Inpatient Prospective Payment System (IPPS)

CMS generally makes payment for inpatient stays under the Inpatient Prospective Payment System (IPPS). The hospital IPPS makes payments to acute care hospitals for each Medicare patient or case treated (refer to Section 1886(d)(1)(B) of the Act for hospitals that are excluded from the IPPS). The per-discharge payment amount is based on the average national resource use for treating patients in similar circumstances, not on the specific cost of treating each individual patient. With few exceptions, Medicare does not pay separately for individual items or services, although certain costs may be paid separately and outside of the IPPS bundle. Physicians are paid separately under the Physician Fee Schedule (PFS) for their professional services provided during the inpatient stay. When certain conditions are met, the hospital may be eligible to receive certain additional payments, as described below.

Under the IPPS, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of Medicare Severity Diagnosis Related Groups (MS-DRGs). The IPPS base payment rate is divided into a labor-related and non-labor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located, and if the hospital is located in Alaska or Hawaii, the non-labor-related share is adjusted by a cost of living adjustment factor. This base payment rate is multiplied by the MS-DRG relative weight. Hospitals may also be eligible for additional payment adjustments, for example if the hospital treats a high-percentage of low-income patients or trains residents in an approved residency program.

This section provides an overview of the MS-DRG classification system and additional payments that may be available under the IPPS for cases involving certain new technologies or cases that are extraordinarily costly. For further information about how payment is determined under the IPPS, including the wage index and other adjustments to payments made under the IPPS, and related downloads, visit CMS Acute IPPS and this Medicare Learning Network (MLN) page.

Medicare Severity Diagnosis Related Groups (MS-DRGs)

Under the 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 care for 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.

For further information about MS-DRGs refer to:

• MS-DRG Classifications
• Acute Inpatient PPS
• MEARIS™ New & Revised MS-DRG

New Technology Add-On Payments (NTAP)

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.

We note that the information below is intended only to provide the public with a basic overview regarding the NTAP. For current requirements regarding the IPPS NTAP, including the NTAP eligibility criteria, please see the statute at sections 1886(d)(5)(K) and (L) of the Social Security Act (“the Act”), the regulations at 42 CFR sections 412.87 and 412.88, and the annual IPPS rulemakings.

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for certain new medical services and technologies (sometimes collectively referred to in this section of the CMS website as “new technologies”) under the IPPS. The regulation at 42 CFR § 412.87(b) specifies three criteria that a new medical service or technology must meet to be eligible to receive the additional payment: (1) the medical service or technology must be new; (2) the medical service or technology must be costly such that the MS-DRG rate otherwise applicable to discharges involving the medical service or technology is determined to be inadequate; and (3) the medical service or technology must demonstrate a substantial clinical improvement over existing services or technologies. These three NTAP criteria are also referred to as the newness criterion, cost criterion, and substantial clinical improvement criterion, respectively. In addition, certain transformative new devices and antimicrobial products may qualify under an alternative inpatient new technology add-on payment pathway, as set forth at 42 CFR § 412.87(c) and (d).

Under § 412.88(a)(2)(ii), new technology add-on payments are limited to the lesser of 65% of the costs of the technology, or 65% of the amount by which the costs of the case exceed the standard MS–DRG payment (75% for a Qualified Infectious Disease Product (QIDP) or a product approved under FDA’s Limited Population Pathway for Antibacterial and Antifungal Drugs (LPAD)).

For further information about how to apply for the NTAP and related deadlines, refer to CMS New Medical Service and New Technologies.

Outlier Payments

A hospital may also qualify for an outlier payment for cases that are extraordinarily costly. This additional payment is designed to protect a hospital from large financial losses due to unusually expensive cases. For further information about how outlier payments are calculated, see CMS Outlier Payments.