Brace yourself for changes in the DRG model with more on the way

Reimbursement will be tied more closely to severity

The Centers for Medicare & Medicaid Services (CMS) has announced significant changes in the inpatient prospective payment system, including interim steps toward a comprehensive revision of the DRG model to tie reimbursement more closely to the severity of the patient's condition.

The final rule, which takes effect Oct. 1, includes the creation of 20 new DRGs in 13 clinical areas and modifications to 32 existing DRGs to better capture the difference in severity. The DRG changes for 2007 are just an interim step toward more comprehensive changes under development for fiscal 2008, with the goal of better accounting for severity across the entire DRG system.

At the same time, CMS took the first steps toward cutting reimbursement for hospital-acquired infections by creating two new DRGs for infectious or parasitic diseases resulting in an operating room procedure, proving $10,000 less in reimbursement for postoperative or post-traumatic infections.

The 2007 fiscal year also begins a three-year transition to using hospital costs instead of hospital charges as a basis for reimbursement. For fiscal 2007, one-third of hospital payments will be determined using estimated hospital costs.

The final rule takes significant steps to improve the accuracy of Medicare's payment for inpatient stays, CMS says. In issuing its final rules for the inpatient prospective system for August, CMS identified the following goals for the changes:

  • making meaningful first steps in diagnosis-related group (DRG) reform in 2007, with plans to continue reforms in 2008;
  • taking steps toward more accurate payments without disrupting hospital payments;
  • ensuring that Medicare does not overpay for some services while underpaying for more severely ill patients and those with complex illnesses;
  • correcting inappropriate hospital incentives for treating certain types of patients and providing certain types of services by redirecting a portion of the payments from cases that are currently overpaid to those that are underpaid.

At the same time it issued the final rule, CMS announced its intention to hire a contractor to evaluate proposals for an alternative DRG system and to release an interim report for public contact by the end of the year. The alternative DRG system is slated to go into effect in fiscal 2008.

The changes for fiscal 2007 include DRG refinements for sepsis patients on mechanical ventilation, a new DRG for carotid stents, and changes in the DRGs for major GI diagnoses.

Some DRGs have significant payment increases, and payment for some is reduced. However, CMS says no DRG's payment has been reduced by more than 5.4%.

"The point that CMS is making is that the current DRG system does not accurately capture the severity of illness. In some cases, it has created overpayment and, for some diagnoses, hospitals are being underpaid. The severity-refined DRGs will more accurately base payments on the actual severity of the patient's condition," says Deborah Hale, CCS, president of Administrative Consultant Services Inc., a health care consulting firm based in Shawnee, OK.

The changes CMS made in the final rule will give hospitals better reimbursement by accounting for severity and more accurate data, which they can use to identify areas where changes may be needed, Hale adds.

"The severity-adjusted DRGs are a victory for hospitals. They may have to work harder on documentation improvement, but the new DRGs will tie the hospital's reimbursement more closely to the patient's condition," Hale says.

The changes mean that it is more important than ever to have physician documentation that provides the most specific information available about the coding staff and that the coding staff use this documentation to assign the case to the right DRG, Hale says.

The DRG modifications provide more opportunities for case managers to focus on specific areas of clinical documentation to make sure that what is in the patient's chart more accurately reflects the patient's condition, Hale says.

"For case managers, the changes provide a DRG system that better reflects the severity of illness, instead of grouping patients with a particular diagnosis into a broad category," she says.

Case management departments that look at profit and loss by diagnostic category will have much better data to use to identify areas for improvement, she adds.

One of the most significant changes is the elimination of DRG 416 (sepsis), which has been replaced by two new DRGs that provide higher reimbursement for patients with sepsis who are on mechanical ventilation for an extended period, Hale says.

DRG 575 covers septicemia with mechanical ventilation for 96 hours or longer. DRG 576 is for patients with septicemia without mechanical ventilation, or who have been on mechanical ventilation for less than 96 hours.

"Sepsis is in the top 10 DRGs for many hospitals, so this could have a big impact on reimbursement. The challenge for case managers is to make sure that the physicians use the specific language to indicate sepsis rather than terms like urosepsis or bacteremia," Hale says.

The new DRGs also significantly increase reimbursements for patients who have been on mechanical ventilation long periods of time by replacing DRG 475 with DRG 565 for patients with a respiratory diagnosis on a ventilator for 96 hours or longer and DRG 566 for patients with a respiratory diagnosis on a ventilator for less than 96 hours.

Under the new DRG system, carotid artery stent procedures should be reported under new DRG 577.

The changes were made because CMS recognized that charges for these procedures were 26% higher than those of other cases currently assigned to DRG 533, Hale says.

Other significant changes are for diagnosis in the digestive system and include the creation of the "Major GI Diagnosis" category. The changes, which are similar to the major cardiovascular disorders implemented in fiscal 2006, can have a substantial impact on reimbursement for GI procedures, Hale says.

The new DRGs recognize higher severity for some gastrointestinal diagnoses, she adds.

For instance, reimbursement can differ by $8,000 for patients with a major bowel procedure, depending on whether a major gastrointestinal diagnosis is present either as the principal or secondary diagnosis, Hale says.

Two new DRGs have been added for infectious or parasitic diseases resulting in an operating room procedure. DRG 579, infectious diseases where the principal diagnosis is postoperative or post-traumatic infection, will result in approximately $10,000 less in reimbursement than DRG 578 (infectious or parasitic diseases), Hale says.

The new DRG follows CMS' announcement that Medicare should not pay more for the care of patients who become infected as a result of their patient care than it pays for a patient who does not have a complication.

"CMS ultimately plans to stop paying for conditions that could have been prevented in the hospital, such as if a patient comes in with a heart attack and develops pneumonia," Hale says.

The final rule removes major bladder procedures from other DRGs and provides separate reporting and increased reimbursement, she adds.

The switch to basing reimbursement on costs rather than charges will not affect case managers, Hale says.

Impact on hospital payments

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.

The final rule particularly targets specialty hospitals that pick patients with the highest reimbursement, leaving community hospitals with the patients whose care may exceed the reimbursement, Hale says.

"The changes will better align payment with the cost of care by increasing payments for some services and decreasing payments for others in a way that adds up to only limited impact at the hospital level but significantly more accurate payment for each patient treated by the hospital," CMS said in a statement.

There will be limited impact on hospital payments because of the incremental reforms for the cost-based and severity-adjusted payments, according to a statement issued by CMS, which estimates that only 2% of hospitals will have a projected reduction in payment.

Payments to all hospitals will increase by an average of 3.5% for fiscal year 2007.

CMS estimates that more than 1,000 hospitals in rural areas will see an average increase of 3.7% in 2007 due to the changes and urban hospitals can expect an average increase of 3.4%. Cardiac specialty hospitals will receive an average increase of 1.2% because of payment refinements.

No DRG weight will decrease by more than 5.4% in 2007, and 19 DRG weights will increase by more than 5%, according to a statement issued by CMS.

This year's changes are the beginning of the most significant revision of Medicare's inpatient hospital rates since 1983.

In its proposed rule for 2007, released in April, CMS had announced its intentions to replace the current 526 DRGs with either 861 severity-adjusted DRGs or an alternative severity-adjusted DRG system. In 2007, CMS will be using a total of 538 DRGs. CMS has contracted with a research firm to evaluate alternative DRG severity systems and expects to implement a new system by fiscal 2008.

"MedPac [The Medicare Payment Advisory Commission] has been pushing hard to implement a severity-refined system, but the bottom line is that CMS realized it was not ready to implement such comprehensive changes," Hale says.

For more information, contact: Deborah Hale, CCS, at