University of Michigan Health-West CFO Chris Kurtz Discusses The IPPS Final Rule

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

On August 1, CMS announced the inpatient prospective payment system (IPPS) rule for 2023, which increased the hospital reimbursement rate by 4.3%, for a total of $2.6 billion for the next fiscal year.

To get a better understanding of what this final rule means, HealthLeaders connected with Chris Kurtz, CFO of the University of Michigan Health-West. Kurtz shared his thoughts on the IPPS final rule and its 4.3% reimbursement rate in an upcoming episode of the HealthLeaders podcast.

HealthLeaders: What is the IPPS final rule?

Chris Kurtz: It's the method of determining both payment rates for Medicare and Medicaid, as well as the payment policy of CMS. It includes not only payment rates to the acute care hospitals, but also to long-term acute care hospitals. It includes quality programs, value-based programs, and even a little bit on the medical education funding side of things.

HL: CMS had originally proposed a 3.2% reimbursement rate, which is now 4.3%. Why the change?

Kurtz: Each spring CMS posts its proposed rates and policy changes for public comment. That initial proposal last spring was, I believe, a 3.2% of an increase in what CMS refers to as its market basket rate. Others might consider this the core rate increase, [since 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% was just not nearly enough to offset all the inflation that we're experiencing, certainly the highest in the last 40 years. And so, CMS went back and did take some of that feedback into their final policy.

HL: What are your feelings on the new rate?

Kurtz: Like most hospital CFOs, I appreciate the fact that CMS has recognized that inflation is a significant issue, and they actually went back and adjusted their rates for that. However, I don't think I'm alone in [believing it] doesn't keep up with the inflation we've actually been experiencing. So, while it's nice to have, it's probably not likely to fix a lot of the problems that we've got going on.

CMS notes that this is the largest increase they've had in the last 30 years. However, as everybody is all too aware right now, current inflation is the highest it's been in 40 years. So, there's already a gap there. The other thing for the audience to remember is that the 4% increase in rates doesn't account for every policy change that's in that IPPS rule. So, capital spending, for instance, is only 2.3%.

At our hospital, construction costs have nearly doubled in the last two years. Uncompensated care is being reduced in the policy to the tune of I think over $300,000,000 just in the state of Michigan alone. We've done our own analysis of what we believe this policy change will do to our own hospital and we estimate that the 4.3% is actually more like a 3.4% increase once you net everything down and you look at all the different parts of the policy.

HL: How is inflation affecting your hospital?

Kurtz: Devastating, to say the least. Our hospital runs on a fiscal year, not a calendar year. So, we run from July to June each year. In the first six months of our 2022, which just wrapped up, we had a pretty healthy, pretty typical 3% operating margin that allows us to reinvest in the buildings and the organization and our people. All the stuff that CFOs are always talking about. But the second six months from January to June of our 2022 year have completely wiped out any margin we had. I think we are not alone like most hospitals in the country, we actually flipped to an operating loss come January through June of 2022, primarily 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 unsustainable. The last six months have been completely devastating and I think you’re going to see more reductions in staff and services coming in the next few months. I know in our own community here there's been some [staffing, closure, and regulatory] announcements already. There are more and more announcements being made nationally each and every day. I expect that to continue for a little while before it gets any better.

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

Kurtz: The concept is a long time coming and I'll say shame on our industry for not addressing it sooner and having somebody tell us how to fix the problem, rather than us as an industry trying to fix it ourselves. And so, because others have fixed it on our behalf, I do have some concerns about whether it can be operationalized or not.

I worry about our ability to provide accurate estimates in an industry like ours. We can give estimates up front, but very often things change once a procedure is started or once somebody's under anesthesia. And can we continue to give those estimates under certain circumstances like that? So, I think there's still more to come. We're working through it, and I think we're doing OK. But I do worry about the operational side of whether we can do what's being asked of us.

HL: Do you think the surprise billing regulations will impact care in any way?

Kurtz: It may slow it down a little bit. We're a hospital with an open medical staff, which means we have a lot of surgeons and others in the hospital who are not employed by our hospital. So, getting that coordination of the physician claim, and the hospital claim, and trying to do all of that within three days or so could be challenging. So, I do wonder if this is going to delay certain services perhaps as we try and figure all of this out.

HL: And finally, speaking more generally, when looking ahead, what do you think are some of the biggest challenges facing hospital and health system CFOs?

Kurtz: I think labor and inflation are by far the largest challenges. It's certainly what keeps me up at night and I don't really see an end at the moment to it. I'm sure it will, but at the moment I don't see it changing a whole lot in the short term. We're not just competing for staff anymore against other hospitals. We're competing for staff against other industries as nurses are leaving healthcare altogether. And so, we've got our hands full on labor and inflation and wondering if we can even staff all the beds we have. There's an issue right now in our community with a lot of hospitals not being able to staff all the beds they have. So, I do worry about that a lot.