On August 1, 2024, the Centers for Medicare & Medicaid Services (CMS) posted the Hospital Inpatient Prospective Payment System (IPPS) final update for fiscal year (FY) 2025, along with proposed policy and regulation changes. The final rule updates Medicare payment policies and quality reporting programs relevant for inpatient hospital services and builds on key agency priorities, including advancing health equity and improving the safety and quality of care.

Key Takeaways from the FY 2025 IPPS Final Update

1. CMS finalized an increase of 2.9% in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users. This increase is based on a projected FY 2025 hospital market basket percentage increase of 3.4%, reduced by a 0.5 percentage point productivity adjustment.
2. CMS finalized a mandatory episode-based payment model called TEAM. TEAM will require acute care hospitals in specific geographic regions to be accountable for the cost of care for Medicare beneficiaries during and after certain surgical procedures: lower extremity joint replacement, surgical hip/femur fracture treatment, spinal fusion, coronary artery bypass graft and major bowel procedures. CMS finalized as proposed that this mandatory model will begin on January 1, 2026.
3. To help mitigate future drug shortages, CMS finalized its proposal to establish a separate payment to support small, independent hospitals in establishing and maintaining a buffer stock of essential medicines.
4. CMS updated its labor market configurations using more current census data. This change will reshuffle hospital geographic assignments and affect the wage index for most hospitals. It also could affect hospital eligibility for geography-specific programs, such as Medicare-dependent hospital (MDH) status. CMS finalized its proposal to continue its low wage index hospital policy.
5. CMS finalized as proposed three policy changes for new technology add-on payment (NTAP) applications for FYs 2025 and beyond.
6. In the 2021 IPPS final rule, CMS finalized a proposal to evaluate existing Medicare Severity Diagnosis-Related Groups (MS-DRGs) with a three-way severity level split to ensure that the base MS-DRG contains a meaningful volume of cases and satisfies other set criteria. CMS will continue to delay implementing these criteria to existing MS-DRGs for another year.
7. CMS finalized its proposed nine guiding principles to be used to determine which secondary diagnosis codes can trigger a complication or comorbidity (CC) or major complication or comorbidity (MCC), and finalized its proposal to add seven diagnoses describing housing instability as CCs.
8. For the Hospital IQR Program, CMS adopted seven new quality measures, removed five existing quality measures and modified two current quality measures.
9. CMS finalized policies to govern the distribution, by January 31, 2026, of an additional 200 Medicare-funded residency positions to train physicians. At least 100 of the positions will be for psychiatry or psychiatry subspecialty residencies. CMS issued a request for information (RFI) on the criteria for determining whether a residency program can be considered “new” for the purposes of deciding if a hospital can receive additional direct graduate medical education and/or indirect medical education positions for that program.
10. Because Congress temporarily extended the low-volume hospital payment adjustment and MDH programs through the end of the calendar year (CY), CMS finalized policies for these hospitals for the portion of the FY that falls within that window (October 1, 2024, through December 31, 2024) and the remainder of the FY, beginning on January 1, 2025.
11. For FY 2025, the total uncompensated care payment (UCP) is approximately $5.7 billion. CMS finalized its proposal to implement the new Office of Management and Budget (OMB) labor market area delineations for the FY 2025 wage index, which will have an impact on the calculation of Medicare disproportionate share hospital (DSH) payment adjustments to certain rural hospitals.
12. CMS summarized responses to its RFI on Medicare payment for maternal care services, noting that the comments will inform the agency’s future actions to reduce maternal health disparities and improve maternal health outcomes.

The final rule is scheduled to be published in the Federal Register on August 28, 2024.