Medicare Payment Primers: The Inpatient Psychiatric Facility Prospective Payment System
Published March 22, 2023

Medicare Payment Primers: The Inpatient Psychiatric Facility Prospective Payment System

This Insight is part of our Medicare Payment Primers Series.

Inpatient psychiatric facilities (IPF), whether freestanding hospitals or distinct part units of an inpatient facility, treat Medicare beneficiaries with acute mental illness or alcohol- and drug-related problems.

IPFs enrolled in Medicare are those to which all the following apply:

  • Are primarily engaged in providing, by or under the supervision of a Doctor of Medicine or Osteopathy, psychiatric services for the diagnosis and treatment of mentally ill persons.
  • Satisfy the requirements of §§1861(e)(3) through (e)(9) of the Social Security Act (general hospital requirements).
  • Maintain clinical and other records on all patients as the Secretary of Health and Human Services finds necessary to determine the degree and intensity of the treatment provided to individuals entitled to hospital insurance benefits under Part A.
  • Meet such staffing requirements as the Secretary finds necessary for the institution to carry out an active program of treatment for individuals receiving services in the institution.

Medicare will pay for a total of 190 days of inpatient psychiatric hospital services during a patient’s lifetime. The 190-day lifetime limit applies to psychiatric services in freestanding hospitals, but not to those provided in a distinct part unit of an inpatient acute care hospital or critical access hospital.


Base Rate

Payments under the IPF Prospective Payment System (PPS) encompass inpatient costs of furnishing covered mental health services. Costs covered by the base rate include routine operating, ancillary, and capital costs. The base rate does not include pass-through costs, such as bad debts and graduate medical education. Payment for IPFs is on a per-diem basis, adjusted to reflect certain patient and facility characteristics that were determined to account for statistically significant cost differences. The per-diem rate is adjusted annually using an IPF-specific market basket index that reflects increases in the cost of goods and services IPFs buy to produce patient care. The IPF payment system is the only payment system where the payment is made on a per-diem basis for services provided within the episode of care.

Facility-Specific Adjustments

Differences in Area Wages: The IPF PPS uses the same area wage index established for a market under the inpatient PPS, without regard to geographic reclassification or the rural floor (See Part II: IPPS). Medicare Geographic Classification Review Board (MGCRB) decisions only apply to payments made under the IPPS. The IPF base rate is separated into labor-related and non-labor-related portions. Only the labor-related portion is adjusted by the wage index. Approximately three-fourths of the per-diem payment amount is wage index adjusted. Under other PPSs, the wage index adjustment is closer to two-thirds.

Indirect Medical Education (IME):  Psychiatric hospitals/units with a residency program receive add-on payments to reflect the additional indirect costs associated with operating an approved graduate medical education program.

The add-on payment to the case-mix-adjusted episodic payment is calculated based on the number of interns and residents in the program in relation to the average daily census (ADC) and is shown as:

Medicare Payment Primers: The Inpatient Psychiatric Facility Prospective Payment System

The ADC in this calculation only includes the days in the psychiatric distinct part unit of an acute care hospital, or in the case of a freestanding psychiatric facility, the days included in the certified component of the facility. There is no separate payment for approved residents under the direct medical education payment formula. Rather, any residents completing training in the psychiatric unit are included in the total count of allowable residents, and the Medicare payment is calculated with the IPF days included in both the numerator and denominator of the Medicare load factor (Medicare days/total days).

Rural Providers: Rural IPFs receive a 17% increase in their base rate over those in urban areas based on analyses that show psychiatric hospitals/units located in rural areas have 1) fewer cases, 2) longer lengths of stay (LOS), and 3) higher average costs.

Quality Reporting Program (QRP): The IPF QRP requires IPFs to submit quality data on selected measures for all patients, regardless of payer. Providers failing to provide this information receive a two-percentage-point reduction to the market basket update for all claims filed during the fiscal year. This may result in an annual update of less than zero for a given fiscal year.

The selected measures are available here.

Patient/Case-Specific Adjustments

Case-Mix Groups: Patients are grouped into one of 17 psychiatric Medicare severity diagnosis-related groups (MS-DRGs). Each MS-DRG is assigned a weight that reflects the average cost of the services within that group compared to the average Medicare case cost for the most frequently reported psychiatric diagnosis (psychosis).

Age: Under the IPF PPS system, the payment rate increases based on patient age beyond 45.

Additional Diagnoses: Additional payment is made for those cases with identified comorbidities, such as cardiac conditions or diabetes, requiring treatment during the stay.

Length of Stay: Under IPF PPS, per-diem rates are reduced as patient length of stay increases.

Emergency Department (ED) adjustment: Those IPFs with an ED receive a 31% increase in the per diem for the first day of a patient’s stay, regardless of whether the patient was admitted through the ED.

Electroconvulsive Therapy (ECT): Additional payments are made under the IPF PPS for each ECT service provided to a patient.

Outliers: In addition to the base IPF PPS payment, IPFs can receive an outlier payment for high-cost patients. The estimated cost of the case must exceed the sum of the IPF’s payment for the case, plus a fixed loss threshold (adjusted annually). If a case is determined to be an outlier, the claim is paid an amount in addition to the IPF rate of 80% of the estimated cost of the case and the outlier threshold for days 1 through 9 of the stay, and 60% for the remaining days.

Case costs are determined using a cost-to-charge ratio—the claim-specific charges multiplied by the facility’s overall cost-to-charge ratio from the most recent cost report (filed or settled). The outlier pool is required by legislation to equal an estimated 2% of the total expected IPF spending for the year.

Interrupted stays: IPFs receive a single payment amount for those cases in which a patient is discharged from the facility and returns to the same IPF within three consecutive calendar days.


CMS Inpatient Psychiatric Facility PPS

This Insight is part of our Medicare Payment Primers Series. If you have questions about any matter related to reimbursement, strategy and transactions, compliance, or valuation, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.

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