Logan Reid
The Inpatient Prospective Payment System (IPPS) is a standard payment system for inpatient acute-care hospital stays under Medicare Part A. The IPPS payment system categorizes each case into a diagnosis-related group (DRG) with a payment weight assigned based on the average resources used to treat Medicare patients in that DRG. The base payment rate is adjusted for wage differences and varies depending on the hospital's location and case-specific factors such as teaching status and the percentage of low-income patients. The IPPS also includes additional payments for unusually costly cases and teaching hospitals. To find the base payment rate for a specific hospital, it is essential to refer to the Centers for Medicare and Medicaid Services (CMS) guidelines and consider the hospital's location, case mix, and other relevant factors.
| Characteristics | Values |
|---|---|
| System | Inpatient Prospective Payment System (IPPS) |
| Applicable to | Acute-care hospitals |
| Payment | Flat rate based on average charges across all hospitals for a specific diagnosis |
| Base rate | Determined by categorizing each case into a diagnosis-related group (DRG) |
| DRG | Has a payment weight assigned, based on the average resources used to treat Medicare patients in that DRG |
| Base payment rate | Divided into a labor-related and non-labor share |
| Labor-related share | Adjusted by the wage index applicable to the area where the hospital is located |
| Non-labor share | Adjusted by a cost of living adjustment factor for hospitals in Alaska and Hawaii |
| Outlier cases | Increased payment to protect hospitals from financial losses due to unusually expensive cases |
| High percentage of low-income patients | Percentage add-on payment applied to the DRG-adjusted base payment rate |
| Disproportionate share hospital (DSH) adjustment | Percentage increase in Medicare payment for hospitals that serve a disproportionate share of low-income patients |
| Teaching hospitals | Receive an add-on payment known as the Indirect Medical Education (IME) adjustment |
| IME adjustment | Varies depending on the ratio of residents-to-beds and residents-to-average daily census |
| Wage index | Measures relative hourly wages for hospitals within each labor market compared to the national average |
| Occupational mix adjustment | Controls for the effect of hospitals' employment choices on the wage index |
| Rural Floor | Wage index of a hospital in an urban area cannot be less than the wage index of hospitals in rural areas of the same state |
| Inpatient Quality Reporting (IQR) | Hospitals failing to report specific quality data receive a reduction in the percentage increase in the market basket index |
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What You'll Learn
The Inpatient Prospective Payment System (IPPS)
Each case is categorized into a Medicare Severity Diagnosis Related Group (MS-DRG) depending on the patient's diagnosis, the procedures performed, complicating conditions, age, sex, and discharge status. Each MS-DRG is assigned a payment weight, which represents the average resources required to treat cases in that particular MS-DRG, relative to the average resources used to treat cases in all DRGs. Every year, the payment weights are recalibrated via CMS rulemaking. The IPPS is designed to adapt to changing technology through annual adjustments to MS-DRG weights. To accommodate the period before costs are recognized in the MS-DRG weights, certain new medical services or technologies may be eligible for new technology add-on payments (NTAP) for hospitals.
The IPPS also makes payments to teaching hospitals, which receive add-on payments to the operating portion of the DRG payment based on a metric known as the teaching intensity factor. The teaching intensity factor is calculated using a formula based on the number of interns and residents assigned to the IPPS portion of the facility, divided by the bed days available in the IPPS portion of the facility. For particular cases that are unusually costly, known as outlier cases, the IPPS payment is increased to protect the hospital from large financial losses due to unusually expensive cases.
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Diagnosis-related groups (DRG)
DRGs are used to determine how much Medicare and some health insurance companies reimburse hospitals for patient care. Rather than reimbursing hospitals for whatever costs they charge to treat patients, the DRG system pays hospitals a predetermined, set rate based on the patient's diagnosis and other factors. This system represents a significant shift in health policy, with the federal government gaining more control over the financial relationship with the hospital industry. The DRG system also aims to increase efficiency, improve transparency, and reduce the average length of hospital stays.
The Medicare Severity Long-Term Care Diagnosis-Related Groups system (MS-LTC-DRGs) is used to assign a DRG to patients upon their discharge from the hospital. Medicare calculates the average cost of the resources needed to treat people in a particular DRG and adjusts the base rate based on factors such as the wage index for a given area. For example, hospitals in Alaska and Hawaii have a higher cost of living, which is reflected in the DRG base payment amount.
The DRG system has some drawbacks. For patients, there may be a possible decrease in the quality of care as the necessity of tests is determined by an administrative formula that may not fit every patient's needs. There are also concerns about upcoding, receiving an earlier discharge than necessary, and increased odds of hospital readmission. For hospitals, the DRG reimbursement methodology can significantly impact their bottom line.
