The Centers for Medicare & Medicaid Services (CMS) has officially released the fiscal year (FY) 2025 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) final rule, effective August 1, 2024. This crucial update outlines the changes in Medicare payment policies for acute care hospitals and long-term care facilities, emphasizing quality improvement programs that pave the way towards enhanced patient care by FY 2030. This final rule ensures that Medicare’s payment systems keep pace with the evolving healthcare landscape, focusing on rewarding value and quality in acute care settings.
Understanding the IPPS and LTCH PPS Framework
At the heart of Medicare’s payment structure for acute care hospitals (under IPPS) and Long-Term Care Hospitals (under LTCH PPS) are prospective payment systems. These systems determine payment rates in advance for inpatient stays, factoring in a patient’s diagnosis, treatments, and the severity of their condition. Hospitals receive a predetermined payment per case, classified using:
- IPPS: Medicare Severity Diagnosis-Related Groups (MS-DRGs)
- LTCH PPS: Medicare Severity Long-Term Care Diagnosis-Related Groups (MS-LTC-DRGs)
CMS is mandated to annually revise IPPS hospital payment rates, considering fluctuations in the cost of goods and services hospitals utilize for Medicare patients, among other economic factors. This adjustment is guided by the hospital “market basket” index. The IPPS national base payment rate is then adjusted based on patient specifics and geographical labor costs. LTCH payment rates are similarly updated, using an LTCH-specific market basket. These annual updates are vital for maintaining the financial stability of hospitals while promoting efficient, high-quality care, aligning with the long-term goals of acute care hospital quality improvement program measures for FY 2030.
Key Changes in Hospital Payment Rates under IPPS
For FY 2025, acute care hospitals that actively participate in the Hospital Inpatient Quality Reporting (IQR) program and are certified Electronic Health Record (EHR) users will see a 2.9% increase in operating payment rates. This is calculated from a projected 3.4% hospital market basket increase, minus a 0.5 percentage point productivity adjustment. Hospitals not meeting IQR program standards or EHR meaningful use criteria will face reduced payment updates.
This image illustrates the concept of payment rate updates, relevant to the discussion of FY 2025 IPPS changes and their impact on hospital finances and quality improvement programs.
Overall, these IPPS changes, along with capital payment rate adjustments, are projected to increase hospital payments by $2.9 billion in FY 2025. Specifically, operating and capital IPPS payments are expected to rise by approximately $3.2 billion. However, Medicare uncompensated care payments to disproportionate share hospitals (DSH) are estimated to decrease by $0.2 billion. New medical technology add-on payments are projected to increase by $0.3 billion, driven by approvals for several new technologies. The expiration of additional payments for Medicare-Dependent Hospitals (MDHs) and low-volume hospitals on December 31, 2024, could lead to a $0.4 billion decrease if not extended by legislation, impacting the financial landscape for these institutions.
Adjustments to Payment Rates under LTCH PPS
The LTCH standard payment rate is set to increase by 3.0% for FY 2025. Payments under the LTCH PPS standard rate are anticipated to increase by about 2.0%, or $45 million. This is largely influenced by an expected 0.8% decrease in high-cost outlier payments as a percentage of total LTCH PPS payments. CMS is increasing the LTCH outlier threshold for FY 2025 to ensure outlier payments remain at approximately 8% of total payments, as mandated by statute. These financial adjustments are crucial for LTCHs to maintain operations and continue contributing to the broader healthcare ecosystem focused on quality improvement.
Wage Index Revisions Based on Updated Labor Market Areas
Medicare is legally required to adjust inpatient hospital payments to reflect area-specific labor cost differences using a wage index. CMS is finalizing the adoption of revised labor market areas for this wage index, based on the most recent delineations from the Office of Management and Budget (OMB) using 2020 Census data. This update ensures that wage adjustments accurately reflect current economic realities across different regions, impacting hospital reimbursements and potentially influencing resource allocation for quality improvement initiatives.
Extension of the Low-Wage Hospital Policy
Recognizing the financial challenges faced by low-wage index hospitals, often including rural facilities, CMS is extending the temporary low-wage hospital policy for at least three more years, starting in FY 2025. This continuation provides crucial financial stability to these hospitals, allowing them to maintain services and invest in quality enhancements. The policy’s effects will be evaluated after the COVID-19 public health emergency (PHE) period, with FY 2024 wage data (expected for FY 2028 rulemaking) being the first full fiscal year of wage data post-PHE. The ongoing litigation surrounding the FY 2020 low wage index hospital policy and its budget neutrality adjustment highlights the complexities and legal considerations in ensuring equitable hospital payments.
