Fact Sheets

Fiscal Year (FY) 2021 Medicare Hospital Inpatient Prospective Payment System (IPPS) and Long Term Acute Care Hospital (LTCH) Proposed Rule (CMS-1735-P)

On May 11, 2020, the Centers for Medicare & Medicaid Services (CMS) proposed a rule that focuses the agency’s efforts on a singular objective: transforming the healthcare delivery system through competition and innovation to provide patients with better value and results. The proposed rule would update Medicare payment policies for hospitals under the Inpatient Prospective Payment System (IPPS) and the Long-Term Care Hospital (LTCH) Prospective Payment System (PPS) for fiscal year 2021. 

The IPPS and LTCH PPS proposed rule is one of five proposed Medicare payment rules released on a fiscal year cycle to define payment and policy for inpatient hospitals, long-term care hospitals, inpatient rehabilitation facilities, inpatient psychiatric facilities, skilled nursing facilities, and hospices. As with these other rules, CMS is publishing this proposed rule to meet the legal requirements to update Medicare payment policies for IPPS hospitals and LTCHs on an annual basis. In recognition of the significant impact of the COVID-19 public health emergency, and limited capacity of health care providers to review and provide comment on extensive proposals, CMS has limited annual rulemaking required by statute to focus primarily on essential policies including Medicare payment to hospitals, as well as proposals that reduce provider burden and may help providers in the COVID-19 response.

The proposed policies in the IPPS and LTCH PPS proposed rule would support the agency’s key priorities, which include Strengthening Medicare and Fostering Innovation. The proposals would also help ensure that America continues to have access to a world-class healthcare system with access to potentially life-saving diagnostics and therapies by unleashing innovation in medical technology and removing barriers to competition.

This fact sheet discusses major provisions of the proposed rule. The deadline for submitting comments on the proposed rule is July 10, 2020.

The proposed rule (CMS-1735-P) can be downloaded from the Federal Register at:

Background on the IPPS and LTCH PPS

CMS pays acute care hospitals (with a few exceptions specified in the law) for inpatient stays under the IPPS. LTCHs are paid under the LTCH PPS. Under these two payment systems, CMS sets base payment rates prospectively for inpatient stays based on the patient’s diagnosis and severity of illness. Subject to certain adjustments, a hospital receives a single payment for the case based on the payment classification assigned at discharge. The classification systems are:

  • IPPS: Medicare Severity Diagnosis-Related Groups (MS-DRGs)
  • LTCH PPS: Medicare Severity Long-Term Care Diagnosis-Related Groups (MS‑LTC‑DRGs).

The law requires CMS to update payment rates for IPPS hospitals annually, and to account for changes in the prices of goods and services used by these hospitals in treating Medicare patients, as well as for other factors. This is known as the hospital “market basket.” The IPPS pays hospitals for services provided to Medicare beneficiaries using a national base payment rate, adjusted for a number of factors that affect hospitals’ costs, including the patient’s condition and the cost of hospital labor in the hospital’s geographic area. Payment rates to LTCHs are typically updated annually according to a separate market basket based on LTCH-specific goods and services.

The proposed changes, which would apply to approximately 3,200 acute care hospitals and approximately 360 LTCHs, would affect discharges occurring on or after October 1, 2020.

CMS is proposing to collect a summary of certain data already required to be disclosed by CMS’ 2019 price transparency rule, specifically hospitals’ median payer-specific negotiated inpatient services charges for Medicare Advantage organizations and third party payers. In addition, the agency is requesting information regarding the potential use of these data to set relative Medicare payment rates for hospital procedures. These provisions advance the mandates in President’s Executive Orders on Promoting Healthcare Choice and Competition Across the United States, Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First, and Protecting and Improving Medicare for Our Nation’s Seniors.


Proposals for New Technology Add-On Payment Pathway for Certain Antimicrobial Products

In light of recent information that continues to highlight the significant concerns and impacts related to antimicrobial resistance and emphasizes the continued importance this issue represents both for Medicare beneficiaries and public health overall, we are proposing some changes regarding new technology add-on payments for certain antimicrobials for FY 2021.

  • Each year in the proposed rule, CMS addresses the applications for new technology add-on payments under the IPPS by presenting its evaluation and analysis of the applications. CMS does not generally make proposals in the rule, but rather describes any concerns it may have about whether a technology meets the criteria for payment as a new technology and seeks additional information as needed for use in making a decision on the applications in the final rule. However, to provide additional predictability and transparency CMS is making proposals with respect to technologies that applied under the alternative pathway for certain transformative devices and certain antimicrobial products adopted in last year’s rulemaking.   

