CMS Publishes FY 2023 Hospital Inpatient Prospective Payment System Final Rule

By | January 29, 2023

The Centers for Medicare and Medicaid Services (CMS) published the final rule for the fiscal year (FY) 2023 Hospital Inpatient Prospective Payment System (IPPS) in the Federal Register on August 10, 2022. The rule affects discharge dates on or after October 1, 2022.

Each year, CMS publishes updates to the regulations and payment calculations adjusting for inflation factors, wage index adjustments, and other patient care related payment adjustments.

Below is an overview of the FY 2023 IPPS, including finalized changes and other relevant updates.

Final Changes for Acute Care Hospitals

CMS has made the following updates, payment policies, and payment rates.

Hospital Market Basket

CMS will implement a 4.3% increase in IPPS operating payments for general acute care hospitals that successfully participate in the quality reporting and are meaningful users of electronic health records (EHR).

This includes an estimated market basket update of 4.1%, reduced by a 0.3% productivity adjustment and increased by a 0.5% adjustment directed by legislation.

While this is estimated to result in increased payments of approximately $2.6 billion for FY 2023, CMS also projects some significant payment decreases. This includes an estimated decrease of $300 million in disproportionate share payments and uncompensated care (UC) payments combined. It also includes an estimated decrease in payments of $750 million for inpatient cases involving new medical technologies.

Medicare Dependent and Low-Volume Hospitals

The additional payments for Medicare-dependent hospitals and low-volume hospitals are set to expire absent congressional intervention.

If the payments expire, the estimated reduction for those affected hospitals is estimated to be $600 million in FY 2023.

Medicare Severity Diagnosis-Related Group

CMS follows its proposed methodology to use the best available data for FY 2023 payment rate updates. As such, CMS will use FY 2021 MedPAR data and FY 2020 cost reports, with certain modifications to address assumptions related to Medicare beneficiaries’ hospital utilization.

As such, to compute diagnosis-related group (DRG) relative weights, CMS finalizes its proposal to calculate and average the results of two sets, one with COVID-19 claims and one without. CMS also proposes to apply a modified methodology in determining the outlier threshold that also factors in assumptions related to Medicare beneficiary utilization in 2023.

Medicare Wage Index

CMS will continue its current policy designed to reduce the disparity between high and low wage index hospitals. This current policy was put in place in FY 2020.

National Adjusted Operating Standardized Amounts

The national adjusted operating standardized amounts are proposed to increase 4.3% with the federal capital payment rate increasing 1.63%, as listed below.

The following metrics align with:

  • Whether or not a hospital is a meaningful EHR user
  • If a hospital submitted quality data
National Adjusted Operating Standardized Amounts: Labor and Nonlabor
67.6% Labor Share and 32.4% Nonlabor Share, if the Wage Index Is Greater than One

National Adjusted Operating Standardized Amounts: Labor and Nonlabor
62% Labor Share and 38% Nonlabor Share, If the Wage Index Is Less than or Equal to One

Capital Standard Federal Payment Rate

Below are the capital standard federal payment rates for FYs 2022 and 2023.

Graduate Medical Education (GME) and Indirect Medical Education

In conjunction with a statutory review resulting from the decision in the Milton S. Hershey Medical Center case, CMS proposed and has now finalized a modified policy for applying the full-time equivalent (FTE) cap when the weighted count exceeds the cap. CMS is finalizing this change retroactively for cost reporting periods beginning on or after October 1, 2001.

CMS finalized its proposal to allow an urban and a rural hospital participating in the same rural training programs (RTP) to enter an RTP Medicare GME affiliation agreement effective for the academic year beginning July 1, 2023.

Medicare DSH Estimate and Uncompensated Care Payments

CMS updated the Medicare disproportionate share hospital (DSH) estimate as well as the three factors used to compute UC payments.

Medicare DSH Estimate

The estimated Medicare DSH amount for FY 2023 is $13.949 billion. This results in an empirically justified amount of $3.488 billion. The Factor 1 amount is $512 million greater than in the proposed rule.

Uncompensated Care Factors

CMS finalized the following uncompensated care factors for FY 2023.