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Wage index adjustments
The HWI was introduced in 1983 as Medicare transitioned from cost-based payments to a system where hospitals are paid a predetermined amount for each group of clinically similar patients. The primary objective of the wage index is to ensure that payment rates reflect the varying labor costs in different geographic areas. This adjustment is crucial as wages typically account for approximately two-thirds of a hospital's total costs.
The wage index measures the relative level of hourly wages for hospitals within distinct labor markets compared to the national average hospital hourly wage. It is calculated based on a survey of wages and wage-related costs of short-term, acute care hospitals. This index is then used to adjust the labor-related portion of the standardized payment rates, with the non-labor-related portion remaining unaffected.
The application of the wage index varies depending on whether a hospital is located in an area with a wage index greater or less than 1.0. For areas with a wage index greater than 1.0, the labor portion of the wage index is adjusted annually based on the proportion of hospitals' costs linked to wages and wage-related costs. Conversely, for areas with a wage index less than 1.0, the labor-related portion of the standardized rate is legally set at 62%.
Additionally, the Balanced Budget Act of 1997 includes a provision known as the "rural floor," which ensures that the wage index of hospitals in urban areas within a state cannot be lower than the wage index of hospitals in rural areas of the same state. This provision further emphasizes the consideration of geographic differences in wage levels.
The wage index is subject to periodic reviews and adjustments to maintain accuracy and fairness. The occupational mix, which pertains to the balance of registered nurses and other nursing staff, is also considered and adjusted on a triennial basis. These adjustments help account for the impact of hospitals' employment choices on the wage index.
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Indirect Medical Education (IME) adjustments
Indirect Medical Education (IME) is a Medicare reimbursement program that provides additional funding to teaching hospitals to compensate for the higher costs associated with training medical residents. This is in contrast to Direct Medical Education (DME), which refers to the direct costs of resident training, such as salaries and educational resources.
The IME adjustment factor is calculated using a hospital's ratio of residents to beds, represented as 'r', and a multiplier set by Congress, represented as 'c'. The formula for calculating the IME adjustment factor is: c x [(1 + r).405 - 1]. The higher the number of residents in training, the greater the IME payment. This ratio reflects the hospital's capacity to train residents and interns, with a higher ratio indicating a greater educational impact.
The IME adjustment was 6.5% in FY 2002 and 5.5% in FY 2003 and subsequent years. However, the IME multiplier has been adjusted over time. For example, the Balanced Budget Act (BBA) of 1997 reduced the IME multiplier over a four-year period due to concerns that the IME adjustment overpaid hospitals relative to their teaching costs. The BBA revised the formula to reduce the IME adjustment factor from 7.7% in FY 1998 to 5.5% in FY 2001 and subsequent fiscal years.
The IME payment also takes into account the hospital's Medicare Disproportionate Share Hospital (DSH) adjustment, which reflects the level of uncompensated care provided by the hospital. This adjustment ensures that hospitals serving a higher proportion of low-income and uninsured patients receive appropriate compensation for their teaching activities.
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Disproportionate Share Hospital (DSH) adjustments
The Medicare DSH adjustment provision was enacted by section 9105 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 and became effective for discharges occurring on or after May 1, 1986. There are two methods for a hospital to qualify for the Medicare DSH adjustment. The primary method is for a hospital to qualify based on a statutory formula that results in the DSH patient percentage. The DSH patient percentage is equal to the sum of the percentage of Medicare inpatient days attributable to patients eligible for both Medicare Part A and Supplemental Security Income (SSI), and the percentage of total inpatient days attributable to patients eligible for Medicaid but not Medicare Part A.
The alternate special exception method is for large urban hospitals that can demonstrate that more than 30% of their total net inpatient care revenue, excluding Medicare or Medicaid, comes from state and local government sources for indigent care. Hospitals whose DSH patient percentage exceeds 15% are eligible for a DSH payment adjustment based on another statutory formula. The formula varies for urban hospitals with 100 or more beds and rural hospitals with 500 or more beds.
The value of the hospital's DSH "index" determines the hospital's eligibility for a DSH payment and the size of the payment. The index is the sum of two ratios: the proportion of all Medicare days attributable to beneficiaries of Supplemental Security Income, and the proportion of all patient days for which Medicaid is the primary payer. States began making Medicaid DSH payments in 1981, and the Medicaid DSH payment provided a mechanism for states to spend tax or donation revenues and earn federal matching dollars.
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Frequently asked questions
This is a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A.
The base payment rate is calculated by taking the average charges across all hospitals for a specific diagnosis. Each case is then categorized into a diagnosis-related group (DRG) to determine the base rate. The base payment rate is then divided into a labour-related and non-labour share.
The wage index measures the relative level of hourly wages for hospitals within each labour market compared to the national average. The wage index adjusts the labour-related share of the base payment rate.
Teaching hospitals receive an IME adjustment, which is a percentage add-on payment for each case paid through IPPS. This adjustment varies depending on the ratio of residents to beds under the IPPS for operating costs and the ratio of residents to the average daily census for capital costs.