In this proposed rule, CMS presents 24 new applications for new technology add-on payment for FY 2021. Of the 24 technologies, three technologies were submitted by applicants as a new medical device that is part of the FDA Breakthrough Devices Program and six technologies were submitted by applicants as a product that received FDA Qualified Infectious Disease Product (QIDP) designation. We are proposing to approve these nine alternative pathway applicant technologies. The remaining 15 technologies were submitted by applicants under the traditional new technology add-on payment pathway criteria. Additionally, CMS proposes to continue the new technology add-on payments for 10 of the 18 technologies currently receiving the add-on payment (the remaining 8 technologies will no longer be within their newness period in FY 2021, which includes the Chimeric Antigen Receptor (CAR) T-cell therapies approved for the new technology add-on payment in FY 2019). 

  • We are proposing to expand the alternative new technology add-on payment pathway for antimicrobial products designated by FDA as QIDPs to include products approved under FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD pathway). The LPAD pathway encourages the development of safe and effective drug products that address unmet needs of patients with serious bacterial and fungal infections. As is the case for QIDPs, under this proposal an antimicrobial drug approved under FDA’s LPAD pathway would be considered new and not substantially similar to an existing technology and would not need to demonstrate that it meets the substantial clinical improvement criterion (the technology would need to meet the cost criterion).
  • In order to allow eligible antimicrobial products to begin receiving the new technology add-on payment sooner, we are proposing to provide for conditional approval for antimicrobial products that otherwise meet the NTAP alternative pathway criteria but do not receive FDA approval in time for consideration in the final rule. Under this proposal, those antimicrobial products that would otherwise meet the applicable add-on payment criteria would begin receiving the new technology add-on payment, effective for discharges the quarter after the date of FDA marketing authorization instead of waiting until the next fiscal year, provided FDA marketing authorization is received by July 1 of the year for which the applicant applied for new technology add-on payments.

New MS-DRG for Chimeric Antigen Receptor (CAR) T-cell Therapy

Building on the actions CMS has taken to date for payments for new medical technologies, CMS is proposing to create a new MS-DRG specifically for cases involving CAR T-cell therapies. The new payment group would help to predictably compensate hospitals for their costs in delivering necessary care to Medicare beneficiaries and provide payment flexibility for the future as new CAR T-cell therapies become available. 

Proposed Changes to Payment Rates under IPPS

The proposed increase in operating payment rates for general acute care hospitals paid under the IPPS that successfully participate in the Hospital Inpatient Quality Reporting (IQR) Program and are meaningful electronic health record (EHR) users is approximately 3.1 percent. This reflects the projected hospital market basket update of 3.0 percent reduced by a 0.4 percentage point productivity adjustment. This also reflects a proposed +0.5 percentage point adjustment required by legislation.

CMS projects the rate increase, together with other proposed changes to IPPS payment policies, will increase IPPS operating payments by approximately 2.5 percent. Proposed changes in uncompensated care payments, new technology add-on payments, and capital payments will decrease IPPS payments by approximately 0.4 percent. Therefore, CMS estimates a total increase in overall IPPS payments of approximately 1.6 percent.

Hospitals may be subject to other payment adjustments under the IPPS, including:

  • Penalties for excess readmissions, which reflect an adjustment to a hospital’s performance relative to other hospitals with a similar proportion of patients who are dually eligible for Medicare and full-benefit Medicaid  
  • Penalty (1 percent) for worst-performing quartile under the Hospital-Acquired Condition Reduction Program 
  • Upward and downward adjustments under the Hospital Value-Based Purchasing Program.

In sum, CMS projects total Medicare spending on inpatient hospital services, including capital, will increase by about $2.07 billion in FY 2021.

Medicare Uncompensated Care Payments

CMS distributes a prospectively determined amount of uncompensated care payments to “Medicare disproportionate share hospitals” based on their relative share of uncompensated care nationally. As required under law, this amount is equal to an estimate of 75 percent of what otherwise would have been paid as Medicare disproportionate share hospital payments, adjusted for the change in the rate of uninsured people. In this rule, CMS proposes distributing roughly $7.8 billion in uncompensated care payments in FY 2021, a decrease of approximately $0.5 billion from FY 2020.

For FY 2021, CMS proposes to use a single year of data on uncompensated care costs from Worksheet S-10 of the FY 2017 cost report to distribute these funds, in part because we have conducted audits of this data. Mindful of the unique challenges facing Indian Health Service and Tribal hospitals and Puerto Rico hospitals, CMS proposes to continue to use data regarding low-income insured days (Medicaid days for FY 2013 and FY 2018 SSI days) to determine the amount of uncompensated care payments for Puerto Rico hospitals and Indian Health Service and Tribal hospitals for one more year (FY 2021), similar to the FY 2020 methodology.

