Medicare’s proposed increase for inpatient payments in FY23 doesn’t meet hospitals’ expectations

• The hospital industry expressed disappointment with the proposed increase for inpatient payments in FY23.
• The concern over the payment increase was exacerbated by proposed reductions to supplemental payments that could result in a net decrease for some hospitals.
• CMS is seeking to stabilize the calculation of UC payments and annual changes to a hospital’s wage index.
• Long-term care hospitals would see a small payment increase under the proposed rule.

The updates in Medicare’s FY23 proposed rule for hospital inpatient payments will leave hospitals and health systems in a tight spot financially, advocates said.

CMS released the proposed rule April 18, putting forth a 3.2% payment increase for hospitals that meet quality-reporting requirements and fulfill the criteria to be designated as meaningful users of electronic health records. The payment boost stems from a projected market-basket increase of 3.1% and statutory adjustments that result in a net gain of 0.1%.

Advocates say the increase isn’t sufficient in an era of surging wage and supply costs. What’s more, the payment-rate change could be close to zero or even amount to a decrease for some hospitals.

While CMS estimates that the payment increase will total $1.6 billion in aggregate, it also projects a decrease of $800 million in Medicare disproportionate share hospital (DSH) and uncompensated care (UC) payments, and another $800 million reduction in new-technology add-on payments.

In addition, a $600 million decrease is anticipated for facilities categorized as Medicare-dependent hospitals and low-volume hospitals, barring legislation to extend those payments.

Add it all up, and it’s not the type of update that hospital advocates were seeking.

“This is simply unacceptable for hospitals and health systems, and their caregivers, that have been on the front lines of the COVID-19 pandemic for over two years now,” Stacey Hughes, executive vice president of the American Hospital Association, said in a written statement.

The Federation of American Hospitals (FAH) described the payment increase as “woefully inadequate. It does not reckon for the hyperinflation, staffing crisis and the continuing pandemic, which will impact resources necessary for patient care well into the future.”

How CMS determined the payment update

The proposed payment rate was set using FY21 Medicare Provider Analysis and Review (MedPAR) data and FY20 cost report data. Such a methodology is in keeping with “historical practice,” CMS said, after two years in which the agency allowed for deviations because of the COVID-19 pandemic.

CMS is proposing to implement certain modifications to the rate-setting methodology “to account for the anticipated decline in COVID-19 hospitalizations of Medicare beneficiaries” compared with FY21.

Specifically, in calculating MS-DRG relative weights for FY23, CMS is proposing to calculate two sets of weights — one including and one excluding COVID-19 claims — and to then average the two sets.

Another change would affect the calculation of outlier fixed-loss amounts.

“We do not believe it is reasonable to assume charges and CCRs [cost-to-charge ratios] will continue to increase at these abnormally high rates,” CMS states in the rule.

Adjustments thus would be made to charge inflation factors and CCR adjustment factors “to provide a more reasonable approximation of the increase in costs that will occur from FY21 to FY23.”

UC payments are a sore point

FAH singled out the anticipated $650 million reduction in UC payments as being particularly problematic, given that those payments are supposed to reflect uninsured rates.

“While it would be an achievement for the number of uninsured to go down in the upcoming year as CMS assumes, the retreat of COVID-19-related policies to extend coverage is more likely to send the uninsured numbers in the opposite direction,” FAH stated. “This is the wrong time to assume the challenge of funding care for uninsured Americans will decline.”

In a move designed to bring a measure of stability to the calculation of UC payments, CMS is proposing to use two years of audited data from Worksheet S-10 of hospitals’ Medicare cost reports. Previously, only one year of data has been used. The applicable years of data for FY23 are from FY18 and FY19 cost reports.

Starting in FY24, CMS is proposing to use a three-year average to calculate UC payments.

Efforts to stabilize the wage index

CMS is seeking to stabilize wage metrics by incorporating a permanent cap that would prevent any facility’s wage index from decreasing by more than 5% year over year. Such caps have been in effect the last several years as well but were considered to be transitional.

The permanent mechanism is designed “to reduce overall volatility for hospitals,” CMS stated, but advocates expressed disappointment that it will be implemented on a budget-neutral basis. In other words, any increase in total Medicare payments stemming from the cap will be negated via a decrease to the annual rate update.

For FY23, CMS estimates that “applying a 5% cap on all wage index decreases would have a very small effect on the proposed budget neutrality factor.”

Similarly, the anticipation is that “the impact to the proposed budget neutrality factor associated with the proposed cap in future years would continue to be minimal.”

LTCHs would see a slight payment increase

The proposed rule also sets regulations for prospective payments to long-term care hospitals (LTCHs). Medicare would increase aggregate payments to LTCHs by $25 million. Discharges paid the standard LTCH payment rate would increase by approximately 0.7% when accounting for a productivity-adjusted market-basket increase of 2.7% and a projected decrease in high-cost outlier payments.

The 60-day comment period for both inpatient and LTCH payments runs through June 17. For more analysis of the proposed rule, visit the HFMA Blog in upcoming days.