The Centers for Medicare & Medicaid Services (CMS) released its fiscal year (FY) 2025 Inpatient Prospective Payment System (IPPS) Final Rule, introducing a range of updates. Among the many changes, the focus on essential medicines for small, independent hospitals is sparking lively watercooler conversations.
Essential Medicines for Small, Independent Hospitals
For cost reporting periods beginning on or after October 1, 2024, CMS finalized a separate payment under the IPPS to help small, independent hospitals establish and maintain a buffer stock of essential medicines as a preventative measure against future shortages.
This payment is available to hospitals that voluntarily maintain a 6-month buffer stock of one or more essential medicines, covering Medicare’s share of these additional costs to be issued in a lump sum, or as biweekly payments to be reconciled at cost report settlement.
Hospitals may create buffer stocks directly or arrange them contractually with a pharmaceutical manufacturer, distributor, or intermediary. Eligible costs for this payment are limited to the buffer stock expenses for medicines on Advanced Regenerative Manufacturing Institute’s (ARMI) list of 86 essential medicines and do not include medicines listed as “currently in shortage” on the FDA Drug Shortages Database.
Medicare will not pay for a newly established buffer stock of an essential medicine if that medicine is currently in shortage unless a hospital had already established and was maintaining a 6-month buffer stock of that medicine prior to the shortage.
How does CMS define “small, independent hospital”?
- Small – No more than 100 beds; and
- Independent – A hospital that is not part of a chain organization. A chain organization is defined by CMS as a “group of two or more health care facilities which are owned, leased, or through any other device, controlled by one organization.”
If a hospital is controlled by one organization or answers “yes” to the question “are there any related organization or home office costs…” on their cost report (specifically, worksheet S-2, part I, line 140), they would be considered part of a chain organization and not meet the independent criterion.
But wait, my hospital is a CAH; does this adjustment apply to my hospital?
No; the proposed adjustment is not applicable for CAH since the costs for maintaining a buffer stock would be paid under the CAH payment methodology (or 101 percent of reasonable incurred costs).
What type of costs are included?
The costs for establishing and maintaining a buffer stock of essential medicines may include (not an all-inclusive list):
- Utilities costs – costs related to cold chain storage, heating, ventilation, and air conditioning.
- Storage costs – expenses related to storing the medicines safely and securely, such as warehouse fees, refrigeration costs (if required), and other facility-related costs.
- Equipment costs – if the hospital needs to purchase or maintain specific equipment (e.g., refrigeration units or specialized storage systems).
- Inventory management costs – costs associated with tracking and managing the buffer stock, including software, labor for inventory control, and any related administrative expenses (or managing stock rotation, expiration dates, and recalls).
- Staffing costs – expenses for staff time dedicated to managing, monitoring, and maintaining the buffer stock, including purchasing, organizing, and overseeing the inventory.
- Pharmaceutical services costs – if hospitals contract with a pharmaceutical manufacturer, distributor, or intermediary to manage the buffer stock, these contractual costs may also be included.
- Handling and distribution costs – costs related to the handling and distribution of medicines from the buffer stock when needed, such as the labor and logistics required to ensure that the medicines are accessible for patient use.
Remember: costs do not include the cost of the medicines themselves and must be related specifically to the establishment and maintenance of a 6-month buffer stock of eligible essential medicines on ARMI’s list, and do not include any costs associated with medicines that are currently in shortage.
Small, independent hospitals are especially vulnerable to supply chain disruptions due to their limited resources compared to larger hospitals or those within chain organizations. This policy aims to strengthen access to a more stable and resilient supply of essential medicines for patients in these hospitals.
Closing
If you have any questions regarding this new policy, contact us or reach out to a DZA reimbursement consultant today.
Tristi Cohelan
Principal
