Is IPPS Obsolete?

The inpatient prospective payment system provides for a new technology add-on payment, but it is vital for hospitals to understand the formula CMS uses to calculate it.

This article appears in the July/August 2019 edition of HealthLeaders magazine.

The inpatient prospective payment system (IPPS) that CMS and many state Medicaid payers as well as commercial payers rely upon is not capable of appropriately paying for the high costs of new technology, particularly breakthrough drugs.

As of 2001, the IPPS provides for a new technology add-on payment (NTAP) that pays an amount above and beyond the DRG payment for qualifying new technologies that meet CMS criteria.

Yet most hospitals do not understand that this is a formula that pays the lesser of a calculated amount up to the cap that CMS establishes—which, to date, has been 50% of the cost of the new technology. This means the hospital, at best, receives payment for only one-half of the acquisition cost. At prices potentially measured in millions of dollars for cell and gene therapies waiting for FDA approval, this is woefully inadequate payment.

The NTAP cap means that if a drug that costs $250,000, for example, is administered in the inpatient setting, the maximum the hospital could receive in payment under the IPPS would be $125,000. Most hospitals cannot absorb a cost of $125,000 with no opportunity for further payment.

Thus, it is important to understand the formula CMS uses. CMS takes the total covered billed charges from the inpatient claim and multiplies that amount by the hospital’s overall cost-to-charge ratio (CCR).

CMS appears to recognize the problem, at least to some extent, as evidenced in the fiscal year 2020 IPPS proposed rule in which CMS has proposed to raise the cap from 50% to 65%. However, this change does not help hospitals because it preserves the formula that calculates cost from billed charges and then pays up to the cap.

The new cell therapy designed to treat diffuse large B-cell lymphoma, called chimeric antigen receptor T-cell therapy—CAR-T for short—is the current technology impacted the most by this problematic formula. The cost for this technology from both its manufacturers is $373,000. The DRG 016 payment at the national standard amount, not adjusted for wage, medical education, or disproportionate share for this year, is $39,951; for 2020, it is proposed to be $42,493.

For the first time in history, the cost of a single item is multiple times the cost of the patient care services paid via the DRG. In other DRGs, CMS reports that the proportion of device and drug payments can rise to a high of 65%, but CAR-T is around 8.7 times the DRG payment amount.

CMS has solicited comments about its suggested alternatives in the IPPS rule regarding CAR-T payment, such as recognizing the actual acquisition cost and/or paying a uniform NTAP rather than using the CCR to calculate cost from charges. Hopefully, many hospitals and associations, including patient advocacy groups, will comment. But these issues beg the question whether the IPPS is obsolete—at least for these new technologies.