Separate IPPS Payment for Essential Medicines Access
Drug shortages pose a significant threat to patient care quality, leading to medication errors, treatment delays, and increased risks of infections and mortality. The Biden-Harris Administration is addressing this issue, and CMS is taking action by finalizing a separate IPPS payment for small, independent hospitals. This payment is designed to help these vulnerable hospitals establish and maintain buffer stocks of essential medicines, ensuring a more reliable supply for patients. This initiative directly supports acute care hospital quality improvement program measures by mitigating risks associated with drug shortages and ensuring consistent access to necessary medications.
This image represents the critical role of essential medicines in acute care hospitals, underscoring the importance of CMS’s initiative to ensure stable access and improve patient outcomes.
GME Residency Slot Distribution to Address Healthcare Workforce Needs
To bolster the physician workforce, particularly in mental health, CMS is implementing section 4122 of the CAA, 2023, distributing 200 additional Medicare-funded residency positions. At least half of these positions are dedicated to psychiatry or psychiatry subspecialties, aligning with the Biden-Harris Administration’s focus on mental health. Priority will be given to health professional shortage areas, aiming to strengthen healthcare access in rural and underserved communities. This investment in graduate medical education (GME) is vital for long-term healthcare capacity building and supports the goals of improved acute care services nationwide.
Recognizing Social Determinants of Health: Inadequate Housing
CMS is acknowledging the impact of social factors on health by finalizing a policy to reclassify the severity designation of ICD-10-CM diagnosis codes for inadequate housing and housing instability from non-complication or comorbidity (NonCC) to complication or comorbidity (CC). This change recognizes the increased resource utilization associated with patients facing housing challenges, building on previous policies addressing homelessness. This policy aligns with the Biden-Harris Administration’s broader efforts and the U.S. Interagency Council on Homelessness to recognize housing stability as a critical determinant of health, improving data accuracy and supporting health equity.
Advancements in New Technology Add-on Payments (NTAP)
To promote access to innovative treatments, especially gene therapies for sickle cell disease (SCD), CMS is increasing the NTAP percentage from 65% to 75% for eligible gene therapies used for SCD treatment, starting in FY 2025. This enhanced financial incentive aims to accelerate the adoption of these potentially life-saving therapies. Additionally, CMS is adjusting the newness period determination for NTAP to start on October 1st instead of April 1st, effective FY 2026. FDA marketing authorization holds will no longer be considered inactive status for NTAP eligibility, starting FY 2026 applications, further streamlining the process for innovative technologies to reach patients.
Enhancements to the Hospital Inpatient Quality Reporting (IQR) Program
The FY 2025 IPPS/LTCH PPS final rule introduces significant updates to the Hospital IQR Program, reflecting a commitment to acute care hospital quality improvement program measures. Seven new quality measures are adopted, five are removed, and two are modified. These changes are designed to refine and enhance the program’s effectiveness in measuring and promoting high-quality hospital care.
New Quality Measures Adopted:
- Hospital Harm – Falls with Injury & Postoperative Respiratory Failure eCQMs: Focus on reducing preventable harm, starting CY 2026 reporting/FY 2028 payment.
- Thirty-day Risk-Standardized Death Rate among Surgical Inpatients with Complications: Measures surgical outcome quality, starting July 2023 reporting/FY 2027 payment.
- Patient Safety & Age-Friendly Structural Measures: Assess hospital infrastructure and patient-centered care, starting CY 2025 reporting/FY 2027 payment.
- Catheter-Associated Urinary Tract Infection & Central Line-Associated Bloodstream Infection SIRs (Oncology Stratified): Targets infection prevention in oncology settings, starting CY 2026 reporting/FY 2028 payment.
Modified Quality Measures:
- Global Malnutrition Composite Score eCQM: Expanded to include patients aged 18-64, starting CY 2026 reporting/FY 2028 payment.
- HCAHPS Survey: Refinements include new survey sub-measures, starting CY 2025 reporting/FY 2027 payment.
Removed Quality Measures:
- Four Payment Measures (AMI, HF, PN, THA/TKA): Episode-based payment measures removed starting FY 2026 payment determination.
- CMS PSI-04 Death Among Surgical Inpatients with Serious Treatable Complications: Replaced by a broader surgical death rate measure, removed FY 2027 payment determination.
