CMS Issues IPPS and LTCH Proposed Rule for FY 2023


CMS issued its annual Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital (LTCH) Prospective Payment System Proposed Rule for FY 2023 (the Proposed Rule). In the Proposed Rule, CMS proposes to update the IPPS and LTCH payment rates, modify the payment rules for direct graduate medical education (DGME) to comply with a recent federal court decision, impose a permanent 5% cap on year-to-year wage index losses, and adopt a new supplemental payment for tribal hospitals and hospitals located in Puerto Rico. This article provides an overview of the key proposals in the Proposed Rule. Comments to the Proposed Rule must be submitted by June 17, 2022.


CMS proposes to increase the operating payment rates for acute care hospitals by 3.2 percent, which reflects a market basket update of 3.1 percent, minus a 0.4 percentage point productive adjustment plus a 0.5 percentage point adjustment required by the statute. The agency estimates that the updated rate will increase Medicare payments to hospitals by $1.6 billion in FY 2023.

CMS estimates that payments to LTCH hospitals will increase by approximately 0.7 percent in FY 2023, due to a 2.7 percent market basket update and a projected decrease in high-cost outlier payments. In all, CMS expects LTCH PPS payments to increase by approximately $25 million in FY 2023 over FY 2022.


CMS proposes a 10-percent cap on decreases in an MS-DRG’s relative weight from one fiscal year to the next with the goal of providing hospitals greater predictability in their Medicare payments. In previous years, CMS received comments asking for a transition period or a cap in relative weight reductions to ease cases of significant payment rate fluctuation. CMS responded in several previous years by adopting a temporary one-time 20-percent cap. Now, CMS seeks to make permanent a 10-percent cap on how much the relative weight for an MS-DRG can decline between years. CMS hopes this may increase predictability and stability for hospitals’ year-to-year Medicare payments and give hospitals more time to adjust to significant changes to relative weights.

CMS considered and rejected a 20-percent cap (which was the temporary cap for certain previous years), considering that still too volatile. CMS also considered and rejected a 5-percent cap because it would result in a larger associated budget neutrality adjustment to the standardized amount. In the end, CMS determined that a 10-percent permanent cap accomplished the balance of mitigating financial impacts from significant fluctuations in the MS-DRG relative weights and not causing a larger budget neutrality adjustment required by a smaller cap. Accordingly, with a 10-percent cap, if an MS-DRG had a relative weight of 1.100 for FY 2022 and then it decreased to 0.9350 in FY 2023 (a 15-percent decline) then the relative weight for that MS-DRG under this proposed rule would be 0.9900. This policy would start with FY 2023, based on FY 2021 claims data, and would limit relative weight decreases for 27 MS-DRGs. It would apply only to existing MS-DRGs that have a current MS-DRG number and would not apply to new MS-DRGs or modified MS-DRGs that will have to be renumbered.


CMS is proposing to adopt a permanent 5 percent cap on decreases to a hospital’s wage index from its wage index in the preceding fiscal year, regardless of the reason for the decline. Under this proposal, a hospital’s wage index in any given year could not be less than 95 percent of its final wage index from the prior year (i.e., the wage index that the hospital had as of the last day of the previous fiscal year). CMS reasons that this policy would increase the predictability of IPPS payments for hospitals and mitigate the instability and significant negative impacts to hospitals resulting from changes to the wage index.

CMS adopted similar temporary caps in FYs 2020 and 2021. However, unlike those temporary policies, this one would be permanent. Furthermore, under the caps adopted in FYs 2020 and 2021, the cap was based on the wage index from the beginning of the preceding fiscal year, without regard to any changes that might have occurred during the year (for example, rural reclassification). Under CMS’s proposal this year, if a hospital reclassifies as rural during the year, its 5 percent cap in the following year will be based on the rural wage index from the preceding year.

CMS is also proposing to continue its policy of excluding the wage data of reclassified rural hospitals from the calculation of the state rural floor. CMS first adopted this policy in FY 2020 to prevent what it referred to as “inappropriate payment increases under the rural floor due to reclassifications.” King & Spalding represented thirty-two hospitals in appeals challenging that policy in federal court. Earlier this month, the D.C. District Court issued a decision invalidating the policy. Citrus HMA, LLC d/b/a Seven Rivers Regional Medical Center v. Becerra, No. 1:20-cv-00707 (D.D.C.). CMS acknowledged the Citrus decision in the Proposed Rule and noted that the decision is still subject to potential appeal.

