You are using an unsupported browser. This web site is designed for the current versions of Microsoft Edge, Google Chrome, Mozilla Firefox, or Safari.
The Office of the Federal Register publishes documents on behalf of Federal agencies but does not have any authority over their programs. We recommend you directly contact the agency associated with the content in question.
If you have comments or suggestions on how to improve the www.ecfr.gov website or have questions about using www.ecfr.gov, please choose the 'Website Feedback' button below.
If you would like to comment on the current content, please use the 'Content Feedback' button below for instructions on contacting the issuing agency
Enhanced content is provided to the user to provide additional context.
This content is from the eCFR and is authoritative but unofficial.
Navigate by entering citations or phrases (eg: 1 CFR 1.1 49 CFR 172.101 Organization and Purpose 1/1.1 Regulation Y FAR).
Choosing an item from citations and headings will bring you directly to the content. Choosing an item from full text search results will bring you to those results. Pressing enter in the search box will also bring you to search results.
Background and more details are available in the Search & Navigation guide.
| Pricing Methodology | 512.540 – 512.545 | |||||||
| ||||||||
42 U.S.C. 1302, 1315a, and 1395hh.
85 FR 61362, Sept. 29, 2020, unless otherwise noted.
89 FR 69914, Aug. 28, 2024, unless otherwise noted.
This content is from the eCFR and may include recent changes applied to the CFR. The official, published CFR, is updated annually and available below under "Published Edition". You can learn more about the process here.
Subscribe to: 42 CFR Part 512 Subpart E - Pricing Methodology
View the most recent official publication:
These links go to the official, published CFR, which is updated annually. As a result, it may not include the most recent changes applied to the CFR. Learn more.
Information and documentation can be found in our developer resources.
The Code of Federal Regulations (CFR) is the official legal print publication containing the codification of the general and permanent rules published in the Federal Register by the departments and agencies of the Federal Government. The Electronic Code of Federal Regulations (eCFR) is a continuously updated online version of the CFR. It is not an official legal edition of the CFR.
Learn more about the eCFR, its status, and the editorial process.
(a) Preliminary target price application. CMS establishes preliminary target prices for TEAM participants for each performance year of the model as follows:
(1) MS-DRG/HCPCS episode type. CMS uses the MS-DRGs and, as applicable, HCPCS codes specified in § 512.525(d) when calculating the preliminary target prices for each MS-DRG/HCPCS episode type.
(i) CMS determines a separate preliminary target price for each of the 24 MS-DRGs specified in § 512.525(d).
(ii) Preliminary target prices for a subset of the MS-DRGs specified in § 512.525(d) include certain HCPCS codes as follows:
(A) HCPCS 27130 and 27447 are included in MS-DRG 470.
(B) HCPCS 27702 is included in MS-DRG 469.
(C) HCPCS 22551 and 22554 are included in MS-DRG 473.
(D) HCPCS 22612 and 22630 are included in MS-DRG 451.
(E) HCPCS 22633 is included in MS-DRG 402.
(2) Applicable time period for preliminary target prices. CMS calculates preliminary target prices for each MS-DRG/HCPCS episode type and region for each performance year and applies the preliminary target price to each episode based on the episode's date of discharge from the anchor hospitalization or the date of the anchor procedure, as applicable. CMS also does all of the following:
(i) Accounts for MS-DRG and HCPCS/APC code changes between the baseline period and performance year by identifying diagnosis or procedure codes that are being moved from one MS-DRG or HCPCS/APC to another for the relevant performance year and mapping the new or revised MS-DRG or HCPCS/APC codes to the original codes that were used in the baseline period.
(ii) Constructs preliminary target prices using the remapped MS-DRG or HCPCS/APC codes in the same manner described in paragraph (b) of this section, with target prices for each MS-DRG/HCPCS episode type, inclusive of episodes initiated by anchor hospitalizations and anchor procedures that would be related to the remapped MS-DRG or HCPCS/APC codes.
