The FY 2023 IPPS Final Rule: What You Need to Know

The Centers for Medicare and Medicaid Services (CMS) published the Final Rule for the fiscal year (FY) 2023 Inpatient Prospective Payment System (IPPS) in August 2022. It brings significant changes to the Medicare system. We’ve outlined the most important updates below, so your healthcare organization can prepare and adjust accordingly.

Overall, CMS is incorporating a resulting increase of 4.3% in IPPS operating payments. This is inclusive of a 4.1% Market Basket increase with a 0.3% productivity reduction and a 0.5% increase directed by legislation. This is 1.1% over the proposed rule that was published in April 2022.

FY 2023 IPPS Final Rule Overview

Overall, the Final Rule updates payment policies and rates regarding several aspects of hospital care:

  • Inpatient hospital services provided under Medicare Part A
  • Increased base operating payment rates by approximately $7 billion (2.6%) compared to FY 2022 levels
  • Outlier payments
  • Lump sum payments for capital expenditures
  • Dual reimbursement of drugs
  • Disproportionate share hospital payments
  • 340B drug pricing discounts
  • The Inpatient Prospective Payment System (IPPS) calculation
  • The Direct Graduate Medical Education (GME) Cap Calculation formula
  • Disproportionate Share Hospital (DSH) payment program and Uncompensated Care programs updates
  • Clarification of criteria used for Medicare’s Star Rating system and Nursing Allied Health Payments
  • Changes to the HAC Reduction Program

Lastly, the rule requires hospitals to submit public pricing information on their websites and allows the use of electronic health records for specific quality measures.

Watch our webinar where BESLER’s Director of Reimbursement Services, Christina Brown, reviews the FY 2023 IPPS Final Rule and touches on the key changes and how they may impact reimbursement.

Primary topics covered in BESLER’s FY 2023 IPPS Final Rule Summary Webinar include the following:

DGME Cap Calculation

The Direct Graduate Medical Education (DGME) Cap Calculation is a formula used by Medicare to determine teaching hospitals’ reimbursement amounts. The IPPS 2023 Final Rule indicates updates to the calculation, resulting in higher payments for teaching hospitals operating over the cap.

Updates to HAC, VBP, HRRP

The IPPS 2023 Final Rule brings critical updates to the Hospital-Acquired Condition (HAC) Reduction Program, Value-Based Purchasing (VBP), and Hospital Readmissions Reduction Program (HRRP). These programs aim to promote higher-quality care and reduce costs associated with preventable hospital-acquired diseases. Due to impact of the Public Health Emergency, COVID-19, there were several adjustments to these programs to mitigate the impact for the measures used in these programs. For example, per the final rule for FY2023, CMS will suppress certain measures in the HAC Reduction Program which would penalize hospitals due to the effects of COVID-19. CMS also advised there would be no HAC penalties for FY23, but the measures would continue to be calculated and reported.

Medicare-Dependent Hospital

Rural hospitals with primarily Medicare patients receive special treatment as Medicare-dependent hospitals (MDHs) under the prospective payment system (PPS) in the form of additional per-case payments. Hospitals that qualify received a blended payment of the Federal and Hospital Specific Rates. As of October 1, 2022, the MDH program expired, and hospitals would have needed to apply for Sole Community Hospital status by September 1, 2022. Hospitals that did not apply will now be reimbursed based on the Federal rate.

Wage Index

The FY 2023 IPPS Final Rule also instituted a permanent cap on wage index decreases of 5%. This will reduce the volatility of year-over-year changes to a hospital’s wage index. There was also an adjustment for hospitals included in the rural floor calculation.

Low-Volume Add-On

Hospitals that qualify for a low-volume add on receive a 25% increase in reimbursement on a per discharge basis. The Final Rule updated the qualifications to significantly reduce the amount of hospitals that would qualify. It adds a financial incentive to support these small rural hospitals that might need help financially due to patient population size constraints. The change helps ensure access to quality healthcare education programs.

Uncompensated Care/DSH Payments

Disproportionate Share Hospital (DSH) program payments intend to reimburse hospitals for the uncompensated care they provide to low-income and uninsured patients, allowing these facilities to continue offering essential healthcare services. The FY 2023 IPPS Final Rule makes several changes to the DSH program, including increasing payments for hospitals with large numbers of Medicaid and uninsured patients. It also clarifies the criteria used to determine payment eligibility.

Strengthening the Uncompensated Care Program and DSH program creates a more equitable system for hospitals to receive adequate reimbursement while providing care to those who need it most.

