University of Michigan Health-West CFO Chris Kurtz discusses the final rule for the IPPS

Kurtz says the inflation has been “devastating, to say the least” for the hospital.

On August 1, CMS announced its Prospective Inpatient Payment System (IPPS) rule for 2023, which increased the hospital’s reimbursement rate by 4.3%, for a total of $2.6 billion for the following fiscal year.

To get a better understanding of what this final rule means, contact HealthLeaders Chris Kurtz, Chief Financial Officer of Michigan Health-West University. Kurtz shared his thoughts on the final rule of IPPS and the 4.3% reimbursement rate on the next episode of Health Leaders Podcast.

HealthLeaders: What is the IPPS Final Rule?

Chris Kurtz: It’s how Medicare and Medicaid determine payment rates, as well as CMS’s payment policy. It includes not only the payment rates for acute care hospitals, but also to long-term acute care hospitals. They include high-quality programs, value-based programs, and even a bit on the medical education funding side.

H: CMS originally proposed a repayment rate of 3.2%, which is now 4.3%. Why the change?

Kurtz: Each spring, CMS publishes its proposed rates and policy changes for public comment. The initial proposal last spring was, I think, a 3.2% increase in what your CMS refers to as the market basket rate. Some may consider this to be the base rate increase, [since it] It does not include things like medical education, capital, and other policy changes. But CMS received overwhelming public comment from many in the hospital industry that 3.2% wasn’t nearly enough to offset all the inflation we’ve been seeing, certainly the highest in the past 40 years. And so, CMS went back and took some of these comments into their final policy.

HL: What are your feelings about the new rate?

Kurtz: Like most hospital CFOs, I appreciate the fact that CMS has recognized that inflation is a huge problem, and they have actually gone back and adjusted their rates for it. However, I don’t think I’m alone [believing it] Not keeping pace with the inflation we’re already seeing. So while it’s nice to have, a lot of the problems we’re going through likely won’t be fixed.

CMS notes that this is the largest increase in the past 30 years. However, as everyone is now aware, the current inflation is the highest in 40 years. So, there is already a gap there. The other thing the public should remember is that the 4% increase in rates does not represent every policy change in this IPPS rule. So, the capital expenditure, for example, is only 2.3%.

In our hospital, construction costs have nearly doubled in the past two years. Unpaid care in politics is reduced to just over $300 million in Michigan alone. We’ve done our own analysis of what we think this policy change will do in our own hospital and estimate that 4.3% is actually an increase of 3.4% once you’ve checked everything and looked at all the different parts of the policies.

HL: How does inflation affect your hospital?

Kurtz: devastating, to say the least. Our hospital operates in a fiscal year, not a calendar year. So, we start from July to June every year. In the first six months of 2022, which just ended, we had a very healthy, very typical operating margin of 3% allowing us to reinvest in the buildings, the organization and our people. All the things CFOs always talk about. But the second six months from January to June of 2022 completely wiped out any margin we had. I think we’re not alone like most hospitals in the country, we actually flipped into an operating loss that comes from January to June of 2022, which is mainly related to inflation.

HL: What does the new IPPS rate mean for the financial well-being of hospitals, health systems, and their patients?

Kurtz: I think it is not sustainable. The past six months have been quite devastating and I think you’re going to see more cuts in staff and services coming in the next few months. I know that in our society here there were some [staffing, closure, and regulatory] Ads already. There are more and more ads being released nationally every day. I expect that to last for a while before it gets better.

HL: Speaking of regulatory announcements, what are your thoughts on the recent surprise billing regulations?

Kurtz: This concept will come a long time ago and I would say shame on our industry for not addressing it sooner and having someone tell us how to fix the problem, rather than as the industry trying to fix it ourselves. And so, because others have fixed it for us, I have some concerns about whether or not it can turn on.

I am concerned about our ability to provide accurate estimates in an industry like ours. We can provide estimates in advance, but often things change once the procedure has begun or once someone has had anaesthesia. And can we continue to give these estimates under certain conditions like this? So, I think there is still more to come. We’re working through that, and I think we’re doing a pretty good job. But I am concerned about the operational aspect of whether we can do what we are asked.

HL: Do you think sudden billing regulations will affect care in any way?

Kurtz: It might slow it down a bit. We are a hospital with open medical staff, which means we have a lot of surgeons and others in the hospital who do not work in our hospital. So getting that coordination between a doctor’s claim and a hospital claim and trying to get it all done within three days or so can be tricky. So, I’m wondering if this will delay certain services perhaps when we try to figure out all this.

HL: And finally, speaking in general, looking to the future, what do you think of some of the biggest challenges facing CFOs in hospitals and the health system?

Kurtz: I think work and inflation are by far the biggest challenge. It’s definitely what keeps me up at night and I don’t really see an end right now for that. I’m sure it will happen, but at the moment I don’t see it going to change much in the short term. We are no longer just competing for staff with other hospitals. We compete for employees versus other industries where nurses are leaving health care entirely. Thus, we have our hands full on employment and inflation and are wondering if we can even employ all of our households. A problem at the moment in our society is that many hospitals are not able to staff all the beds they have. So, I worry about that a lot.

Amanda Schiavo is the financial editor at HealthLeaders.

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