In addition, CMS is proposing for all eligible hospitals, except Indian Health Service and Tribal hospitals, to use the most recent available single year of audited Worksheet S-10 data to distribute uncompensated care payments for all subsequent fiscal years. We expect there to be an increasing number of hospitals audited for Worksheet S-10 with future cost reporting years. As a result, we have confidence that the best available data in future years will be the Worksheet S-10 data for cost reporting years for which audits have been conducted.

Graduate Medical Education Policy

CMS is proposing policy changes related to closing teaching hospitals and closing residency programs to address the needs of residents attempting to find alternative hospitals in which to complete their training and to foster seamless Medicare indirect medical education and direct graduate medical education funding. This proposal would expand the existing definition of who is considered a displaced resident (beyond residents who are physically present at the hospital training on the day prior to or the day of hospital or program closure). These proposed policies would provide greater flexibility for the residents to transfer while the hospital operations or residency programs were winding down, and would allow funding to be transferred for certain residents who are not physically at the closing hospital/closing program.

Hospital-Acquired Condition (HAC) Reduction Program

The HAC Reduction Program creates an incentive for hospitals to reduce the incidence of hospital-acquired conditions by requiring the Secretary to reduce payment by one percent for applicable hospitals, which are subsection (d) hospitals that rank in the worst-performing quartile on select measures of hospital-acquired conditions. In the FY 2021 IPPS/LTCH PPS proposed rule, CMS is proposing to:

  • Automatically adopt applicable periods (i.e., performance periods for measures used in the Program) beginning with the FY 2023 program year and all subsequent program years and update the definition of applicable period at 42 CFR 412.170.
  • Refine validation procedures used by the Program in order to align with the Hospital IQR Program’s validation procedures, which happen concurrently.

Hospital Readmissions Reduction Program (HRRP)

The Hospital Readmissions Reduction Program (HRRP) reduces payments to hospitals with excess readmissions. The program includes six claims-based outcomes measures.  The 21st Century Cures Act directs CMS to assess payment reductions based on a hospital’s performance relative to other hospitals with a similar proportion of patients dually eligible for Medicare and full-benefit Medicaid. For the FY 2021 IPPS/LTCH PPS proposed rule, CMS is proposing to:

  • Automatically adopt applicable periods (i.e., performance periods for measures used in the Program) beginning with the FY 2023 program year and all subsequent program years, and update the definition of applicable period at 42 CFR 412.152 to align with the automatic adoption proposal.

Hospital Inpatient Quality Reporting (IQR) Program

The Hospital IQR Program is a pay-for-reporting quality program that reduces payment to hospitals that fail to meet program requirements. In the FY 2021 IPPS/LTCH PPS proposed rule, CMS is proposing changes to reporting and public reporting of electronic clinical quality measures (eCQMs) and the current validation process. Specifically, the rule proposes to:

  • Make changes to the hospital reporting of eCQMs including
    • Progressively increasing the number of quarters of eCQM data reported, from one self-selected quarter of data to four quarters of data over a three-year period, by requiring hospitals to report two quarters of data for the CY 2021 reporting period/FY 2023 payment determination, three quarters of data for the CY 2022 reporting period/FY 2024 payment determination, and four quarters of data beginning with the CY 2023 reporting period/FY 2025 payment determination and for subsequent years.
    • Beginning the public display of eCQM data on the Hospital Compare website (or its successor website) and/or, beginning with data reported by hospitals for the CY 2021 reporting period/FY 2023 payment determination and for subsequent years that would be included with the fall 2022 refresh of the website.
  • Make changes to the Hospital IQR Program validation process including
    • For chart abstracted measure validation, requiring the use of electronic file submissions via a CMS-approved secure file transmission process and no longer allowing the submission of paper copies of medical records or copies on digital portable media such as CD, DVD, or flash drive.
    • Reducing the number of hospitals selected for validation from up to 800 to up to 400 hospitals.
    • Combining the validation processes for chart-abstracted measures and eCQMs by aligning: (a) data submission quarters; (b) hospital selection; and (c) scoring processes by providing one combined validation score for the validation of chart-abstracted measures and eCQMs with the eCQM portion of the combined score weighted at zero.
    • Formalizing the process for conducting educational reviews for eCQM validation in alignment with current processes for providing feedback for chart-abstracted validation results.

