This educational resource provides a comprehensive overview of Medicare payment systems, focusing specifically on how inpatient hospital critical care is funded. Navigating the complexities of healthcare costs can be challenging, especially when it comes to understanding which programs are in place to cover intensive medical services. This document aims to clarify the different Medicare payment structures, with a particular emphasis on the program that addresses inpatient critical care within hospital settings.
I. Medicare Payment Systems Overview
Medicare, the federal health insurance program for individuals 65 and older, certain younger people with disabilities, and people with End-Stage Renal Disease, utilizes various payment systems to reimburse healthcare providers. These systems are designed to ensure that healthcare services are paid for in a structured and predictable manner. A key concept within Medicare’s payment framework is the Prospective Payment System (PPS).
A Prospective Payment System (PPS) is a method of reimbursement where payment is predetermined, regardless of the intensity of services actually provided. This means that hospitals and other healthcare facilities receive a set payment amount based on the patient’s condition and the type of care they require, rather than being paid for each individual service rendered. Medicare employs PPS across a range of healthcare settings, using classification systems to categorize services and determine appropriate payments. For example, Diagnosis-Related Groups (DRGs) are used for hospital inpatient services, and Ambulatory Payment Classifications (APCs) are used for hospital outpatient claims.
This guide will explore various Medicare payment systems, including those for:
- Acute Care Hospital Inpatient Services
- Hospice Care
- Hospital Outpatient Services
- Inpatient Psychiatric Facilities
- Inpatient Rehabilitation Facilities
- Long-Term Care Hospitals
- Ambulatory Surgical Centers
- Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS)
- Home Health Services
- Skilled Nursing Facilities
Our primary focus, however, will be on the Acute Care Hospital Inpatient Prospective Payment System (IPPS), as this is the program most directly relevant to understanding Which Program Pays For Inpatient Hospital Critical Care.
II. Acute Care Hospital Inpatient Prospective Payment System (IPPS) – The Key to Inpatient Critical Care Coverage
The Acute Care Hospital Inpatient Prospective Payment System (IPPS) is the primary Medicare program that pays for inpatient hospital services, including critical care. Hospitals that contract with Medicare for acute inpatient care agree to accept predetermined IPPS rates as full payment for covered services. This system ensures that hospitals are reimbursed for the care they provide to Medicare beneficiaries who require inpatient critical care.
Understanding IPPS Coverage and Episodes of Care
The IPPS benefit covers Medicare patients for up to 90 days of inpatient care per episode of illness, with an additional 60-day lifetime reserve. An episode of care begins when a patient is admitted to the hospital and ends when they have been discharged and remain out of the hospital or skilled nursing facility (SNF) for 60 consecutive days. This definition is crucial for understanding the scope of coverage under IPPS, especially for patients requiring extended critical care.
Annual Updates to IPPS Payment Rates
The Centers for Medicare & Medicaid Services (CMS) annually updates IPPS payment rates to reflect changes in healthcare costs and to incorporate improvements in coding and classification. These updates include adjustments to base rates, wage indexes, Medicare Severity Diagnosis-Related Group (MS-DRG) definitions and weights, and outlier thresholds. These annual adjustments are vital to ensuring that the IPPS program continues to adequately fund inpatient hospital critical care and other services. You can find the latest updates to IPPS payment rates on the CMS website for IPPS regulations and notices.
For Fiscal Year (FY) 2025, the operating payment rates for general acute care hospitals participating in the Hospital Inpatient Quality Reporting (IQR) Program and using certified electronic health records (EHRs) will increase by 2.9%. This increase is derived from a projected FY 2025 IPPS hospital market basket update of 3.4%, reduced by a statutorily required 0.5 percentage point productivity adjustment. Congress determines the operating rate update by considering the projected increase in the hospital market basket index, which measures the price changes of goods and services hospitals purchase to provide patient care, including the resources needed for critical care units.
How IPPS Payment Works for Inpatient Critical Care
Medicare pays acute care hospitals an IPPS payment per inpatient case, or inpatient discharge. This single payment covers a wide range of services delivered during the inpatient stay, including critical care. It is important to note that hospitals cannot separately bill Medicare Part B for outpatient diagnostic services and admission-related outpatient non-diagnostic services provided during the 3 days prior to inpatient admission. These services are bundled into the IPPS payment.