  • Factor 1: $10.461 billion
  • Factor 2:71%, as compared to 68.57% in 2022

When applying Factor 2 to Factor 1, the result is a UC pool amount of $6.874 billion to be shared by qualifying hospitals. The 2023 pool is $318 million less than in FY 2022.

CMS finalized its proposal to use Line 30 from FY 2018 and FY 2019 Worksheet S-10 data for FY 2023 to determine Factor 3 for all hospitals, except Indian Health Service (IHS) and Puerto Rico hospitals.

For FY 2024, CMS plans to use the average of the three most recent years for which audited data is available. As an example, for FY 2024, it’s likely to be from FY 2018–2020.

IHS or Tribal Hospitals and Puerto Rico Hospitals

For IHS and Puerto Rico hospitals, CMS finalized its proposal to discontinue the use of a low-income insured days proxy and to address significant financial disruption from implementing a new supplemental payment.

CMS will now determine Factor 3 for IHS and Tribal hospitals and Puerto Rico hospitals based on S-10 data.

Days Associated with Section 1115 Demonstration Projects

In 2020 and 2021, several court cases concluded that Section 1115 waiver days must be included in the DSH calculation under existing regulations. As a result, CMS stated it would revise the regulation to clarify, and further limit, which days can be included in the Medicaid fraction.

Specifically, in the FY 2022 proposed rule, CMS proposed to include only those days in which a patient directly receives inpatient hospital insurance coverage on a Section 1115 waiver. However, CMS didn’t finalize this proposal.

In the FY 2023 proposed rule, CMS again proposed changes to the regulations. Section 1115 waiver days are to be included in the DSH calculation if:

  • Applicable on days patients receive hospital health insurance that provides essential health benefits
  • Covered with hospital health insurance bought with premium assistance equal to at least 90% of the cost of the health insurance
  • Covered patient isn’t also entitled to Medicare Part A

However, as with the prior year, CMS again chose not to finalize its proposed changes to the regulations related to Section 1115 waiver days. CMS indicated that it expects to revisit this issue in future rulemaking.

Other Notable CMS Updates

CMS also addressed several other proposed changes regarding many hospital programs and health initiatives, including:

  • Hospital-Acquired Condition (HAC) Reduction Program
  • Social Determinants of Health Comment Solicitation
  • Payment Adjustment for Domestically Made Surgical N95 Respirators Comment Solicitation
  • Principles for Measuring Health Care Quality Disparities
  • Continuing to Advance Toward Future Digital Quality Measurement
  • Hospital Readmissions Reduction Program (HRRP)
  • Hospital Inpatient Quality Reporting (IQR) Program
  • PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program
  • Medicare and Medicaid Promoting Interoperability Programs
  • Hospital Value-Based Purchasing (VBP) Program

Hospital Value-Based Purchasing (VBP) Program

Due to the impact of COVID-19 on measure performance, CMS is suppressing several measures from the Hospital VBP Program for 2023.

MIPS Facility-Based Scoring Not Available for PY2022

CMS won’t calculate a total performance score under the Hospital VBP Program for any hospital for 2023. This renders it impossible to provide a 2022 Merit-Based Incentive Payment System (MIPS) score for quality and cost performance categories for hospital-based providers that have traditionally received the Hospital VBP Program score.

It’s important for facility-based clinicians and groups to understand their MIPS reporting requirements for 2022, particularly those that have historically relied upon the Hospital VBP Program score. Facility-based providers will need to collect and submit quality measure data to receive a score other than zero in the quality performance category.

Providers can learn more about the MIPS clinical quality measures and select the relevant measures using the Explore Measures and Activities tool. A reporting exception application is available until December 31, 2022, to providers without available and applicable measures, to request performance category reweighting. CMS advises citing COVID-19 as the triggering event, noting the decision to suppress measures in the Hospital VBP Program was in response to COVID-19’s effect on performance.

Economic Impact

The overall economic impact of this final rule is an estimated $950 million decrease in payments from the United States federal government during FY 2023.


Thanks to Moss Adams for this blog post.