Christina Brown also joined The Hospital Finance Podcast presented by BESLER to discuss additional updates and tips for hospitals affected by the FY 2023 IPPS Final Rule. Listen to the episode using the link below, or continue reading to learn about the topics covered.

Disproportionate Share Hospital Payments Changes

The Disproportionate Share Hospital (DSH) payment program aims to provide extra payments to IPPS hospitals serving a disproportionate amount of low-income patients. The rule decreased the overall uncompensated care pool amount by $318M from FY2022.

The payment reallocates payment amounts among IPPS hospitals that are eligible to receive DSH payments based on their uncompensated care costs. The rule indicates the recent audit years of S-10, 2018 and 2019, will be used to determine Factor 3 of the calculation, and for FY2024 and subsequently will use a 3- year rolling average.

Updates to the Provider Reimbursement Manual

Transmittal 18 of the Provider Reimbursement Manual released on December 29, 2022, contains many updates to the cost report forms as well as provides additional guidance in a number of areas, one in particular are updates to the areas for uncompensated care. Transmittal 18 is the result of the updates in the Final Rule, and is effective for cost reports beginning on or after October 1, 2022.

How to Prepare for PRM Updates

IPPS hospitals should prepare to remain compliant with the new regulations as soon as possible. Hospitals should review their internal processes and procedures to ensure they meet all measures outlined in the Final Rule.

IPPS Coding Changes

BESLER’s Kristen Eglintine, Coding Analyst Supervisor, and Sara Clark, IP Coding Analyst, co-hosted a webinar summarizing critical aspects of the Final Rule with an emphasis on ICD-10 code and guideline changes. Watch the webinar using the link below and continue reading to learn more.

The 2023 ICD-10-CM update is rather extensive. It includes 1,176 new codes. They revised 28, and they deleted 287 codes.

COVID-19 and Our Public Health Emergency

The FY 2023 IPPS Final Rule includes provisions that allow hospitals more flexibility in reporting diagnoses and procedures related to COVID-19. It also adjusts certain care costs associated with treating patients affected by the COVID-19 virus.

Diagnosis Coding

The rule allows hospitals to report diagnoses related to COVID-19 that are clinically appropriate, helping ensure that Medicare can reimburse them for the services they provide. It also includes a new methodology for reimbursing patient care costs, helping ensure hospitals receive adequate payment for their services – even amid a public health emergency.

Procedure Coding

The IPPS rule also includes updated procedures associated with patient care. It grants hospitals more flexibility in reporting procedures related to COVID-19 patient treatment and adjusts certain associated costs. Overall, reimbursements for procedure-related expenses help ensure eligible hospitals provide the utmost care for patients during the COVID-19 crisis.


The rule updates Medicare Severity-Diagnosis Related Group (MS-DRG) coding criteria to reflect better patient care costs associated with COVID-19 treatment. In doing so, the CMS limits reductions to 10% for MS-DRG relative weight decreases each year to mitigate financial impacts from the public health emergency.

Kristen Eglintine joined The Hospital Finance Podcast presented by BESLER to discuss coding updates in light of the Final Rule. Listen to the episode using the link below, or keep reading for more information.

Is COVID-19 Still Impacting Healthcare?

The US Department of Health and Human Services issued the public health emergency. It’s been in place since January 27, 2020, and has been renewed throughout the pandemic. The latest extension is effective Feb. 9, 2023. It’s important to note because it has affected decisions made by CMS, published in the 2023 IPPS Final Rule.

ICD-10-CM Changes That Coders Can Expect to See

The FY 2023 IPPS Final Rule updates the ICD-10-CM (International Classification of Diseases, Tenth Revision, Clinical Modification) code set to reflect better diagnosis and procedure coding related to COVID-19 treatment. The rule adds new codes (totaling 1,176) for medical conditions associated with reporting dementia, head injuries, and long-term drug therapy. The CMS also revised 28 and deleted 287 codes.

Other areas of change affect heart conditions, pregnancy, childbirth, head injuries, those associated with vehicle collisions, and drug poisoning. There are also new codes for personal history and new patient and caregiver non-compliance.

Tips on Preparing for the New Coding Changes

There are numerous online resources regarding the new coding changes. All coders and CDI (Clinical Documentation Improvement) professionals should become familiar with the fiscal year 2023 CM (Clinical Modifications) and PCS (Procedure Coding System) official coding guidelines.

The 2023 addendum includes what changes occurred in the tabular list by each chapter, so it’s easy to find new, deleted, or revised ICD-10-CM codes.


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