Hospitals Excluded from IPPS
It’s important to understand that certain types of hospitals and hospital units are excluded from the IPPS and are paid under different systems. These exclusions, defined under Section 1886(d)(1)(B) of the Social Security Act, include:
- Cancer hospitals
- Children’s hospitals
- Extended neoplastic disease care hospitals
- Hospitals located outside the 50 states, the District of Columbia, and Puerto Rico (e.g., U.S. Virgin Islands, Guam)
- Inpatient psychiatric facilities (IPFs)
- Inpatient rehabilitation facilities (IRFs)
- Long-term care hospitals (LTCHs)
- Religious nonmedical health care institutions (RNHCIs)
While these facilities are not paid under IPPS, they have their own specific prospective payment systems designed to address their unique service offerings. However, for the vast majority of acute care hospitals providing critical care, the IPPS is the relevant payment program.
III. Medicare Severity Diagnosis-Related Groups (MS-DRGs) – Classifying Inpatient Critical Care Cases
A core element of the IPPS is the use of Medicare Severity Diagnosis-Related Groups (MS-DRGs). These groups are crucial for determining payment under IPPS, especially for complex cases like inpatient hospital critical care. MS-DRGs are a patient classification system designed to reflect the clinical complexity and resource intensity associated with an inpatient hospital stay. CMS assigns inpatient hospital discharges to MS-DRGs based on a range of factors to ensure appropriate payment that reflects the resources used for varying levels of patient severity, which is particularly relevant in critical care settings. You can find more information on MS-DRG classifications and software on the CMS website.
Factors Determining MS-DRG Assignment
Several key pieces of information from a patient’s medical record determine MS-DRG assignment, and consequently, the payment the hospital receives for inpatient critical care. These factors include:
- Principal Diagnosis: The primary condition that led to the hospital admission. In critical care, this might be conditions like sepsis, respiratory failure, or acute myocardial infarction.
- Secondary Diagnoses: Coexisting conditions that impact the complexity and resource use of the inpatient stay. These are particularly important in critical care, where patients often have multiple organ system failures or comorbidities.
- Procedures Performed: Surgical or medical procedures carried out during the hospital stay. Critical care often involves complex procedures, impacting the MS-DRG assignment.
- Patient Demographics: Factors like sex, age, and discharge status also contribute to MS-DRG assignment.
CMS considers up to 25 diagnosis codes and 25 procedure codes for MS-DRG assignment, reflecting the potential complexity of inpatient critical care cases. MS-DRG definitions are reviewed annually to ensure they accurately reflect current medical practice and resource utilization. This annual review is vital for keeping pace with advancements in critical care medicine and ensuring appropriate reimbursement.
Severity Levels within MS-DRGs
The MS-DRG system incorporates three levels of severity based on secondary diagnosis codes, further refining the payment system to account for the varying intensity of inpatient critical care cases:
- Major Complication or Comorbidity (MCC): This represents the highest severity level, indicating conditions that significantly increase hospital resource consumption. MCCs are common in critical care patients and lead to higher MS-DRG payments.
- Complication or Comorbidity (CC): This is the next severity level, indicating conditions that also increase resource consumption, though to a lesser extent than MCCs.
- Non-Complication or Comorbidity (Non-CC): This is the lowest severity level, applied when secondary diagnoses do not significantly affect illness severity or resource use.
MS-DRGs can be further subdivided (or split) into two or three severity levels based on these CC subgroups, allowing for even more granular payment adjustments. Some MS-DRGs are not subdivided, known as base MS-DRGs. For FY 2025, there are 773 MS-DRGs, providing a highly detailed classification system for inpatient hospital services, including critical care.
IV. Base Payment Amounts and Adjustments for Inpatient Critical Care
The IPPS payment is built upon base payment amounts, which are standardized amounts set for operating and capital costs. These are the foundation upon which hospital payments, including those for critical care, are calculated. Operating costs cover labor and supplies, while capital-related costs cover depreciation, interest, rent, and property-related expenses.
These base payment rates are adjusted annually to account for several factors that can significantly influence the cost of providing inpatient critical care:
- MS-DRG Relative Weight: This weight reflects the patient’s clinical condition and the associated treatment costs compared to the average Medicare case. MS-DRGs with higher relative weights, often associated with critical care, result in higher payments.