CMS is also proposing to continue the low wage index hospital policy that it first adopted in FY 2020. Under this policy, CMS makes upward adjustments to the wage indices of hospitals with a wage index value below the 25th percentile. The adjustment for each eligible hospital is equal to half of the difference between the otherwise applicable final wage index value for the hospital and the 25th percentile wage index value for all hospitals that same year. For FY 2023, CMS is proposing that the 25th percentile wage index will be 0.8401. As in past years, CMS is proposing to fund these adjustments by making a budget neutrality adjustment to the standardized amount.

CMS acknowledged that a recent decision of the D.C. District Court, issued in March of 2022, invalidated CMS’s low wage index hospital as it was imposed in FY 2020. Bridgeport Hospital v. Becerra, No. 1:20-cv-01574 (D.D.C.). The agency noted that the decision is not final at this time and subject to potential appeal. Nonetheless, CMS hinted that it may decide not to finalize its proposal to continue the low wage index hospital policy in the final rule “depending on public comments or developments in the court proceedings.”


CMS is proposing several changes and updates to graduate medical education payments in FY 2023. First, the agency is proposing to modify its formula for calculating DGME payments in accordance with the D.C. District Court’s decision in Milton S. Hershey Medical Center v. Becerra, 2021 WL 1966572 (D.D.C. 2021). In that case, the court found that CMS’s current DGME payment formula is contrary to the statute because it applies a weighting factor to fellows that is lower than the factor prescribed by the statute. King & Spalding represented thirty-two of the hospitals in that case.

In the Proposed Rule, CMS proposes to remedy the flaw in its DGME payment formula by allowing hospitals to claim the lesser of their weighted FTE count or their unweighted FTE cap in a given cost reporting period. CMS also proposes to modify the FTE counts from the prior and penultimate years in the same way. The agency projects that this change will increase DGME payments to hospitals by approximately $170 million in FY 2023. This proposal would apply retroactively to cost reporting periods beginning on or after October 1, 2001. However, the agency specified that no cost reports would be reopened to apply the updated policy.

CMS is also proposing to update the statistics that are used to calculate managed care DGME payments for calendar years 2020 and 2021. The Medicare statute requires CMS to reduce managed care DGME payments to hospitals to finance the payment of managed care nursing and allied health payments. CMS is proposing to reduce managed care DGME payments by 3.71 and 3.22 percent in calendar years 2020 and 2021, respectively.


Medicare has historically paid providers for Medicare’s share of the costs that providers incur in connection with approved nursing and allied health (NAH) educational activities. The costs of these programs are excluded from the definition of inpatient hospital operating costs. Instead, they are identified as “passed through” and paid on a reasonable cost basis.

Hospitals that operate approved nursing or allied health education programs and receive Medicare reasonable cost reimbursement for these programs also receive additional payments from Medicare Advantage organizations.

In a 2000 rulemaking, CMS stated that updates to the MA add-on payments for NAH will be made through annual IPPS rulemakings. Instead, however, CMS has updated those rates through informal Change Request transmittals that exist outside of the annual rulemaking process. CMS last updated these rates for CY 2019.

In the Proposed Rule, CMS acknowledged that it was “reminded” of its requirement to publish the MA add-on payment rates. CMS is now proposing to issue the rates for CYs 2020 and 2021 based on its belief that it now has sufficient HCRIS data to develop the rates for these years. According to CMS, these rate updates are “most needed to ensure accurate and timely cost report settlements of cost reports with portions overlapping with CYs 2020 and 2021.” CMS also expects to propose to issue the rates for CY 2022 in the FY 2024 IPPS proposed rule, and the rates for CY 2023 in the FY 2025 IPPS proposed rule, and so forth. CMS is not proposing any substantive change to its NAH MA add-on payment regulation at 42 C.F.R. § 413.87.


In the Proposed Rule, CMS proposes to modify (on a prospective basis only) the regulatory formula for the Medicaid fraction of the Medicare DSH payment. Until recently, CMS interpreted its regulatory formula to mean that hospitals could not include the patient days of individuals for whom a hospital receives reimbursement from an uncompensated care pool established under a Section 1115 waiver. Two federal court decisions, including the D.C. Circuit’s decision in Bethesda Health, rejected that interpretation, holding that both the statute and the regulation require CMS to include section 1115 days in the Medicaid fraction. King & Spalding represented the plaintiff hospitals in Bethesda Health.