(iii) Adjusts the preliminary target price by calculating and applying the scaling factor to the standardized episode spending of the MS-DRG portion for the anchor hospitalization or standardized episode spending of the HCPCS/APC portion of the anchor procedure.
(3) Episodes that begin in one performance year and end in the subsequent performance year. CMS applies the preliminary target price to the episode based on the date of discharge from the anchor hospitalization or the date of the anchor procedure, as applicable, and reconciles the episode based on the date of discharge from the anchor hospitalization or the date of the anchor procedure.
(b) Preliminary target price calculation.
(1) Calculation of the preliminary target price. CMS calculates preliminary target prices based on average baseline episode spending for the region where the TEAM participant is located.
(i) The region used for calculating the preliminary target price corresponds to the U.S. Census Division associated with the primary address of the CCN of the TEAM participant, and the regional episode spending amount is based on all hospitals in the region, except as specified in § 512.540(b)(1)(ii).
(ii) In cases where a TEAM participant is located in a mandatory CBSA selected for participation in TEAM which spans more than one region, the TEAM participant and all other hospitals in the mandatory CBSA are grouped into the region where the most populous city in the mandatory CBSA is located for pricing and payment calculations.
(2) Baseline periods and associated performance years. CMS uses the following baseline periods to determine baseline episode spending:
(i) Performance Year 1: Episodes with anchor hospitalization start dates or anchor procedure dates beginning on or after January 1, 2022, and anchor hospitalization discharge dates or anchor procedure dates between January 1, 2022, and December 31, 2024.
(ii) Performance Year 2: Episodes with anchor hospitalization or anchor procedure start dates beginning on or after January 1, 2023, and anchor hospitalization discharge dates or anchor procedure dates between January 1, 2023, and December 31, 2025.
(iii) Performance Year 3: Episodes with anchor hospitalization or anchor procedure start dates beginning on or after January 1, 2024, and anchor hospitalization discharge dates or anchor procedure dates between January 1, 2024, and December 31, 2026.
(iv) Performance Year 4: Episodes with anchor hospitalization or anchor procedure start dates beginning on or after January 1, 2025, and anchor hospitalization discharge dates or anchor procedure dates between January 1, 2025, and December 31, 2027.
(v) Performance Year 5: Episodes with anchor hospitalization or anchor procedure start dates beginning on or after January 1, 2026, and anchor hospitalization discharge dates or anchor procedure dates between January 1, 2026, and December 31, 2028.
(3) Baseline episode spending weights. CMS calculates the benchmark price as the weighted average of baseline episode spending, applying the following weights:
(i) Baseline episode spending from baseline year 1 is weighted at 17 percent.
(ii) Baseline episode spending from baseline year 2 is weighted at 33 percent.
(iii) Baseline episode spending from baseline year 3 is weighted at 50 percent.
(4) Exclusion for high episode spending. CMS applies a high-cost outlier cap to baseline episode spending at the 99th percentile of regional spending for each of the MS-DRG/HCPCS episode types specified in paragraph (a)(1)(ii) of this section for each baseline year individually.
(5) Exclusion of incentive programs and add-on payments under existing Medicare payment systems. Certain Medicare incentive programs and add-on payments are excluded from baseline episode spending by using, with certain modifications, the CMS Price (Payment) Standardization Detailed Methodology used for the Medicare spending per beneficiary measure in the Hospital Value-Based Purchasing Program.
(6) Prospective normalization factor. Based on the episodes in the most recent calendar year of the baseline period, CMS calculates a prospective normalization factor at the MS-DRG/HCPCS region level, which is a multiplier that ensures that the average of the total risk-adjusted benchmark price does not exceed the average of the total non-risk adjusted benchmark price, by doing the following:
(i) CMS applies risk adjustment multipliers, as specified in § 512.545(a)(1) through (3), to the most recent baseline year episodes to calculate the estimated risk-adjusted target price for all performance year episodes.
(ii) CMS divides the mean of the preliminary target price for each episode across all hospitals and regions by the mean of the estimated risk-adjusted target price calculated in § 512.540(b)(6)(i) for the same episode types across all hospitals and regions.
