha, senior vice president of government affairs with Premier, said in a written statement.

Supplementary payments take a hit

Even aside from the market basket update, hospital groups noted there were significant issues with the payments in store for FY23.

Among areas where payment is being reduced:

Outlier payments will decrease by 1.7 percentage points after CMS calculated that the payments for FY22 will exceed the target by that amount. 

New-technology add-on payments (NTAPs) will decrease by $750 million based largely on the expiration of the three-year NTAP designation for some products. The impact is greater than usual because for FY22, CMS had granted a one-year extension for 13 technologies to account for temporary changes to the NTAP methodology stemming from the COVID-19 public health emergency.

Low-volume hospital and Medicare-dependent hospital payments will decrease by $600 million. For low-volume hospitals, the Affordable Care Act modified the definition and payment adjustment methodology in hospitals’ favor starting in 2011, but those provisions are expiring and would need to be extended by Congress.

The payment protections afforded to Medicare-dependent hospitals via legislation likewise are expiring and would require congressional reauthorization. Those hospitals can apply for the sole-community hospital (SCH) designation but would need to do so by Sept. 1 to receive SCH status in time for the Oct. 1 start of FY23.

Disproportionate share hospital (DSH) and uncompensated care (UC) payments will drop by about $300 million, although that’s an improvement from a projected $800 million reduction in the proposed rule. The decrease largely stems from an estimate of the uninsured rate for 2022 and 2023 as determined by CMS’s Office of the Actuary.

CMS finalized a proposal to use two years of historical Worksheet S-10 data to calculate UC payments in FY23 and to use three years of data starting in FY24. For FY23, the data will be derived from FY18 and FY19 cost reports.

Commenters expressed concern that large teaching hospitals in the coming year would be at risk of a substantial decrease in UC payments, which could affect access specifically to transplant programs for underserved populations.