On April 13, CMS issued its proposed rule for the Medicare inpatient prospective payment system for FY08. The rule includes proposals to:
- Take significant steps to improve the accuracy of Medicare’s payment under the acute care hospital IPPS, while providing additional incentives for hospitals to engage in quality improvement efforts
- Restructure the inpatient diagnosis related groups to account more fully for the severity of patients’ conditions
- Ensure that Medicare no longer pays hospitals for their additional costs of hospital-acquired conditions (including infections)
- Expand the list of publicly reported quality measures
- Reduce payment for a DRG involving the implantation of a device, when a hospital replaces a device and the replacement is supplied to the hospital at no or reduced cost
Payment to all hospitals would increase by an average of 3.3 percent for FY08 when all provisions of the rule are taken into account, while payments to specific hospitals may increase more or less than this amount depending on the patients they serve. CMS is proposing to adopt a high-cost outlier threshold of $23,015, down from $24,475 in FY07, and expects that by better recognizing severity of illness in the DRGs, fewer cases would be paid as outliers. However, the lower outlier threshold is to meet the legal requirement to continue paying between 5 percent and 6 percent of payments as outliers. The proposed rule would continue to phase in a change introduced in FY07 that would better align payment with the costs of care by using estimated hospital costs, rather than list charges, to establish relative weights for the DRGs. Under the proposed rule, hospitals would be paid during 2008 based on a blend of one-third list charge-based weights and two-thirds hospital cost-based weights for the DRGs. In 2009, hospitals would be paid 100 percent based on cost-based DRG weights.
Expanding on the work of the previous two years, the proposed rule would create 745 new severity-adjusted DRGs (Medicare Severity DRGs, or MS-DRGs) to replace the current 538 DRGs. Although projected aggregate spending from the reforms will not change, payments would increase for hospitals serving more severely ill patients and decrease for serving patients who are less severely ill. Consistent with public interest expressed regarding last year’s changes, CMS said, it is proposing to revise the current DRGs so that the system will continue to be based on a nonproprietary case mix system, making it available to the public.
The changes reflect recommendations from the Medicare Payment Advisory Commission. CMS took its initial steps toward implementing the new system when it created new DRGs for cardiac procedures performed in FY06. An additional set of DRGs reflecting severity of illness was introduced for discharges in FY07. By more accurately recognizing the costs of caring for a patient, the new MS-DRGs will further reduce incentives for hospitals to “cherry pick,” the practice of treating only the healthiest and most profitable patients. They also address concerns that specialty hospitals may selectively provide such profitable services. For example, concerns about inappropriate payments for specialty hospitals involved payments for certain elective cardiac admissions. Last year, we estimated that payment reforms for 2006 and 2007 reduced payments to cardiac specialty hospitals by over 5 percent. The reforms for FY08 are estimated to reduce payments an additional 4 percent.
Comments on the proposed rule will be accepted until June 12, 2007, and a final rule, to be effective for discharges on or after Oct. 1, 2007, will be published later in the summer. Read the press release. Download the rule.