(7) Prospective trend factor. CMS calculates a multiplier for each MS-DRG/HCPCS episode type and region which is applied to the most recent calendar year of the applicable baseline period. The multiplier is calculated using linear regression on the logarithmically transformed average regional spending for each MS-DRG/HCPCS episode type in the baseline years and trend years at both the regional and national level. CMS exponentiates the coefficient from this regression to calculate the estimated annual change (where an exponentiated coefficient of 1 signifies no change) in average regional spending for each MS-DRG/HCPCS episode type from year to year. CMS then squares this value to calculate the 2-year prospective trend factor. The prospective trend factor for each MS-DRG/HCPCS episode type and region is the average (arithmetic mean) of the multiplier for that MS-DRG/HCPCS episode type and region and the national average for that MS-DRG/HCPCS episode type.
(8) Communication of preliminary target prices. CMS communicates the preliminary target prices for each MS-DRG/HCPCS episode type for each region, and the preliminary target prices for each MS-DRG/HCPCS episode type specific to the TEAM participant before the performance year in which they apply.
(c) Discount factor. CMS incorporates an episode category specific discount factor of 1.5 percent for CABG and Major Bowel episodes and 2 percent for LEJR, SHFFT, and Spinal Fusion episodes to the TEAM participant's preliminary episode target prices intended to reflect Medicare's potential savings from TEAM.
[89 FR 69914, Aug. 28, 2024, as amended at 90 FR 37204, Aug. 4, 2025]
CMS calculates the reconciliation target price as follows:
(a) CMS risk adjusts the preliminary episode target prices computed under § 512.540 at the beneficiary level using a TEAM Hierarchical Condition Category (HCC) count risk adjustment factor, an age bracket risk adjustment factor, a beneficiary economic risk adjustment factor, and at the hospital level using a hospital bed size risk adjustment factor and a safety net hospital risk adjustment factor, and at the episode category-specific beneficiary level using factors specified in paragraphs (a)(6)(i) through (v) of this section.
(1) The TEAM HCC count risk adjustment factor uses five variables, representing beneficiaries with zero, one, two, three, or four or more CMS-HCC conditions based on a 180-day lookback period that ends on the day prior to the anchor hospitalization or anchor procedure.
(2) The age bracket risk adjustment factor uses four variables, representing beneficiaries in the following age groups as of the first day of the episode:
(i) Less than 65 years.
(ii) 65 to less than 75 years.
(iii) 75 years to less than 85 years.
(iv) 85 years or more.
(3) The beneficiary economic risk adjustment factor uses two variables, representing beneficiaries that, as of the first day of the episode—
(i) Meet one or more of the following economic measures:
(A) [Reserved]
(B) National CDI above the 80th percentile.
(C) Eligibility for the low-income subsidy.
(D) Eligibility for full Medicaid benefits.
(ii) Do not meet any of the three economic measures in paragraph (a)(3)(i) of this section.
(4) The hospital bed size risk adjustment factor uses four variables based on the TEAM participant's characteristics:
(i) 250 beds or fewer.
(ii) 251-500 beds.
(iii) 501-850 beds.
(iv) 850 beds or more.
(5) The safety net hospital risk adjustment factor is based on the TEAM participant meeting the definition of safety net hospital, as defined in § 512.505.
(6) Episode category-specific beneficiary level risk adjustment factors represent the presence or absence in beneficiaries, based on a 180-day lookback period that ends on the day prior to the anchor hospitalization or anchor procedure, of each of the following conditions:
(i) CABG episode category.
(A) Prior post-acute care use.
(B) HCC 37: Diabetes with Chronic Complications.
(C) HCC 48: Morbid Obesity.
(D) HCC 125: Dementia, Severe.
(E) HCC 126: Dementia, Moderate.
(F) HCC 127: Dementia, Mild or Unspecified.
(G) HCC 155: Major Depression, Moderate or Severe, without Psychosis.
(H) HCC 199: Parkinson and Other Degenerative Disease of Basal Ganglia.