The program is also increasing the mandatory electronic clinical quality measures (eCQMs) reporting requirements over three years, moving from six to eleven eCQMs by CY 2028 reporting/FY 2030 payment determination. Scoring for eCQM data validation will begin with CY 2025 discharges, impacting FY 2028 payments. These enhancements aim to provide a more robust and comprehensive assessment of hospital quality, driving continuous improvement towards FY 2030 goals.
Focus on Patient Safety and Post-Discharge Outcomes
CMS is actively seeking feedback on improving care coordination to enhance post-discharge patient outcomes. This includes exploring measures beyond readmissions, such as unplanned emergency department visits and observation services within 30 days of discharge. This focus on the continuum of care reflects a broader understanding of patient needs and aims to drive improvements across the entire patient journey, aligning with the goals of acute care hospital quality improvement program measures for FY 2030.
Medicare Promoting Interoperability Program Updates
The Medicare Promoting Interoperability Program continues to evolve, with FY 2025 rule updates including separating the Antimicrobial Use and Resistance (AUR) Surveillance measure into two distinct measures: Antimicrobial Use (AU) Surveillance and Antimicrobial Resistance (AR) Surveillance. Two new eCQMs, Hospital Harm – Falls with Injury and Postoperative Respiratory Failure, are added for eligible hospitals and CAHs to select. The Global Malnutrition Composite Score eCQM is also modified. Mandatory eCQM reporting requirements will progressively increase, mirroring the Hospital IQR Program changes. The performance-based scoring threshold is also increasing, emphasizing the program’s commitment to advancing EHR meaningful use and interoperability.
PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program Enhancements
The PCHQR Program for cancer hospitals is also being updated with the adoption of the Patient Safety Structural measure and sub-measure updates to the HCAHPS Survey measure. Public display of hospital performance on the Hospital Commitment to Health Equity measure is being expedited to January 2026, highlighting the importance of health equity in specialized cancer care settings.
Hospital Readmissions and Hospital-Acquired Condition Reduction Programs
While no new changes are introduced for the Hospital Readmissions Reduction Program and the Hospital-Acquired Condition (HAC) Reduction Program in FY 2025, previously finalized policies remain in effect. These programs continue to play a crucial role in incentivizing hospitals to reduce readmissions and HACs, contributing to overall quality improvement efforts.
Hospital Value-Based Purchasing (VBP) Program Modifications
Modifications to the Hospital VBP Program include adjustments to scoring on the HCAHPS Survey measure for FY 2027-2029, focusing on unchanged dimensions during survey updates. Sub-measure updates to the HCAHPS Survey will be adopted in FY 2030, with scoring adjustments to account for these changes. These refinements ensure the VBP program remains relevant and effective in promoting value-based care.
Long-Term Care Hospital Quality Reporting Program (LTCH QRP) Updates
The LTCH QRP is enhancing its data collection to better address social determinants of health. Four new SDOH assessment items (Living Situation, Food, Utility) will be added to the LTCH CARE Data Set (LCDS) starting October 1, 2026. The Transportation SDOH assessment item is being modified to improve data collection. The LCDS admission assessment window is being extended to four days, easing data collection burden. CMS is also exploring the development of an LTCH QRP Star Rating System to enhance public transparency and support consumer choice.
Respiratory Infection Data Reporting for Hospitals and CAHs
To improve preparedness for respiratory infections, CMS is renewing and revising data reporting requirements for hospitals and CAHs. Electronic reporting of data on COVID-19, influenza, and RSV will be mandatory starting November 1, ensuring continuous monitoring of respiratory illnesses. In PHE situations, additional data reporting may be required, enhancing public health surveillance and response capabilities.
Conclusion: A Path Towards Enhanced Acute Care Quality by FY 2030
The FY 2025 IPPS and LTCH PPS final rule represents a significant step forward in refining Medicare payment systems and quality reporting programs. These updates are not just about adjusting payment rates; they are about strategically aligning financial incentives with quality improvement goals. By focusing on measures that enhance patient safety, promote interoperability, address social determinants of health, and reward value, CMS is laying a foundation for achieving substantial enhancements in acute care hospital quality improvement program measures by FY 2030. These changes are designed to support hospitals in their ongoing efforts to deliver higher quality, more efficient, and more equitable care to Medicare beneficiaries, ultimately leading to a more robust and patient-centered healthcare system.
