CMS proposes sweeping changes in hospital payment structure

New rule would require more attention to documentation

The Centers for Medicare & Medicaid Services has proposed sweeping changes to the payment structure for hospitals, including the first significant revision of the Inpatient Prospective Payment System (IPPS) since it was implemented in 1983.

The changes could have a tremendous effect on hospital reimbursement and are likely to require much more documentation in order for a hospital to receive the reimbursement it is entitled to, says Deborah Hale, CCS, president of Administrative Consultant Services Inc., a health care consulting firm based in Shawnee, OK.

The proposed rules would base the payment rates assigned to DRGs on hospital costs rather than charges, by basing the calculation of the DRG-relative weights on the newly developed hospital-specific relative values cost center (HSRVcc) methodology.

In addition, CMS proposes to replace the current 526 DRGs with either a proposed 861 severity-adjusted DRGs or an alternative severity-adjusted DRG system developed in response to public comments being solicited on the issue.

The proposal calls for increasing the 526 DRGS to 1,258 all-patient refined DRGs, (APR-DRGs) developed by 3M, then ultimately refining the system by consolidating the APR-DRGs into a new DRG system with 861 consolidated severity-adjusted DRGs or CS-DRGs.

"The changes in methodology will create four DRGs per diagnosis based on severity. Under the APR-DRGs, certain diagnoses or combinations of diagnoses could put a hospital into a higher reimbursement category. The new methodology will require more documentation and it will become critical that the documentation reflect all of the services the patient receives," Hale says.

CMS is expected to issue its final rule early in August. CMS proposes implementing the hospital-specific cost weights in fiscal 2007 and to adopt the severity DRG system in 2008, if not earlier.

CMS issued a statement saying that the new methodology will improve the accuracy of the hospital payment system and lead to better incentives for hospital quality and efficiency.

"The hospital payment reforms we are proposing . . . will mean payments for hospital inpatient services will more accurately reflect the costs of providing the services. We are taking important steps to make payments fairer to hospitals and to assure beneficiary access to services in the most appropriate setting," says CMS administrator Mark B. McClellan, MD, PhD.

The proposed changes are based on recommendations from the Medicare Payment Advisory Commission (MedPAC) and Congressional concerns that the existing system may create incentives for some hospitals to "cherry-pick" the most profitable cases, according to a statement issued by CMS.

In a 61-page document sent to McClellan, Rick Pollack, executive vice president of the Chicago-based American Hospital Association (AHA), expressed concerns about the proposed changes in the DRG weights and classifications.

"We believe the AHA and CMS share a common goal in refining the system to create an equal opportunity for return across DRGs, which will provide an equal incentive to treat all types of patients and conditions. However, more time is needed to understand the significant proposed policy changes, which redistribute from $1.4 to $1.7 billion within the inpatient system," Pollack wrote.

The AHA proposes a one-year delay in the proposed DRG changes to address concerns about the HSRVcc methodology, which the AHA says is flawed.

In addition, the organization, which represents 4,800 hospitals, called for the changes to be phased in over a three-year period.

The new rule proposes that Medicare should not pay for care of patients who develop complications that could not have been prevented.

"CMS says it is going to stop paying for at least two conditions that could have been prevented in the hospital," Hale says. The two conditions have not yet been determined, she adds.