(I) HCC 213: Cardio-Respiratory Failure and Shock.
(J) HCC 224: Acute on Chronic Heart Failure.
(K) HCC 226: Heart Failure, Except End-Stage and Acute.
(L) HCC 228: Acute Myocardial Infarction.
(M) HCC 229: Unstable Angina and Other Acute Ischemic Heart Disease.
(N) HCC 238: Specified Heart Arrhythmias.
(O) HCC 249: Ischemic or Unspecified Stroke.
(P) HCC 253: Hemiplegia/Hemiparesis.
(Q) HCC 263: Atherosclerosis of Arteries of the Extremities with Ulceration or Gangrene.
(R) HCC 280: Chronic Obstructive Pulmonary Disease, Interstitial Lung Disorders, and Other Chronic Lung Disorders.
(S) HCC 298: Severe Diabetic Eye Disease, Retinal Vein Occlusion, and Vitreous Hemorrhage.
(T) HCC 326: Chronic Kidney Disease, Stage 5.
(U) HCC 327: Chronic Kidney Disease, Severe (Stage 4).
(V) HCC 383: Chronic Ulcer of Skin, Except Pressure, Not Specified as Through to Bone or Muscle.
(W) [Reserved]
(X) HCC 409: Amputation Status, Lower Limb/Amputation Complications.
(ii) LEJR episode category.
(A) Ankle procedure or reattachment, partial hip procedure, partial knee arthroplasty, total hip arthroplasty or hip resurfacing procedure, and total knee arthroplasty.
(B) Disability as the original reason for Medicare enrollment.
(C) Prior post-acute care use.
(D) HCC 17: Cancer Metastatic to Lung, Liver, Brain, and Other Organs; Acute Myeloid Leukemia Except Promyelocytic.
(E) HCC 36: Diabetes with Severe Acute Complications.
(F) HCC 37: Diabetes with Chronic Complications.
(G) HCC 48: Morbid Obesity.
(H) HCC 125: Dementia, Severe.
(I) HCC 126: Dementia, Moderate.
(J) HCC 127: Dementia, Mild or Unspecified.
(K) HCC 151: Schizophrenia.
(L) HCC 155: Major Depression, Moderate or Severe, without Psychosis.
(M) HCC 199: Parkinson and Other Degenerative Disease of Basal Ganglia.
(N) HCC 224: Acute on Chronic Heart Failure.
(O) HCC 225: Acute Heart Failure (Excludes Acute on Chronic).
(P) HCC 226: Heart Failure, Except End-Stage and Acute.
(Q) HCC 238: Specified Heart Arrhythmias.
(R) HCC 253: Hemiplegia/Hemiparesis.
(S) HCC 267: Deep Vein Thrombosis and Pulmonary Embolism.
(T) HCC 280: Chronic Obstructive Pulmonary Disease, Interstitial Lung Disorders, and Other Chronic Lung Disorders.
(U) [Reserved]
(V) HCC 326: Chronic Kidney Disease, Stage 5.
(W) HCC 327: Chronic Kidney Disease, Severe (Stage 4).
(X) HCC 383: Chronic Ulcer of Skin, Except Pressure, Not Specified as Through to Bone or Muscle.
(Y) HCC402: Hip Fracture/Dislocation.
(iii) Major Bowel Procedure episode category.
(A) Long-term institutional care use.
(B) HCC 17: Cancer Metastatic to Lung, Liver, Brain, and Other Organs; Acute Myeloid Leukemia Except Promyelocytic.
(C) HCC 22: Bladder, Colorectal, and Other Cancers.
(D) HCC 37: Diabetes with Chronic Complications.
(E) HCC 48: Morbid Obesity.
(F) HCC 78: Intestinal Obstruction/Perforation.
(G) HCC 125: Dementia, Severe.
(H) HCC 126: Dementia, Moderate.
(I) HCC 127: Dementia, Mild or Unspecified.
(J) HCC 151: Schizophrenia.
(K) HCC 155: Major Depression, Moderate or Severe, without Psychosis.
