Setting the price per admission in advance — payment by diagnosis group, and \$2.9 billion more in fiscal 2027
The Centers for Medicare and Medicaid Services issued a final rule setting fiscal 2027 payment rates for inpatient care at acute care hospitals. Payment is made at rates fixed in advance by diagnosis group, and total payments are projected to rise by about \$2.9 billion.
Document overview (primary data)
- Document typeRule
- AgencyDepartment of Health and Human Services
- Citation91 FR 49570
Key points
- The Centers for Medicare and Medicaid Services set fiscal 2027 payment rates for inpatient care at acute care hospitals.
- Payment is made at predetermined rates for each discharge, with discharges classified by diagnosis-related group.
- The base rate divides into labor-related and nonlabor-related shares, the former adjusted by the local wage index.
- Payments in fiscal 2027 are projected to rise by about \$2.9 billion relative to fiscal 2026.
- The increase reflects both higher rates and the expiration of certain special programs.
1Not what it cost, but a price set in advance
There are broadly two ways to pay a hospital: settle what was actually spent afterward, or pay an amount fixed beforehand. For inpatient care, Medicare takes the second, in what is called a prospective payment system.
Amounts are set by diagnosis group. Admissions classified into the same group are paid the same in principle, whatever was actually done. Treat efficiently and the difference stays with the hospital; run over and the hospital bears it.
2How an amount is assembled
- 1Standardized amountA national base, divided into labor-related and nonlabor-related shares
- 2Area adjustmentThe labor-related share is multiplied by the wage index for the hospital area
- 3A special adjustmentIn Alaska and Hawaii the nonlabor-related share is adjusted for cost of living
- 4Group weightThe resulting base rate is multiplied by the relative weight of the diagnosis group
Labor costs differ sharply by region, so only the part of the payment corresponding to labor is adjusted to local wage levels, while the part corresponding to supplies is not. That is why the same diagnosis group pays differently depending on where a hospital sits.
3The fiscal 2027 projection
The increase reflects not only a higher rate but the effect of special programs reaching their end dates. Where programs for hospitals with few patients or heavy Medicare dependence expire, those payments cease. An increase overall can therefore coincide with decreases at individual hospitals.
4Objections to the size of the increase
The rule records comments received. Several commenters said the proposed increase in operating payment rates was too low and failed to account for the enduring impacts of high price inflation and cost increases, citing compensation costs including contract labor and workforce shortages, and administrative costs including those attributed to prior authorization. Where rates are set annually, the level itself becomes an annual contest.
Why it matters
Shifting the unit of payment from cost incurred to a fixed amount per diagnosis group leaves the gains from efficiency with the provider. Building local wage levels into the rate is also instructive as a way of fitting a national system to regional difference.
FAQ
What is a prospective payment system?
Why does the same diagnosis group pay differently?
Sources (primary)
Source: Federal Register (federal documents, public domain). Links go to the official site.