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The FY 2025 IPPS Proposed Rule

The Centers for Medicare & Medicaid Services (CMS) has issued its fiscal year (FY) 2025 Inpatient Prospective Payment System (IPPS) Proposed Rule. The FY 2025 IPPS Proposed Rule includes many proposed updates: the most pertinent include risks to rural urban status, low-wage hospital policy updates, adjustments to essential medicine-buffer stock for small hospitals, and updates to the Graduate Medicare Education program.

Updated Labor Market Areas for ALL Hospitals

Critical access hospitals (CAHs), Medicare dependent hospitals (MDHs), and sole-community hospitals (SCHs) must be located in a rural area. Due to CMS proposals to current labor market areas, a few of these types of hospital are in jeopardy of losing their rural status. CMS defines hospital labor market areas based on delineations of statistical areas established by the Office of Management and Budget (OMB) and is proposing to change certain areas from urban to rural or rural to urban.

Certain CAHs previously situated in rural areas may now find themselves located in urban areas. If its status is changed, a CAH has a transitional period of two years (following the effective date of its redesignation) to maintain the CAH status. In other words, CAHs would have until September 30, 2026, to request a reclass back to rural.

Special statuses limited to hospitals located in a rural area (such as MDH or SCH) may be terminated if relocated in an urban area. Affected hospitals should apply for rural reclassification status prior to October 1, 2024, to ensure no disruption in status.

In addition, for some PPS hospitals, these changes carry the risk of a reduction in their wage index payments. To combat these reductions, CMS proposes to continue the 5 percent cap on any decrease in the hospital’s wage index compared to its wage index for FY 2024. Thus, a hospital’s FY 2025 wage index is the greater of its FY 2025 wage index, or 95 percent of its FY 2024 wage index. For example, if a hospital’s wage index in FY 2024 was 1.000 and decreased to .9000 in FY 2025, the 5 percent cap would limit its FY 2025 wage index to .9500.

This policy is budget neutral, which means the cost of the cap is a decrease to the market basket index of .997162 (or around a $13 decrease to the FY 2025 base rate).

DZA will reach out individually to hospitals affected by these revised delineations.

Continuation of the Low-Wage Hospital Policy

Beginning in FY 2020, CMS implemented the low-wage hospital policy, aimed to boost the wage index values for PPS hospitals, mostly rural, with lower wage index values. This policy was intended to be effective for a least four years and to provide low wage index hospitals with an opportunity to increase employee compensation without the usual lag in those increases. Following COVID-19 and the subsequent public health emergency (PHE), CMS proposes continuation for at least three more years beginning FY 2025 (as FY 2024 was the first full year post the COVID-19 PHE).

Under the continuation of this policy, PPS hospitals that fall below the 25th percentile wage index value (or have a wage index less than .8879 in FY2 025) will see their wage index increase by half of the difference between its final wage for that year and the 25th percentile wage index value across all hospitals for that year.

What kind of magic math is this? For example, if a hospital’s wage index is .6879 in FY 2025, the adjusted wage index will be .7879 (or .6879 +( [.8879 less .6879] divided by 2)). This example assumes its 2025 wage index did NOT decrease more than 5 percent of its 2024 wage index.

This policy is also budget neutral, meaning the cost of increasing those at the bottom quartile is a decrease to the market basket index of .997498 (or about an $11 decrease to the FY 2025 base rate).

Essential Medicines for Small, Independent Hospitals

CMS is proposing an adjustment to small, independent hospitals based on the “reasonable costs” incurred for establishing and maintaining access to buffer stock of 86 essential medicines during its cost report year. A small, independent hospital is defined as one with 100 beds or fewer that operates independently, not as part of a chain organization.

Am I an independent hospital?

Pull out your cost report, go to worksheet S-2, part I, line 140: If it says N for No and lines 141 thru 143 are blank, move to the next question.

Am I a small hospital?

Now flip to worksheet E, part A, line 4. Are the bed days available 100 or less? If yes, this adjustment applies to you.

But wait, I am a CAH, does this adjustment apply to me?

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).

The add-on is not for the cost of the medicines themselves but for the added cost of creating a buffer stock. Examples of these additional costs include: utilities like cold chain storage and heating, ventilation, and air conditioning; warehouse space; refrigeration; management of stock including stock rotation, managing expiration dates, and managing recalls; administrative costs related to contracting and record-keeping; and dedicated staff for maintaining the buffer stock.

Since these types of hospitals may face challenges in directly maintaining buffer stocks due to space, equipment, and staffing limitations, the proposal also suggests the contractual arrangements with pharmaceutical manufacturers, intermediaries, or distributors to maintain the buffer stock would be eligible for payment.

CMS recognizes concerns hospitals may hoard essential medicines and thus disrupt the supply chain. Their solution is limiting the adjustment to small, independent hospitals and stating that there would be no separate payments for establishing a buffer stock for drugs listed as “currently in shortage” on the FDA Drug Shortages Database.

This separate payment is not budget neutral and is slated to commence in FY 2025. Hospitals could potentially receive the payment as either a lump sum or in bi-weekly installments, with reconciliation occurring at the time of cost report settlement.

Graduate Medicare Education

New Programs

To qualify as a “new” program eligible for the creation of new cap slots, a hospital that was previously non-teaching must meet three primary criteria: all (1) residents, (2) program directors, and (3) teaching staff are new. CMS proposes that for a program to be “new,” at least 90 percent of individual resident trainees (not FTEs) must lack previous training in the same specialty as the new program. If over 10 percent of trainees (not FTEs) transferred from another program, even in their first year, the program would be ineligible for new cap slots.

Proposed Distribution of Slots Under Section 4122 of the Consolidated Appropriations Act of 2024 (CAA), 2023

Congress authorized an additional 200 Medicare-funded residency positions. Each qualifying hospital that submits a timely application is to receive at least one residency position (or a fraction of one) before any hospital receives more than one. The increase in positions becomes effective on July 1, 2026, with the application deadline set for March 31, 2025. Use the Medicare Electronic Application Request Information System (MEARIS) to apply online.


If you have any questions regarding the FY 2025 IPPS Proposed Rule, contact us or reach out to a DZA reimbursement consultant today.

Tristi Cohelan

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