(L) HCC 199: Parkinson and Other Degenerative Disease of Basal Ganglia.
(M) HCC 201: Seizure Disorders and Convulsions.
(N) HCC 211: Respirator Dependence/Tracheostomy Status/Complications.
(O) HCC 213: Cardio-Respiratory Failure and Shock.
(P) HCC 224: Acute on Chronic Heart Failure.
(Q) HCC 226: Heart Failure, Except End-Stage and Acute.
(R) HCC 238: Specified Heart Arrhythmias.
(S) HCC 253: Hemiplegia/Hemiparesis.
(T) HCC 267: Deep Vein Thrombosis and Pulmonary Embolism.
(U) HCC 280: Chronic Obstructive Pulmonary Disease, Interstitial Lung Disorders, and Other Chronic Lung Disorders.
(V) HCC 326: Chronic Kidney Disease, Stage 5.
(W) HCC 327: Chronic Kidney Disease, Severe (Stage 4).
(X) HCC 383: Chronic Ulcer of Skin, Except Pressure, Not Specified as Through to Bone or Muscle.
(Y) HCC 463: Artificial Openings for Feeding or Elimination.
(iv) SHFFT episode category.
(A) HCC 36: Diabetes with Severe Acute Complications.
(B) HCC 37: Diabetes with Chronic Complications.
(C) HCC 38: Diabetes with Glycemic, Unspecified, or No Complications.
(D) HCC 48: Morbid Obesity.
(E) HCC 63: Chronic Liver Failure/End-Stage Liver Disorders.
(F) HCC 93: Rheumatoid Arthritis and Other Specified Inflammatory Rheumatic Disorders.
(G) HCC 109: Acquired Hemolytic, Aplastic, and Sideroblastic Anemias.
(H) HCC 125: Dementia, Severe.
(I) HCC 126: Dementia, Moderate.
(J) HCC 127: Dementia, Mild or Unspecified.
(K) HCC 180: Quadriplegia.
(L) HCC 181: Paraplegia.
(M) HCC 191: Quadriplegic Cerebral Palsy.
(N) HCC 198: Multiple Sclerosis.
(O) HCC 199: Parkinson and Other Degenerative Disease of Basal Ganglia.
(P) HCC 211: Respirator Dependence/Tracheostomy Status/Complications.
(Q) HCC 213: Cardio-Respiratory Failure and Shock.
(R) HCC 226: Heart Failure, Except End-Stage and Acute.
(S) HCC 238: Specified Heart Arrhythmias.
(T) HCC 249: Ischemic or Unspecified Stroke.
(U) HCC 253: Hemiplegia/Hemiparesis.
(V) HCC 280: Chronic Obstructive Pulmonary Disease, Interstitial Lung Disorders, and Other Chronic Lung Disorders.
(W) HCC 326: Chronic Kidney Disease, Stage 5.
(X) HCC 383: Chronic Ulcer of Skin, Except Pressure, Not Specified as Through to Bone or Muscle.
(Y) HCC 402: Hip Fracture/Dislocation.
(v) Spinal Fusion episode category.
(A) Prior post-acute care use.
(B) HCC 17: Cancer Metastatic to Lung, Liver, Brain, and Other Organs; Acute Myeloid Leukemia Except Promyelocytic.
(C) HCC 18: Cancer Metastatic to Bone, Other and Unspecified Metastatic Cancer; Acute Leukemia Except Myeloid.
(D) HCC 37: Diabetes with Chronic Complications.
(E) HCC 48: Morbid Obesity.
(F) HCC 93: Rheumatoid Arthritis and Other Specified Inflammatory Rheumatic Disorders.
(G) HCC 125: Dementia, Severe.
(H) HCC 126: Dementia, Moderate.
(I) HCC 127: Dementia, Mild or Unspecified.
(J) HCC 155: Major Depression, Moderate or Severe, without Psychosis.
(K) HCC 180: Quadriplegia.
(L) HCC 181: Paraplegia.
(M) HCC 182: Spinal Cord Disorders/Injuries.
