Hospital Inpatient Prospective Payment System (IPPS)
Model Summary
Hospital Inpatient Prospective Payment System (IPPS)
Overview
The IPPS is Medicare's primary payment system for approximately 3,200 acute care hospitals, determining how Medicare reimburses inpatient hospital stays using Diagnosis-Related Groups (MS-DRGs). CMS updates IPPS rates annually through the Federal Register, typically effective October 1 (fiscal year basis). The IPPS rule also governs several quality-based payment programs including Hospital Value-Based Purchasing (VBP), the Hospital Readmissions Reduction Program (HRRP), and the Hospital-Acquired Condition (HAC) Reduction Program.
Payment Rate Update Trends (FY 2021-2026)
| Fiscal Year | Market Basket | Productivity Adj. | Statutory Adj. | Net Update | Total Payment Impact |
|---|---|---|---|---|---|
| FY 2021 | 2.4% | 0.0% | +0.5% | ~2.9% | +$3.5B |
| FY 2022 | 2.7% | -0.7% | +0.5% | ~2.5% | +$2.3B |
| FY 2023 | 4.1% | -0.3% | +0.5% | 4.3% | +$2.6B |
| FY 2024 | 3.3% | -0.2% | -- | 3.1% | +$2.2B |
| FY 2025 | 3.4% | -0.5% | -- | 2.9% | +$2.9B |
| FY 2026 (Proposed) | 3.2% | -0.8% | -- | 2.4% | +$4.0B |
The market basket spiked in FY 2023 (4.1%) reflecting post-COVID inflation, then moderated. The productivity adjustment was suspended (0.0%) in FY 2021, has been increasing since, reaching 0.8% in FY 2026. The +0.5% statutory adjustment from legislation applied in FY 2021-2023 but is absent from FY 2024 onward, reducing the net update.
Uncompensated Care / DSH Payments
| Fiscal Year | Uncompensated Care Pool | Year-over-Year Change |
|---|---|---|
| FY 2021 | ~$8.3B | -$60M |
| FY 2022 | ~$7.2B | -$1.1B |
| FY 2023 | ~$6.8B | -$318M |
| FY 2024 | ~$5.8B (est.) | -$957M |
| FY 2025 | ~$5.6B (est.) | -$200M |
| FY 2026 (Proposed) | ~$7.1B (est.) | +$1.5B |
Uncompensated care payments dropped sharply from $8.3B (FY 2021) to approximately $5.6B (FY 2025) as ACA coverage expanded and COVID-era Medicaid continuous enrollment reduced uninsured rates. The FY 2026 proposed rule reverses this trend with a +$1.5B increase, reflecting the end of Medicaid continuous enrollment provisions and rising uninsured rates.
New Technology Add-on Payments (NTAP)
| Fiscal Year | Estimated NTAP Spending | Notable |
|---|---|---|
| FY 2021 | ~$874M | 24 technologies eligible |
| FY 2022 | ~$1.5B | 42 technologies (COVID-era extensions) |
| FY 2023 | ~$784M | Extensions ended, spending normalized |
| FY 2024 | ~$420M | Further normalization |
| FY 2025 | ~$720M | Gene therapy add-on increased to 75% |
| FY 2026 (Proposed) | ~$954M | Continued growth |
Hospital Value-Based Purchasing (VBP) Program
| Fiscal Year | Withhold Rate | Scoring Status | Health Equity Adj. | TPS Range |
|---|---|---|---|---|
| FY 2021 | 2% | Normal scoring | None | 0-100 |
| FY 2022 | 2% | Suppressed (COVID) | None | N/A |
| FY 2023 | 2% | Suppressed (COVID) | None | N/A |
| FY 2024 | 2% | Resumed; equity adj. adopted | +10 bonus points | 0-110 |
| FY 2025 | 2% | Normal | Continues | 0-110 |
| FY 2026 (Proposed) | 2% | Normal | Proposed removal | 0-100 |
FY 2022-2023 were effectively "lost years" for value-based purchasing, with hospitals receiving back exactly what was withheld. FY 2024 introduced the health equity adjustment (up to 10 bonus TPS points for serving dual-eligible populations). The FY 2026 proposed rule would remove this equity adjustment — a significant policy reversal.
Hospital Readmissions Reduction Program (HRRP)
The HRRP was largely on COVID-pause from FY 2022-2023. The FY 2026 proposed rule is the most significant HRRP update in years:
- Adding Medicare Advantage data to readmission calculations (expanding measured population significantly)
- Shortening performance period from 3 years to 2 years
- Removing COVID-19 exclusions and risk adjustments
Hospital-Acquired Condition (HAC) Reduction Program
The 1% penalty for the worst-performing quartile has been consistent across all years. FY 2022-2023 saw COVID-driven data suppression and full program pauses. Normal operations resumed in FY 2024. The FY 2026 proposed rule updates the CDC NHSN HAI baseline to 2022.
FY 2026 Policy Direction Shift
The FY 2026 proposed rule signals a clear directional change under the new administration:
- Removing health equity measures and adjustments (VBP equity adjustment, Health Commitment to Equity measure, SDOH screening measures)
- Deregulation emphasis with RFI on reducing administrative burden per Executive Order 14192
- Incorporating MA data into readmissions calculations
- Reversing uncompensated care decline with +$1.5B increase