CMS has issued a notice of proposed rulemaking that would create the first significant revision of the inpatient prospective payment system since it was implemented in 1983. The changes respond to congressional concern that the existing system can create an incentive for hospitals to cherry-pick profitable cases. CMS says that the revision would improve the accuracy of payment rates for inpatient stays by basing the weights assigned to DRGs on hospital costs rather than charges and by adjusting the DRGs for patient severity. The estimated market basket increase of 3.4% in FY07 would increase payments to acute care hospitals by $3.3 billion. More than 1,000 hospitals in rural areas would see an average increase of 6.7%. The reforms would also significantly affect payments to specialty hospitals. Public comment would be key to shaping the final rule, CMS administrator Mark McClellan pledged.
The new cost-based DRG weighting would go into effect October 1, 2006. This change is intended to eliminate biases in the current DRG system arising from the differential markup hospitals assign for ancillary services among the DRGs. A second step, scheduled for FY08, would replace the current 526 DRGs with either the proposed 861 consolidated severity-adjusted DRGs or an alternative severity-adjusted DRG system developed in response to public comments. CMS is also considering ways of improving recognition of severity in the current DRG system by FY07.
In addition, CMS is proposing to increase the outlier threshold for FY07 to $25,530, up from $23,600 in 2006. The proposed FY 2007 threshold is expected to keep aggregate hospital outlier payments within the target of 5.1% of total payments under the inpatient PPS.
"Everyone agrees that the Medicare DRG payments are distorted," said Richard L. Gundling, FHFMA, vice president of product development at HFMA, "which results in Medicare paying much more for some types of patients (notably surgical patients) and too little for others (namely medical patients). All hospital finance managers should analyze the impact based on your own patient mix and then submit comments to CMS on the proposed rule."
The proposed rule will be published in the April 25, 2006 Federal Register. Comments will be accepted until June 12, 2006.