(N) HCC 192: Cerebral Palsy, Except Quadriplegic.
(O) HCC 193: Chronic Inflammatory Demyelinating Polyneuritis and Multifocal Motor Neuropathy.
(P) HCC 199: Parkinson and Other Degenerative Disease of Basal Ganglia.
(Q) HCC 224: Acute on Chronic Heart Failure.
(R) HCC 226: Heart Failure, Except End-Stage and Acute.
(S) HCC 238: Specified Heart Arrhythmias.
(T) HCC 249: Ischemic or Unspecified Stroke.
(U) HCC 253: Hemiplegia/Hemiparesis.
(V) HCC 254: Monoplegia, Other Paralytic Syndromes.
(W) HCC 267: Deep Vein Thrombosis and Pulmonary Embolism.
(X) HCC 326: Chronic Kidney Disease, Stage 5.
(Y) HCC 383: Chronic Ulcer of Skin, Except Pressure, Not Specified as Through to Bone or Muscle.
(Z) HCC 401: Vertebral Fractures without Spinal Cord Injury.
(b) All risk adjustment factors are computed prior to the start of the performance year via a linear regression analysis. The regression analysis is computed using 3 years of claims data as follows:
(1) For performance year 1, CMS uses claims data with dates of service dated January 1, 2022 to December 31, 2024.
(2) For performance year 2, CMS uses claims data with dates of service dated January 1, 2023 to December 31, 2025.
(3) For performance year 3, CMS uses claims data with dates of service dated January 1, 2024 to December 31, 2026.
(4) For performance year 4, CMS uses claims data with dates of service dated January 1, 2025 to December 31, 2027.
(5) For performance year 5, CMS uses claims data with dates of service dated January 1, 2026 to December 30, 2028.
(c) The annual linear regression analysis produces exponentiated coefficients to determine the anticipated marginal effect of each risk adjustment factor on episode costs. CMS transforms, or exponentiates, these coefficients, and the resulting coefficients are the beneficiary and hospital-level risk adjustment factors, specified in paragraphs (a)(1) through (6) of this section, that would be used during reconciliation for the subsequent performance year.
(d) At the time of reconciliation, the preliminary target prices computed under § 512.540 are risk adjusted by applying the applicable beneficiary level and hospital-level risk adjustment factors specific to the beneficiary in the episode, as set forth in paragraphs (a)(1) through (6) of this section.
(e) The risk-adjusted preliminary target prices are normalized at reconciliation to ensure that the average of the total risk-adjusted preliminary target price does not exceed the average of the total non-risk adjusted preliminary target price.
(1) The final normalization factor at reconciliation—
(i) Is the mean benchmark price for each MS-DRG/HCPCS episode type and region divided by the mean risk-adjusted benchmark price for the same MS-DRG/HCPCS episode type and region.
(ii) As applied, cannot exceed ±5 percent of the prospective normalization factor (as specified in § 512.540(b)(6)).
(2) CMS applies the final normalization factor to the previously calculated, beneficiary and provider level, risk-adjusted target prices specific to each region and MS-DRG/HCPCS episode type.
(f) CMS calculates a multiplier for each MS-DRG/HCPCS episode type and region which is applied during reconciliation to the most recent calendar year of the applicable baseline period. The multiplier is calculated as the average regional capped performance year episode spending for each MS-DRG/HCPCS episode type divided by the average regional capped baseline period episode spending for each MS-DRG/HCPCS episode type.
(1) The retrospective trend factor is capped so that the maximum difference cannot exceed ±3 percent of the prospective trend factor (as specified in § 512.540(b)(7)).
(2) CMS applies the capped retrospective trend factor to the previously calculated normalized, risk adjusted target prices specific to each region and MS-DRG/HCPCS episode type, as specified in paragraph (e)(2) of this section, to calculate the reconciliation target prices, which are compared to performance year spending at reconciliation, as specified in § 512.550(c).
[89 FR 69914, Aug. 28, 2024, as amended at 90 FR 37205, Aug. 4, 2025]