On Oct. 1, 2024–the first day of the new federal fiscal year–hospitals throughout the country expected to see Medicare rate increases as detailed in the FY 2025 Inpatient Prospective Payment System Final Rule. The amount of the increase varied from hospital to hospital, based on several adjustments the Centers for Medicare & Medicaid Services (CMS) makes to reflect specific market conditions.
Thanks to an interim final rule released by CMS on Sept. 30, however, hospitals saw rate increases on Oct. 1 different than anticipated. Within the interim final rule, CMS explains its decision to discontinue the low wage index hospital policy for FY 2025 in response to the U.S. Court of Appeals for the District of Columbia’s July 2024 decision in Bridgeport Hospital v. Becerra.
In 2020, CMS adopted the low wage index hospital policy increasing the wage index value for those hospitals with a wage index value below the 25th percentile by half the difference between (1) the hospital’s final wage index value and (2) the 25th percentile wage index value across all hospitals. CMS applied the policy in a budget-neutral manner, meaning it funded this increase by decreasing reimbursement for all other hospitals.
Some of the hospitals negatively impacted by the low wage index hospital policy sued CMS, claiming the agency did not have the authority under the statute to implement this policy. The court agreed, finding CMS “lacks the power to inflate reimbursement rates beyond the congressionally prescribed wage-index values for an entire quartile of hospitals. The wage-index provision does not authorize it.” The court concluded that “[b]ecause [CMS] cannot manipulate wage-index rates up and down in a way that picks winners and losers by sweeping aside the congressionally required formula, [CMS] wage-index redistribution policy is unlawful. And because the unlawful policy is not curable on remand, [CMS’] action must be vacated.”
While not addressing the impact of the low wage index hospital policy prior to FY 2025, CMS has now recalculated hospital payment rates for the current fiscal year by removing the upward adjustment for hospitals in the bottom quartile and by removing the low wage index budget neutrality factor from the FY 2025 standardized amounts for both operating and capital payments. Those hospitals that had benefitted from the policy will now see lower reimbursement than anticipated in FY 2025 while all other hospitals will benefit from the discontinuation of the budget neutrality factor.
A total of 768 hospitals (those with wage indexes in the bottom quartile) will receive lower reimbursement in FY 2025 than anticipated. For those hospitals most significantly impacted, i.e., those whose wage index will decrease by more than 5% from its FY 2024 wage index, CMS will apply its transitional payment exception to limit the FY 2025 reduction to 5%. CMS estimates 113 hospitals (85 urban and 28 rural) will benefit from the transitional exception policy at a cost of approximately $41 million (an amount low enough to avoid any budget neutrality adjustment).
The end result of eliminating the budget neutrality factor tied to the low wage index hospital policy is an $18 increase in the FY 2025 base rate. For hospitals that formerly benefited from the policy, however, the higher base rate now will be multiplied by a lower wage index, resulting in lower reimbursement.
CMS included in the interim final rule a table detailing the impact of the policy change on various categories of hospitals. Urban hospitals, as a whole, will see a 0.1% increase in payments (anticipated vs. actual payments for FY 2025) while rural hospital payments will be 0.5% less. Reimbursement for 142 urban IPPS hospitals in the East South Central region (Tennessee, Alabama, Mississippi, and Kentucky) will be 1.7% lower on average, while average reimbursement for the 132 rural IPPS hospitals in the same region will be 2.6% lower. By contrast, IPPS hospitals in regions with historically higher wages will see slightly higher average reimbursement, ranging from 0.1 to 0.4%.
This isn’t the end of the story for the low wage index hospital policy. The court vacated the policy, meaning it expects CMS to undo its impact in prior fiscal years. That means hospitals that benefitted from the policy may be subject to recoupment while hospitals negatively impacted by the budget neutrality adjustments may see additional payments. CMS crafted such a remedy in the face of the Supreme Court’s decision regarding payments to hospitals for 340B drugs. In that case, 340B hospitals received significant lump sum payments with all hospitals facing reduced reimbursement for outpatient services for more than a decade to cover related payment adjustments.
CMS’ latest action reminds us once again of the inequity inherent in the wage index adjustment: Hospitals with low wage indexes receive less in reimbursement, leaving them with less to pay in wages. Based on the court’s decision in Bridgeport Hospital, it’s now up to Congress–not CMS—to address this issue. Until then, hospitals in communities with lower wages–often poorer communities with higher social risk factors–will be expected to do more with less.
If your organization needs assistance with wage index reviews or other reimbursement matters, contact PYA by calling 800-270-9629.
