Last year, the Centers for Medicare & Medicaid Services (CMS) made one of the most sweeping changes to its acute hospital inpatient reimbursement system since the introduction of diagnosis-related groups (DRGs). With the adoption of Medicare severity-adjusted DRGs (MS-DRGs) for the hospital prospective payment system (PPS), CMS has created a patient classification system that should better recognize the severity of illness in Medicare payment rates. The number of DRGs changed from 538 to 745, and there is an increased emphasis on coding secondary diagnoses to more properly represent the severity of illness of a Medicare patient.

CMS indicated in the FY08 rule for the hospital PPS that it expects Medicare payments to hospitals will increase as a result of MS-DRGs because the new system strengthens incentives to improve clinical documentation and coding. CMS believes that better documentation and coding will in turn lead to an increase in the Medicare case mix index (CMI) of hospitals.  

CMS has attempted to make a prospective adjustment for improved coding and documentation to maintain a level of budget neutrality. By lowering the standardized amount, the dollar figure that is used to convert a case weight into a reimbursement amount, CMS can offset the expected increase in CMI. In the FY08 final rule, CMS proposed decreasing the standardized amount by 1.2 percent for FY08, another 1.8 percent in FY09, and yet another 1.8 percent in FY10.

On Sept. 29, 2007, Congress enacted a bill (the TMA, Abstinence Education, and QI Programs Extension Act) that decreased the coding adjustments to 0.6 percent in 2008 and another 0.9 percent in 2009, cutting the offset amount in half. The act also requires CMS to make subsequent payment adjustments in FY10, FY11, and FY12 if changes in the Medicare CMI in FY08 and FY09 exceed real changes in underlying patient severity by more than the 0.6 percent and
0.9 percent adjustments currently required by statute.  If the increase in severity measured by the CMI is not due to an increase in underlying patient severity, this provision means there will be a bigger negative adjustment in 2010.

According to CMS in the FY09 rule for the hospital PPS, one way to study increases in the CMI that are due to better documentation and coding is to study increases in the coding of major complicating conditions (MCCs) and decreases in cases with noncomplicating conditions (NCCs).

To this end, an analysis was undertaken that looked at all 2007 Medicare Provider Analysis and Review (MedPAR) data (100 percent of Medicare fee-for-service claims) as well as data from the first and second quarters of FY07 and the first and second quarters of FY08 from a number of hospitals and Medicare Advantage payers. The data were divided based on the type of DRG (see Exhibit 1):

  • DRGs that have a three-way split (MCC, CC, and NCC)
  • DRGs that have a two-way split (MCC and either CC or NCC)
  • DRGs that have a two-way split (NCC and either MCC or CC)
  • DRGs that have no split

Exhibit 1

exhibit-1-Assessing the Financial Impact of MS-DRGs

The FY07 data look similar to the MP07 data, but the FY08 data show a dramatic increase in MCCs and CCs. If this information proves to be consistent across all Medicare data for 2008, we can expect a more significant decrease in standardized amounts in 2010 and beyond.

The analysis for this article was provided by Ingenix. For more information, send an e-mail to

Publication Date: Monday, December 01, 2008

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