In response to those decisions, CMS is proposing to modify its regulatory formula to specify that section 1115 patient days cannot be included in the Medicaid fraction unless the patient receives health insurance through the section 1115 demonstration or purchases such insurance with the use of premium assistance (equal to at least 90 percent of the cost of health insurance) provided by a section 1115 demonstration. This revision, according to the agency, would foreclose hospitals from claiming patient days of patients whose care was covered in part by a section 1115 uncompensated care pool.


Under the Affordable Care Act, since FY 2014, hospitals have received 25 percent (as estimated by CMS) of the DSH payment they would have received under the payment methodology that existed prior to FY 2014. The remaining 75 percent (Factor 1) is reduced by the change in national uninsured rates (Factor 2) and divided among eligible hospitals based on their proportionate share of UCC (Factor 3). For each hospital, the product of these three factors represents its additional payment for UCC for the applicable fiscal year.

To calculate Factor 1 in the Proposed Rule, CMS used the most recently available projections of Medicare DSH payments for the fiscal year, as calculated by CMS’s Office of the Actuary (OACT) using the most recently filed Medicare hospital cost reports with Medicare DSH payment information and the most recent Medicare DSH patient percentages and Medicare DSH payment adjustments provided in the IPPS Impact File. The OACT estimate for FY 2023 is approximately $13.266 billion. Therefore, Factor 1 for FY 2023, after 25 percent reduction is $9.949 billion.

CMS calculated Factor 2 in the Proposed rule by multiplying Factor 1 by 1 minus the change in the percent of individuals who are uninsured in 2013 to the rate of uninsured in the most recent period for which data is available. The OACT estimates that the uninsured rate for the historical, baseline year of 2013 was 14 percent and that the uninsured rate for CYs 2022 and 2023 is 8.9 percent and 9.3 percent, respectively. Using this data, CMS has calculated a Factor 2 of 65.71 percent. Thus, the UCC payment pool, after applying Factors 1 and 2, is $6.537 billion.

To calculate Factor 3 in FY 2023, CMS is proposing to use the average of the data from Worksheet S-10 of the FY 2018 and FY 2019 cost reports. CMS also notes that FY 2024 will be the first year that three years of audited S-10 data will be available. Accordingly, CMS is proposing to begin using three years of audited S-10 data to calculate Factor 3 in FYs 2024 and onward. CMS is issuing these proposals to address concerns from stakeholders about the potential year-to-year fluctuations in uncompensated care payments.


The Proposed Rule includes a proposal to establish a new supplemental payment for Indian Health Services (IHS), Tribal hospitals, and hospitals located in Puerto Rico to mitigate the anticipated impact of another aspect of the Proposed Tule—that is—CMS’s proposal to discontinue the use of the low-income insured days proxy to calculate uncompensated care payments for these hospitals. CMS recognizes that the discontinuance of the low-income insured days proxy could result in significant financial disruption to IHS, Tribal, and Puerto Rico hospitals and is thus simultaneously proposing this new supplemental payment. This new supplemental payment would not change the DSH or uncompensated care payment methodologies for other hospitals.

The new supplemental payment is not budget neutral. Medicare payments elsewhere will not be reduced as a result of this proposal. CMS estimates the impact of this proposed change for FY 2023 would increase Medicare spending by approximately $92 million.


Medicare reimburses teaching hospitals for the costs of training residents in approved medical residency training programs. Payment for graduate medical education (GME) has two components: (1) direct graduate medical education (DGME), and (2) indirect medical education (IME). DGME and IME payments are based, in part, on the number of full-time equivalent (FTE) residents that the program trains, subject to a cap on the number of FTEs. Hospitals do not receive additional Medicare dollars for training residents above their FTE cap.

Medicare regulations allow so-called “affiliation agreements,” sometimes known as cap-sharing agreements, that permit two or more hospitals that are part of an affiliated group to cross-train residents, share a total combined FTE cap and contractually reapportion the cap slots among themselves. Currently, however, Medicare regulations do not allow such affiliation agreements for urban and rural teaching hospitals that train residents as part of CMS’s rural track program. These programs have historically been created in the specialty of family medicine only (and are often called “1-2 programs”).

