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Get ready for a totally new DRG system focused on hospital costs, not charges
CMS proposes major changes in the IPPS, with more to come
The Centers for Medicare & Medicaid Services (CMS) has proposed sweeping changes to the hospital inpatient prospective payment system for fiscal year 2008, which begins Oct. 1, 2007.
In a surprising move, CMS announced its intention to use the Medicare-Severity DRG (MS-DRG) system for 2008 instead of any of the five other severity-adjusted DRG systems it has contracted with the Rand Corp. to evaluate.
However, in its proposed rule, the agency did not rule out implementing another DRG system in FY 2009, according to Deborah Hale, CSS, president of Administrative Consultant Services Inc., a health care consulting firm based in Shawnee, OK.
CMS is continuing with its evaluation of the five alternative DRG systems for long-term use and has asked Rand to evaluate the proposed MS-DRG system, using the same criteria it is applying to the other DRG systems. CMS will not make a decision as to which DRG system to permanently adopt until Rand's analysis is complete.
"The new severity-based DRGs represent one of the most significant improvements to the hospital inpatient payment system since the institution of the prospective payment system in 1983. When combined with the reforms that were established last year, these refinements of the hospital payment system should significantly improve the predictability, reliability, and fairness of Medicare payments," said Leslie Norwalk, Esq., CMS acting administrator.
The proposed rule will implement a provision of the Deficit Reduction Act of 2005 that takes the first steps toward eliminating higher payments for the additional cost of treating a patient who acquires a condition, including an infection, during a hospital stay. Hospitals will be required to begin reporting secondary diagnoses that are present on admission, beginning in October.
Other provisions of the proposed rule include continuing the three-year transition to using hospital costs instead of hospital charges as a basis for reimbursement and expanding the number of quality measures that hospitals must report in order to qualify for the full market basket payment update.
CMS is soliciting comments on the proposed rule until June 12. The final rule, which will be effective for discharge on or after Oct. 1, will be issued later in the summer.
CMS updated an analysis of the MS-DRG system, which it considered adopting in the mid-1990s, and proposes to create 745 new DRGs to replace the current 538. The new DRGs will be numbered 1 through 999, leaving room for new DRGs in the future.
"The proposed rule represents a significant improvement to the Medicare program's ability to recognize severity of illness in its inpatient hospital payments," CMS documents assert.
The new DRG system makes it more important than ever for case managers and coders to make sure that the documentation and coding is accurate, Hale says.
Hospitals could lose more than expected
"CMS is assuming that the new DRGs will result in better documentation and better coding, so they are planning a -2.4% adjustment to the standard payment rate. Therefore, if a hospital does not effectively improve documentation and coding, it may lose more than anticipated," she adds.
The emphasis of the changes is on re-evaluation of the complications and comorbidities list, Hale says. The way the base DRG is assigned remains essentially the same as in the current system, she adds.
"Under the current system, 80% of patients have a complication or comorbidity [CC] so the CC no longer gives the hospital adequate credit for severely ill patients," she says.
The MS-DRG system splits DRGs into three categories: MCC — major complication/comorbidity; CC — complication/comorbidity; and non-CC — neither of those.
"Many more DRGs will now be split based on the presence of MCC/CC/non-CC, including chronic obstructive pulmonary disease and congestive heart failure. However, there are more than 50 DRGs that are not split," Hale says.
Many conditions that are common CCs under the present system, no longer will affect the DRG assignment, she adds. These include blood loss anemia codes, arterial fibrillation, dehydration, urinary tract infections, and uncontrolled diabetes.
"The MS-DRGs better recognize the severity of illness than the current CMS DRGs," CMS said in a published statement.
The new system will both increase and decrease payments to hospitals, depending on the kind of cases they treat, CMS said.
"The MS-DRGs, like all of the severity DRG systems being evaluated by Rand, can be expected to increase payments to urban hospitals and decrease payments to rural hospitals. This impact occurs because patients treated in urban hospitals are generally more severely ill than patients in rural hospitals," CMS said.
Under the new system, hospitals treating more severely ill and more costly patients will receive higher payments, while payments for hospitals treating less severely ill patients will decline.
"The new DRG system presents opportunities to improve documentation and coding to receive higher payments without a real increase in patient severity of illness. By more accurately recognizing the cost 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," CMS said.
CMS: Specialty hospitals likeliest to get hit
One of the aims of the changes in the proposed rule, according to CMS documents, is to eliminate biases in the current system that have provided incentives for physician-owned specialty hospitals to treat the healthiest and most profitable cases, leaving the sickest and least profitable patients to general acute care hospitals.
Hardest hit are likely to be the cardiac specialty hospitals, according to a statement issued by CMS.
"Cardiac specialty hospitals generally treat the healthiest and least costly patients and their payments are projected to decline by 4% from the MS-DRG. This reduction is in addition to reductions of over 5% that we estimated last year," CMS stated.
The proposed rule for FY 2008 continues changes begun last year to improve the accuracy of Medicare's inpatient hospital payments by using hospital costs rather than charges to set rates. For FY 2007, one-third of hospital payments were determined using estimated hospital costs. Beginning in October, the figure increases to two-thirds of hospital payments.
More quality measures to come
The proposed rule adds five new quality measures, bringing to 32 the number of performance measures hospitals would need to report in FY 2008 in order to qualify for the full market basket payment update in FY 2009. The new performance measures that go into effect in October 2007 include measures in the Surgical Care Improvement Project (SCIP), 30-day mortality measures for some conditions, and the 27-item Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS).
The HCAHPS measures patient perception of care in seven categories that include: nurse communication, physician communication, responsiveness of hospital staff, communication about medicine, cleanliness and quiet of hospital environment, pain management, and discharge information, along with two questions about overall quality of care and whether patients would recommend the hospital to others.
CMS also announced its intention to add five additional measures in FY 2009 and is soliciting comments on whether and how to add other measures in future years.
"These reforms represent CMS' continued push to become a more active purchaser of high-quality care for Medicare beneficiaries," Norwalk said.
As part of its quest to implement a value-based purchasing program for Medicare payments, beginning in FY 2009, CMS has developed an internal hospital pay-for-performance workgroup that is expected to issue a final report in June 2007.
(Editor's note: Look for more details on the MS-DRGs and how they will affect the activities of case managers in the July issue of Hospital Case Management.)