Medicare Finalizes Higher 2.9% Inpatient Payment Rate For 2025

Dive Brief:

• The Biden administration has finalized a 2.9% payment hike for inpatient hospitals in Medicare next year, an increase over the 2.6% that regulators initially proposed.
• It’s on the higher end of historical rate increases, and should result in $2.9 billion in additional funds going to hospitals in 2025 compared to this year.
• Hospital lobbies still decried the rate as insufficient, while taking issue with other policies in the regulation finalized Thursday that would cut payments to hospitals serving more vulnerable and long-stay patients.

Dive Insight:

The nearly 3,000-page final rule finalizes a 3.4% increase to the market basket, a metric that accounts for changes in the prices of hospital goods and services, reduced by a 0.5% productivity adjustment.

Overall, next year for-profit operators will receive a rate bump of 3.3%, while nonprofit hospitals will get an average rate increase of 2.7%, according to the rule.

It’s the second straight year for-profit hospitals have received an above-average rate increase, according to TD Cowen analyst Ryan Langston, and should boost earnings for operators like HCA and UHS.

That’s because every 0.2% that’s added to the rate is worth roughly an additional 0.3% in earnings before interest, taxes, depreciation, and amortization, Langston said in a note Thursday.

Despite regulators increasing the final rates for 2025, hospital groups weren’t happy.

“CMS’ payment updates for hospitals will exacerbate the already unsustainable negative or break-even margins many hospitals are already operating under,” said Molly Smith, the American Hospital Association’s group VP for public policy, in a statement Thursday.

Hospitals have long argued that the CMS updates payment rates based on incomplete data that underestimates their costs of providing care. Health systems also point to high inflation that’s made it more expensive to take care of patients in lobbying for higher reimbursement from the government.

However, that argument flies in the face of earnings reports from major hospital operators — most of which have posted high profit margins in the past few years, due to generous federal aid during the COVID-19 pandemic and more recently from returning patient volumes, strong investment returns and contributions from outpatient facilities.

On Thursday, the CMS also finalized another provision unpopular with the industry that will lower payments to long-term care hospitals, which care for complex patients who need extended inpatient stays.

Regulators finalized a 3% standard payment update for those facilities next year. However, that’s expected to drop to 2%, or $45 million, because of a projected decrease in high-cost outlier payments from regulators raising the threshold for hospitals to qualify for the reimbursement.

The increase to the outlier threshold is “higher than historical norms,” the CMS wrote in a fact sheet on the final rule, but is needed to ensure that outlier payments are within the bounds determined by law.

“We are troubled that the final long-term care hospital outlier threshold is nearly 30% higher than it is currently,” wrote the AHA’s Smith. The increase “forces these hospitals to absorb hundreds of thousands of dollars in additional losses when caring for the sickest patients,” she added.

Hospital groups also slammed the CMS for lowering payments to disproportionate share hospitals, which care for a larger number of vulnerable patients. DSH payments are set to decline by $200 million next year compared to this year. The CMS originally proposed an increase of $560 million.

In addition, the final rule puts in place a new mandatory payment model bundling hospital payments for five different surgical episodes, including joint replacements and spinal fusion. The Transforming Episode Accountability Model, which will begin in January 2026 and run for five years, aims to improve care coordination between providers during and post-surgery.

However, hospital lobbies took issue with the model’s mandatory nature, arguing it could put financial pressure on lower-resourced facilities, while pointing to the CMS’ mixed track record when it comes to savings and outcomes of value-based payment models.

Policy leaders at the CMS have said they plan to enact more mandatory models amid research finding long-term participation is key to the models’ success.

The model “add[s] insult to injury” from the 2025 rates, Federation of American Hospitals CEO Chip Kahn said in a statement.

The final rule also ups the severity designation of diagnosis codes used to treat patients experiencing homelessness, which should result in higher payments to hospitals for their care. And, it requires 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.

The rule also increases technology payments to help improve access to gene therapy for sickle cell disease, and creates a separate payment to small independent hospitals for creating a buffer stock of essential medicines to try and mitigate drug shortages.

In addition, it finalized proposals that hospitals create a permanent data reporting structure for COVID-19 and other respiratory viruses like flu and RSV.