CMS Proposes 2.6% Payment Increase For Inpatient Hospitals Next Year

Dive Brief:

• The Biden administration plans to hike Medicare payment for inpatient care at hospitals by 2.6% next year, according to a rule proposed Wednesday.
• It’s the lowest proposed rate since 2019, and below both the 2.8% increase the CMS proposed for 2024 and the 3.1% increase regulators eventually finalized, according to TD Cowen analyst Gary Taylor. However, it should still increase hospital payments by $3.2 billion, the CMS said.
• Hospital groups decried the rate increase as insufficient to cover the increasing costs of delivering care, and took issue with policies that could lower payments for long-term care facilities.

Dive Insight:

The proposed payment rate reflects a 3% increase to the market basket, an index meant to quantify changes in the prices of hospital goods and services, reduced by a 0.4% productivity adjustment.

Still, rates could increase in the final rule, which comes in August. Historically, regulators raise rates after stakeholders lodge their complaints about the proposal during the public comment period. Industry groups are already lobbying for the CMS to hike payments, arguing that the proposal isn’t enough to help hospitals operate amid persistent inflation and labor costs.

The 2.6% update is “woefully inadequate, especially following years of high inflation and rising costs for labor, drugs, and equipment,” said Ashley Thompson, senior vice president of public policy analysis and development at the American Hospital Association, in a statement.

It’s a perennial argument that hospitals use when vying for higher reimbursement from the government, and one that holds true for a number of small, rural hospitals. However, major hospital operators have notched high profit margins in recent years — even during the pandemic, thanks to generous federal aid — and more recently from returning patient volume and strong investment returns.

“Although the increase is lower compared to recent (higher cost) years, we would note that the intial [2025] rate still sits towards the higher end of historical rate increases,” which generally range from 1% to 3%, wrote J.P. Morgan analyst Calvin Sternick in a Wednesday note.

Over the past few years, pricing growth for hospitals has lagged behind elevated levels of wage inflation, as hospitals jockeyed for employees in a tight labor market. Yet industry-wide hospital wages have fallen over the past year, according to Jefferies analyst Brian Tanquilut.

As such, the rule “lays a solid foundation for hospitals to maintain margins given wage inflation is tracking in a similar range,” Tanquilut wrote in a note Thursday morning.

Overall, for-profit facilities are expected to receive a 2.6% payment update in 2025 if the rule is finalized as proposed. Nonprofit hospitals will receive a 2.3% bump.

Hospital groups were also up in arms about payment changes for long-term care hospitals, which care for complex patients who need extended stays.

The CMS proposed a 2.8% increase to the standard federal payment rate for such facilities. However, payments to long-term care hospitals are expected to increase 1.6%, or $41 million, after adjusting for a projected decrease in high-cost outlier payments next year.

Regulators proposed increasing the long-term care hospital outlier threshold by “an extraordinary amount,” AHA’s Thompson said. The outlier threshold is how much the costs of treating a patient must exceed payments for a hospital to qualify for additional reimbursement.

The changes would result in an additional $31,048 loss per patient for the facilities, exacerbating operational concerns for the hospitals and putting more pressure on short-term acute care facilities and their intensive care units, Thompson said.

Payments to disproportionate share hospitals, which serve high numbers of low-income payments, would increase $560 million under the proposed rule.

That’s compared to a drop of $957 million for 2024, after regulators forecast that the uninsured rate would drop due to pandemic-era coverage gains, despite Medicaid redeterminations throwing millions of Americans off coverage.

The CMS also proposed hospitals create a permanent data reporting structure for COVID-19 and other respiratory viruses like flu and RSV, after the lack of a standardized process hamstrung public health agencies’ ability to get a handle on COVID-19 in the pandemic’s early days.

The rule would also require long-term care facilities to report social determinants of health data, including housing and food stability, to account for the resources required to care for homeless individuals. It would also increase technology payments to help improve access to gene therapy for sickle cell disease, and create a separate payment to small independent hospitals for creating a buffer stock of essential medicines.