HFMA VIEWS

James Alexander
Technical Director, HFMA

It’s shaping up to be a long hot summer, particularly for hospital providers. That really shouldn’t come as a surprise--because year after year, the release by the Centers for Medicare and Medicaid Services of the proposed inpatient prospective payment system rule has tended to heat things up for providers. But with this year’s installment (if the proposals are adopted), you may find yourself mopping your brow a bit more than usual. Not only is there a big, hot issue in the works--the giant step to severity-adjusted diagnosis-related groups--but also, there is a plethora of “devilish” details to look forward to. 

You may find yourself needing to work up a Medicare-only to-do list as you assess the impacts of the MS-DRG plan (the MS-CMS DRGs are the preferred version, MS for “Medicare severity”) and the other proposals. Of course, the proposal to change the DRG system is not new; the trial balloon having been floated last year. And hospitals have had weeks to review the interim report of the RAND Corporation, analyzing several likely models of severity-adjusted DRGs. (See Evaluation of Severity-Adjusted DRG Systems: Interim Report.) By familiarizing yourself with what to expect from this change, you can find some measure of comfort in the sultry summer days, and prepare for the impact of the changes.

Those Devilish Details
Even if you may already have achieved a comfort level with the idea of the severity-adjusted DRGs, other details set forth in the IPPS proposed rule will also require your attention. In particular, you may need to deal with the heat-producing effects of the following provisions:

• The proposed annual reclassification of diagnoses and procedures and the proposed recalibration of the DRG relative weights required by section 1886(d)(4)(C) of the Social Security Act
• The proposed changes in hospitals’ wage index values reflecting wage data from hospitals’ cost reporting periods beginning during FY04, compared with the FY03 wage data
• The proposed wage and recalibration budget neutrality factors
• The expiration of the labor market area transition for those hospitals that were designated urban under the old labor market area designations and are now designated rural hospitals
• The expiration of the three-year provision for applying an imputed rural floor to states that have no rural areas or that have rural areas but lack IPPS hospitals in those areas
• The Medicare Geographic Classification Review Board’s geographic reclassifications to be effective in FY08
• The proposed adjustment to the application of the rural floor budget neutrality provision on the wage index instead of on the standardized amount
• The Sept. 30, 2007, expiration of section 508 of Pub. L. 108-173, which allowed a qualifying hospital to appeal its wage index classification  and apply for reclassification to another area of the state in which the hospital is located (or, at the discretion of the Secretary of Health and Human Services, to an area within a contiguous State)
• The enactment of section 505 of Pub. L. 108-173, which provides that a hospital can qualify for an increase in its wage index if a threshold percentage of residents of the county where it is located commute to work at hospitals in counties with higher wage indexes
• The zero update to urban hospitals for capital in FY08
• The planned budget neutrality adjustment to be made for the adoption of the proposed MS-DRGs under section 1886(d)(3)(A)(iv) of the Social Security Act, which will adjust for aggregate payment increases resulting from changes in the coding or classification of discharges that do not reflect real differences in case mix.

The Sizzlers
The real “dog days” for hospitals are likely to come from the final two of the details described above.

This last proposal, hidden behind the unassuming phrase “budget neutrality adjustment,” may prove the most important for its reach and dollar impact on hospitals. CMS contends this is an adjustment for the “paper” inflation of care levels derived from improved coding, which the agency suggests leads to overpayments. The agency believes that adoption of the MS-DRGs it is proposing “would create a risk of increased aggregate levels of payment as a result of more comprehensive documentation and coding.” And because the Secretary of HHS has broad discretion under section 1886(d)(3)(A)(vi) of the Social Security Act to adjust the standardized amount so as to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case mix, CMS wants to exercise that authority.

The Medicare Actuary has estimated that an adjustment of 4.8 percent over two years will be necessary to maintain budget neutrality for the transition to the MS-DRGs. The plan, therefore, is to reduce the IPPS standardized amounts by 2.4 percent each year for FY08 and FY09. To give that a little context, the market basket update is slated to be 3.3 percent. The American Hospital Association has estimated that the financial impact of this provision, typically referred to as a “behavioral offset,” will be $25 billion over five years.

In the next-to-last point above, CMS has proposed freezing capital payments to all hospitals, excepting rural hospitals. CMS’s rational for this proposal is that during the period from FY96 through FY04, every type of hospital and geographic grouping of hospitals realized a positive aggregate margin from their capital IPPS payments, whereas, capital margins for rural hospitals lagged considerably behind the margins for urban hospitals. The proposal would give rural hospitals the full 0.8 percent update in FY08 determined by the update framework.

The CMS analysis of capital margins shows that during the period of 1998-2005, hospital inpatient Medicare capital margins for various types of hospitals were as follows:

• Urban 8.3
• Rural 0.3
• Teaching 11.6
• Nonteaching 1.3

Bank on the hospital industry mobilizing over the next several months over these two CMS proposals in particular.

A Chance for Input
The proposed rule was published in the May 3 Federal Register. Comments to CMS on the proposed rule will be accepted until June 12, 2007 (see instructions in the Federal Register), with a final rule to be released by Aug. 1, 2007. The policies and payment rates would take effect Oct. 1, 2007.

Your comments could make a difference in CMS’s writing of the final regulations, so don’t hesitate to participate in the process as long as there’s still time to do so And don’t forget to add these publications to your summer reading list.