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Blog | Medicare Payment and Reimbursement

CMS seeks healthcare provider comments on possible new methodology to calculate MS-DRG weights

Blog | Medicare Payment and Reimbursement

CMS seeks healthcare provider comments on possible new methodology to calculate MS-DRG weights

  • In the 2021 IPPS rule, CMS proposes that hospitals report certain market-based payment rate information on their Medicare cost report for cost reporting periods ending on or after January 1, 2021.
  • This data could eventually be used in 2024 to set MS-DRG relative weights if CMS ultimately proposes the process it is seeking comments on in the IPPS rule.  
  • Both the data collection proposal and the process CMS seeks comments on as a possible replacement for its current weight setting methodology could face many legal and technical hurdles.

In the 2021 IPPS rule, CMS proposes that hospitals report certain market-based payment rate information on their Medicare cost report for cost reporting periods ending on or after January 1, 2021. This data could eventually be used to change the methodology for calculating the IPPS MS-DRG relative weights to reflect relative market-based pricing that would be effective in 2024 if it were finalized.

To be clear, CMS is not proposing a new methodology for rebasing weights beginning in 2024, merely asking for comments on their idea. The rule specifically proposes the following be reported on hospital Medicare cost reports after January 1, 2021:

  • The median payer-specific negotiated charge that the hospital has negotiated with all its Medicare Advantage (MA) organizations payers, by MS-DRG.
  • The median payer-specific negotiated charge the hospital has negotiated with all its third-party payers, which would include MA organizations, by MS-DRG.

The payer-specific negotiated charges used by hospitals to calculate these medians would be the payer-specific negotiated charges for service packages that hospitals are required to make public under the requirements finalized in the Hospital Price Transparency Final Rule that can be cross-walked to an MS-DRG.

In the rule, CMS seeks comment on a potential (not yet a proposed) change to the methodology for calculating the IPPS MS-DRG relative weights to incorporate this market-based rate information. Beginning in FY24, CMS is considering a methodology that utilizes the proposed median payer-specific negotiated charge information from Medicare Advantage plans, collected on the cost report, to calculate MS-DRG relative weights.


First,  from here out in this post, I’m going to refer to what CMS calls the “payer specific negotiated charge,” which is its concocted term to skirt Congressional intent in the ACA, by what it actually is … the price.

What policy problem is CMS trying to solve? The proposed rule states that CMS is responding to last fall’s Executive Order (EO) on Protecting and Improving Medicare for Our Nation’s Seniors. The EO described the market benefits provided under the Medicare Advantage program as providing, “efficient and value-based care through choice and private competition, and has improved aspects of the Medicare program that previously failed seniors.” It then directed the Medicare program to adopt and implement market-based reforms to fee-for-service pricing.

If CMS proposes in a future rule to use MA rates to rebase MS-DRG weights in the Medicare FFS program, would it align Medicare pricing with the market? Nope. Medicare FFS payments for inpatient services would still be based on administratively set operating and capital standardized amounts that are well below what is paid in the commercial market (and the cost to deliver care). And CMS will apply the budget neutrality adjustment factor to the MA-based MS-DRG relative weights (just like they do the current cost-based rates). So while this might reallocate Medicare FFS payments across service lines, it would not increase the size of the pie so that Medicare payments for inpatient services resemble prices for services in the provider sector. And we’ll still have the cost shift which acts as a hidden tax on those who have private insurance

Technical challenges. Then there are a couple of technical problems. To inject market-based reforms into Medicare FFS pricing using MA rates as a proxy for the market, you have to assume that MA plans and hospitals negotiate from a relatively blank slate based on the hospital’s cost to produce demand for the given service in the market, the perceived quality/brand of the provider and the plan’s ability to deliver MA volume to the provider in-exchange for price concessions across targeted services. Some of this happens, however, plans and providers typically don’t start from a blank slate. Often, they start with the Medicare FFS MS-DRG weight schedule and standardized amounts.

While there are real problems with CMS’s process for developing a proxy for cost using charges and the cost to charge ratio, at least the imputed cost from the current process is a reasonable estimation of the relative resources used to provide care, which is what the law requires as the basis for the DRG weights. So in this new proposed model, how do you efficiently price a new MS-DRG or reprice an existing MS-DRG to update it to reflect changes in technology or care delivery without an understanding of resource use? This is why MA plans and providers who negotiate contracts using MS-DRGs typically start with the existing Medicare FFS schedule.

If CMS were to adopt its suggested proposal and base MS-DRGs weights on the negotiated MA prices,  MS-DRG weights would, over time, be largely based on the market power of high-volume MA plans and providers (instead of actual resource use). They would also suffer from a circularity problem (MA rate negotiations would drive FFS weight setting which would further influence MA rate negotiations…). So the MS-DRG weights overtime could become less reflective of the resources used to provide care. Also, because MA pricing is based on Medicare per capita FFS spending benchmarks (that are influenced to a significant degree by hospital prices and spending), there would possibly be a feedback effect on MA rate setting as well.

100% chance of legal challenges. The administration painstakingly points out in the rule the that its reporting proposal is based on median MS-DRGs prices. While the rule does not specifically mention CMS’s current legal entanglement over its proposed price transparency rule, it’s clear they are writing this section in a manner that will allow them to defend themselves against a future suit should their price transparency policy be overturned in the courts. However, if the court ultimately rules against the administration in the price transparency lawsuit, this policy may still trigger the same First Amendment issues related to compelled speech.

It’s probably not going to be hard to figure out that the median price per MS-DRG is the dominant plan’s price in states like Alabama, Mississippi, South Carolina, Wyoming, North Dakota, Delaware, Iowa, Louisiana, Rhode Island, and West Virginia — where one plan has over 80% of the large group market business. The administration may be able to skirt this if they keep the median price data confidential. However, CMS technical staff members were adamantly against this when HFMA discussed this with them related to a proposal we developed to base Medicare rates on actual cost. It may also strengthen their case for collecting this information and having it FOIA-able if they do propose and finalize their suggestion to base MS-DRG weights on MA prices starting in 2024. Then they have a legitimate programmatic reason for gathering the data.

The other possible legal challenge relates to how MS-DRG weights are set. Section 1886(d)(4) of the Social Security Act requires the Secretary to “assign an appropriate weighting factor which reflects the relative hospital resources used … within that group compared to discharges classified within other groups.” While CMS may be able to convince a court the market-based methodology its exploring, if it ultimately finalizes it, meets the requirements of the statute to base MS-DRG weights on relative hospital resources, it could be a challenging argument to make for the administration for the reasons discussed above.


About the Author

Chad Mulvany, FHFMA,

is director, healthcare finance policy, strategy and development, HFMA’s Washington, D.C., office.


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