- Wage Index: This index adjusts for market conditions in the hospital’s location compared to national conditions, specifically reflecting differences in labor costs. Hospitals in areas with higher labor costs receive higher IPPS payments to reflect the increased cost of staffing critical care units.
These adjustments ensure that the IPPS payment system is responsive to both the complexity of patient conditions and the geographic variations in healthcare costs, both critical considerations for funding inpatient hospital critical care.
V. Additional IPPS Payments Relevant to Critical Care
Beyond the base payment and MS-DRG system, several other payment adjustments and add-ons within IPPS can be particularly relevant to hospitals providing inpatient critical care:
- Outlier Payments: Cases that are extraordinarily high-cost, often seen in critical care, can qualify for outlier payments. These payments are designed to protect hospitals from significant financial losses due to unusually expensive cases, which are frequent in critical care.
- Graduate Medical Education (GME) Payments: Hospitals that train residents in approved GME programs receive separate payments for the direct costs of training (direct GME) and adjustments to their operating and capital payment rates to reflect the higher indirect patient care costs associated with teaching hospitals (indirect medical education (IME)). Many major critical care centers are teaching hospitals, making these adjustments important.
- Disproportionate Share Hospital (DSH) Payments: Hospitals that serve a disproportionate share of low-income patients receive increased payments. Critical care units in these hospitals often face unique challenges due to the socioeconomic factors impacting their patient populations.
- New Technology Add-on Payments: Hospitals can receive additional payments for treating patients with certain newly approved, costly technologies that offer a substantial clinical improvement over existing treatments. Critical care is an area where new technologies are frequently adopted, and these payments can facilitate access to cutting-edge treatments.
- Adjustments for Rural and Low-Volume Hospitals: Qualifying rural hospitals and low-volume hospitals can receive payment adjustments to ensure access to care in underserved areas. Critical care services in rural settings are particularly vulnerable, making these adjustments vital.
These additional payment mechanisms within IPPS further refine the system to address the unique financial challenges and resource needs associated with providing inpatient hospital critical care.
VI. Determining an IPPS Payment – A Step-by-Step Process
To understand how a hospital receives payment for inpatient hospital critical care under IPPS, it’s helpful to outline the determination process:
- Claim Submission and MS-DRG Assignment: The hospital submits a claim to its Medicare Administrative Contractor (MAC) for each patient treated. Based on the claim information, the MAC assigns the case to an MS-DRG.
- Base Payment Rate Calculation: The base payment rate, or standardized dollar amount, is determined. This includes both labor-related and non-labor-related shares.
- Wage Index Adjustment: The labor-related share of the base payment rate is adjusted by a wage index to reflect area labor cost differences. The labor share is set at 67.6% if the hospital’s wage index is greater than 1.0, and 62% if the wage index is less than or equal to 1.0. The non-labor-related share is adjusted by a Cost-of-Living Adjustment (COLA) factor for hospitals in Alaska or Hawaii.
- MS-DRG Weighting Factor Application: The wage-adjusted standardized amount is multiplied by the MS-DRG weighting factor. This weight is specific to each MS-DRG and reflects the average resources needed to treat cases within that MS-DRG compared to the average resources for all MS-DRGs.
This step-by-step process illustrates how the IPPS payment is calculated, taking into account patient complexity (MS-DRG), geographic cost variations (wage index), and the standardized base payment rate.
Figure 1. Acute Care Hospital IPPS: Operating Base Payment Rate Adjusted for Geographic Factors
Figure 2. Acute Care Hospital IPPS: Capital Base Payment Rate
VII. MS-DRG Relative Weights and Market Condition Adjustments
MS-DRG Relative Weights are a cornerstone of the IPPS, as they directly influence the payment amount for each case, including critical care. Each MS-DRG is assigned a weight reflecting the average case cost within that group compared to the average Medicare case cost. These weights are used for both operating and capital payment rates. CMS annually adjusts MS-DRG weights based on standardized charges and costs, ensuring that the payment system remains aligned with evolving healthcare costs and practices.
Market Condition Adjustments, particularly the area wage index, are crucial for accounting for geographic variations in labor costs. The wage index reflects differences in hospital wage rates among labor markets by comparing the average hourly wage (AHW) for hospital workers in each area to the national average. This adjustment is especially significant for critical care, which requires highly skilled and specialized personnel whose wages can vary substantially across different regions. Hospitals believing their wage index is inaccurate can request geographic reclassification through the Medicare Geographic Classification Review Board (MGCRB).