Hospital Value-Based Purchasing (VBP) Program

The Hospital VBP Program adjusts payments to hospitals under the IPPS for inpatient services based on their performance. CMS is providing estimated and newly established performance standards for certain measures for the FY 2023, FY 2024, FY 2025, and FY 2026 program years. We are not proposing to add new measures or remove measures from the Hospital VBP Program in this proposed rule. 

PPS-Exempt Cancer Hospital Quality Reporting (PCHQR) Program

The PCHQR Program collects and publishes data on an announced set of quality measures. CMS is proposing to:

  • Refine two existing National Healthcare Safety Network (NHSN) measures, Catheter-Associated Urinary Tract Infection (CAUTI) and Central Line-Associated Bloodstream Infection (CLABSI), to incorporate an updated methodology developed by the Centers for Disease Control and Prevention that uses updated HAI baseline data that is risk-adjusted to stratify results by patient location.
  • Begin to publicly report the updated versions of the CLABSI and CAUTI measures in fall CY 2022.

Hospital Star Ratings

We previously announced that we would include a proposed update to the Overall Hospital Quality Star Rating methodology in the FY 2021 IPPS proposed rule based on the feedback we’ve received to date from stakeholders, including through a public comment period, listening sessions, a technical expert panel, and national quality conferences. However, in recognition of the significant impact of the COVID-19 public health emergency and the limited capacity of health care providers to review and provide comment on extensive proposals, CMS has limited annual rulemaking required by statute to essential policies as well as proposals that reduce provider burden and may help providers in the COVID-19 response. We thank the stakeholders who have provided feedback on potential changes to the Overall Hospital Quality Star Rating methodology, and look forward to returning to this in future rulemaking.

Medicare and Medicaid Promoting Interoperability Programs

In 2011, the Medicare and Medicaid EHR Incentive Programs (now known as the Promoting Interoperability Programs) were established to encourage eligible professionals, eligible hospitals, and critical access hospitals (CAHs) to adopt, implement, upgrade, and demonstrate meaningful use of certified EHR technology (CEHRT). Below are our proposals for CY 2021 and later years, on which we are seeking public comment.

We are proposing an EHR reporting period of a minimum of any continuous 90-day period in CY 2022 for new and returning participants (eligible hospitals and CAHs) in the Medicare Promoting Interoperability Program attesting to CMS.

We are proposing to continue the Query of PDMP measure as an optional measure worth five bonus points in CY 2021. This was originally proposed and finalized in the FY 2020 IPPS/LTCH PPS proposed and final rules.

We are proposing to rename the Support Electronic Referral Loops by Receiving and Incorporating Health Information measure. The proposed name would read: Support Electronic Referral Loops by Receiving and Reconciling Health Information measure. This proposal more accurately reflects the actions required in the measure’s numerator.

CMS also seeks public comment on the following proposals:

  • The Medicare Promoting Interoperability Program is proposing to adopt the following in alignment with the Hospital IQR Program:
    • eCQM Reporting Periods
      • Progressively increase the number of quarters hospitals are required to report eCQM data
        • 2021 – 2 quarters of data
        • 2022 – 3 quarters of data
        • 2023 and each subsequent year – 4 quarters of data
    • Public Reporting of eCQM Data
      • We are proposing to publicly report eCQM performance data for the first time, beginning with data reported for the CY 2021 reporting period, on Hospital Compare and/or, or any successor websites.
  • We are proposing to correct inadvertent technical errors in the regulation text, specifying transition factors for the incentive payments to Puerto Rico eligible hospitals.  This text would read as follows: (A) 1 for FY 2018; (B) ¾ for FY 2019; (C) ½ for FY 2020; and (D) ¼ for FY 2021.

Proposed Changes to Payment Rates under LTCH PPS

Overall, for FY 2021, CMS expects LTCH-PPS payments to decrease by approximately 0.9 percent or $36 million, which reflects the continued statutory implementation of the revised LTCH PPS payment system. LTCH PPS payments for FY 2021 for discharges paid using the standard LTCH payment rate are expected to increase by 2.1 percent after accounting for the proposed annual standard Federal rate update for FY 2021 of 2.5 percent, and an estimated decrease in outlier payments and other factors.

LTCH PPS payments for cases that will complete the statutory transition to the lower payment rates under the dual rate system are expected to decrease by approximately 20 percent. This accounts for the LTCH site neutral payment rate cases that will no longer be paid a blended payment rate with the end of the statutory transition period, which represent approximately 25 percent of all LTCH cases and 10 percent of all LTCH PPS payments.