CMS is now proposing to allow urban and rural hospitals that participate in the same separately accredited 1-2 family medicine rural track program and have rural track FTE limitations to enter into “Rural Track Medicare GME Affiliation Agreements.” Programs that are not separately accredited in the 1-2 format and are not in family medicine would not be permitted to enter into “Rural Track Medicare GME Affiliation Agreements” under CMS’s proposal. Included in CMS’s proposal are two requirements:

The hospital entering into the rural track Medicare GME affiliation agreement must attest in that agreement that each participating hospital’s FTE counts and rural track FTE limitations in the agreement do not reflect FTE residents nor FTE caps associated with programs other than the rural track program.

Hospitals can only participate in rural track Medicare GME affiliated groups if they have rural track FTE limitations in place prior to October 1, 2022.


To mitigate the potentially penalizing effects of the COVID-19 pandemic on hospitals’ quality measure data, CMS proposes to suppress or otherwise change several measures beginning in FY 2023.


The HRRP is a Medicare value-based purchasing program that reduces payments to hospitals with excess readmissions. CMS proposes to resume the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate (RSRR) following Pneumonia Hospitalization measure (NQF #0506) beginning with the FY 2024 program year following suppression of this measure which was previously finalized for FY 2023. CMS also proposes to modify the Hospital 30-Day, All-Cause, Risk-Standardized Readmission Rate (RSRR) following Pneumonia Hospitalization measure (NQF #0506) to exclude COVID-19 diagnosed patients from the measure denominators, beginning with the FY 2024 program year and modify all six condition/procedure specific readmissions measures to include a covariate adjustment for history of COVID-19 within one year preceding the index admission, beginning with the FY 2024 program year.

Finally, CMS is seeking public comment on promoting health equity through possible future incorporation of hospital performance for socially at-risk populations into the HRRP.


Under the Hospital VBP Program, CMS makes value-based incentive payments to hospitals based on their performance on measures established for a performance period. CMS proposes to suppress the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS) and five Hospital Acquired Infection (HAI) measures, for the FY 2023 Program Year and update the baseline periods for certain measures for the FY 2025 Program Year. The Proposed Rule would also revise the scoring and payment methodology for the FY 2023 Program Year such that hospitals would not receive Total Performance Scores (TPSs). Instead, each hospital would receive a payment incentive multiplier that results in a value-based incentive payment that is equal to the amount withheld for the fiscal year (2 percent).


Under the HAC Reduction Program, CMS provides an incentive to hospitals to reduce the incidence of hospital-acquired conditions. CMS now proposes to:

Suppress the CMS PSI 90 measure and the five CDC NHSN HAI measures from the calculation of measure scores and the Total HAC Score, thereby not penalizing any hospital under the HAC Reduction Program FY 2023 Program Year;

Publicly and confidentially report CDC NHSN HAI measure results, but not calculate or report measure results for the CMS PSI 90 measure for the HAC Reduction Program FY 2023 Program Year;

Suppress CY 2021 CDC NHSN HAI measures data from the FY 2024 HAC Reduction Program Year;

Update the measure specification to the minimum volume threshold for the CMS PSI 90 measure beginning with the FY 2023 Program Year; and

Update the measure specifications to risk-adjust for COVID-19 diagnosis in the CMS PSI 90 measure beginning with the FY 2024 HAC Reduction Program Year.


Under the IPPS, hospitals are required to report data on measures selected by the HHS Secretary for a fiscal year in order to receive the full annual percentage increase. CMS is proposing several changes to the Hospital IQR Program, including the adoption of 10 new quality measures.

CMS is also proposing to refine the following two current measures beginning with the FY 2024 payment determination: (1) Hospital‐Level, Risk‐Standardized Payment Associated with an Episode-of-Care for Primary Elective THA/TKA; and (2) Excess Days in Acute Care (EDAC) After Hospitalization for Acute Myocardial Infarction (AMI) (NQF #2881). Finally, CMS is proposing changes to current policies related to eCQMs and hybrid measures.


The PCHQR Program is a voluntary quality reporting program for the eleven cancer hospitals that are statutorily exempt from the IPPS (PCHs), CMS is proposing to begin public display of the 30-Day Unplanned Readmissions for Cancer Patients Measure (PCH-36) and the four end-of-life measures (PCH-32, PCH-33, PCH-34, and PCH-35). CMS also proposes to adopt and codify a patient safety exception into the measure removal policy.

The Proposed Rule is scheduled to be published in the Federal Register on May 10, 2022. A display copy of the Proposed Rule is available here, and a CMS fact sheet is available here.

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