VIII. Quality and Value-Based Programs within IPPS
It is important to recognize that the IPPS is not solely a payment system; it also incorporates mechanisms to promote quality and value in inpatient hospital care, including critical care. Several programs within IPPS link payment to hospital performance on quality measures:
- Hospital Value-Based Purchasing (VBP) Program: This program adjusts hospitals’ base operating MS-DRG payments based on their performance on quality measures. Hospitals can receive upward, downward, or neutral adjustments, incentivizing high-quality care delivery.
- Hospital Readmissions Reduction Program (HRRP): This program reduces payments to hospitals with higher-than-expected readmission rates for certain conditions. While not directly focused on critical care, reducing readmissions is a crucial goal for patients who have received critical care services.
- Hospital-Acquired Condition (HAC) Reduction Program: This program reduces overall IPPS payments for hospitals ranking in the worst-performing quartile on measures of Hospital-Acquired Conditions (HACs). Preventing HACs, like infections, is particularly important in critical care settings.
- Hospital Inpatient Quality Reporting (IQR) Program: This program requires hospitals to report quality-of-care information publicly. Hospitals failing to meet reporting requirements face payment reductions. Public reporting encourages transparency and quality improvement efforts.
These programs demonstrate that Medicare’s approach to paying for inpatient hospital critical care is not just about covering costs, but also about incentivizing and rewarding high-quality, efficient, and patient-centered care.
IX. Beyond IPPS: Other Medicare Payment Systems – A Brief Overview
While IPPS is the primary program paying for inpatient hospital critical care, Medicare utilizes a range of other payment systems for different healthcare settings and services. Here’s a brief overview of some of these systems, as detailed in the original document:
- Ambulatory Surgical Center (ASC) Payment System: This system covers outpatient surgical services provided in ASCs for patients who do not require inpatient hospitalization.
- DMEPOS Fee Schedule: This fee schedule covers Durable Medical Equipment, Prosthetics, Orthotics, and Supplies provided under Medicare Part B.
- Home Health Prospective Payment System (HH PPS): This system covers home health services for eligible Medicare beneficiaries needing skilled care in their homes.
- Hospice Payment System: This system covers comprehensive hospice care for terminally ill individuals.
- Hospital Outpatient Prospective Payment System (OPPS): This system covers hospital outpatient services, including emergency department visits and clinic services.
- Inpatient Psychiatric Facility Prospective Payment System (IPF PPS): This system covers inpatient psychiatric services provided in specialized facilities.
- Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS): This system covers intensive rehabilitation services provided in inpatient rehabilitation facilities.
- Long-Term Care Hospital Prospective Payment System (LTCH PPS): This system covers care in long-term care hospitals for patients with complex medical needs requiring extended hospital stays.
- Skilled Nursing Facility Prospective Payment System (SNF PPS): This system covers skilled nursing care provided in skilled nursing facilities.
While these systems are not directly responsible for paying for inpatient hospital critical care, understanding their existence within the broader Medicare landscape provides context for how different types of healthcare services are funded.
X. Conclusion: IPPS – The Program Covering Inpatient Hospital Critical Care
In conclusion, when considering “which program pays for inpatient hospital critical care,” the answer is primarily the Medicare Acute Care Hospital Inpatient Prospective Payment System (IPPS). This comprehensive system is designed to reimburse hospitals for the full spectrum of inpatient services, including the highly resource-intensive care provided in critical care units.
The IPPS, through its use of MS-DRGs, base payment rates, and various adjustments, aims to accurately reflect the cost of providing care for diverse patient conditions, including the most complex and critical illnesses. Furthermore, the integration of quality and value-based programs within IPPS underscores Medicare’s commitment to not only paying for care but also promoting high-quality and efficient healthcare delivery in the inpatient hospital setting. While other Medicare payment systems exist for different types of healthcare services, IPPS remains the cornerstone for funding inpatient hospital critical care for Medicare beneficiaries.
Disclaimer: This information is for educational purposes only and should not be considered as legal or financial advice. For specific guidance on Medicare payment policies, please consult official CMS resources and regulations.
Resources:
- Medicare Learning Network® (MLN)
- CMS.gov – Centers for Medicare & Medicaid Services
- Social Security Act
- Electronic Code of Federal Regulations (eCFR)
