Hospital groups claim acute-care hospitals will lose billions of dollars under the CMS' proposal to introduce an expanded system for evaluating patient severity.
The CMS in its fiscal 2008 proposed rule on inpatient hospital services unveiled plans to create 745 new severity-adjusted DRGs to replace the 538 existing ones. The Medicare Severity DRGs, or MS-DRGs, "should significantly improve the predictability, reliability and fairness of Medicare payments," when combined with the reforms established in 2006, said CMS acting Administrator Leslie Norwalk.
The MS-DRGs are part of the agency's plans to phase in a new system that would base payments on cost rather than charges and better reflect the severity of a patient's condition. The agency believes this payment track would more accurately reflect the costs of caring for a patient and reduce incentives to "cherry-pick" only the healthiest and more profitable patients.
The CMS has asked RAND Health—which in an initial analysis compared the CMS' current system with five other severity-adjusted classification systems—to evaluate its new MS-DRG program. RAND is scheduled to issue a final report in September, possibly a month after the final inpatient prospective payment system rule is issued.
The MS-DRGs are actually an update of a system the CMS had developed in the mid-'90s, said Richard Averill, director of clinical and economic research for 3M Health Information Systems, a subsidiary of 3M Co. Based on discussion with industry sources, it appears that the agency might use the MS-DRG system in the interim and possibly move to another one later.
The agency said one of the attractions of MS-DRGs is they would not be based on a proprietary system and would be available to the public. 3M is the developer of Consolidated Severity-Adjusted-DRGs, one of the systems evaluated by RAND in its interim report. RAND concluded that 3M's system would probably do the best job of the five possibilities in paying for patients appropriately, but its drawbacks were that it was a proprietary system that was potentially too complex.
Averill wouldn't speculate on whether 3M's system is still in the running with the CMS as a classification tool to measure severity. The task for RAND is to look at all of these alternative systems in combination with the cost-based weights that the CMS is phasing in and get a complete picture of what the impact will be, Averill said.
The CMS in its rule also proposed to eliminate certain capital-related cost provisions for urban hospitals. Capital-related payments help hospitals modernize their information systems and infrastructure. "It's a big-ticket item," said Don May, vice president for policy with the American Hospital Association, yet the CMS is proposing no inflationary update for urban hospitals for these costs, plus it's proposing to take away the 3% large urban area capital add-on that's used to pay for construction costs, he said.
According to May, the CMS' rationale is that urban hospitals are making too much money on capital payments, but the AHA opposes this measure in addition to the CMS' suggestion to discontinue the teaching and disproportionate-share hospital adjustments. (The CMS is requesting comment on that idea.)
The reimbursement levels for hospitals overall are under the proposed rule vary depending on the analysis. According to the CMS, payments as a whole to hospitals under the proposed rule should increase by $3.3 billion, or an average of 3.3%, to more than 3,500 acute-care hospitals in fiscal 2008, provided they report quality data to the agency.
The AHA disputes those numbers. It argues that a 2.4% "back door" cut the CMS wants to apply to the standard payment rate in fiscal 2008 and 2009 to compensate for MS-DRG changes would result in a $5 billion reduction to hospital payments.
That 3.3% figure "is a made-up number," May said. "The 3.3% is the update for inflation. Then, because of this DRG change, CMS is anticipating that hospitals will change their coding and payments will go up, and something needs to be done to offset that." The agency's response is another arbitrarily set number—a 2.4% cut, May said.
So the net effect is a slim increase, "and that's on top of the volatility that would be created by going to a new DRG system," May said.
The MS-DRGs would be an improvement to the hospital payment system, said Kenneth Raske, president of the Greater New York Hospital Association. However, he agreed that the agency shouldn't "intellectualize the expected behavior of 3,500 hospitals and tens of thousands of people doing the coding" and introduce an arbitrary cut. What the CMS should do instead is wait to see if the hospitals do upcode as a response to the new DRGs and then make adjustments, he said.
Projected aggregate spending isn't expected to change under the MS-DRGs, but the CMS estimates that payments will be more likely to increase for hospitals serving more severely ill patients. Payments are more-likely to decrease for hospitals that treat the less-sickly patients—such as rural and specialty hospitals. Urban hospitals, for example, which are expected to get a 3.5% to 3.6% increase, generally treat sicker patients. Rural hospitals by comparison, may get just a 0.9% increase, compared with the 3.7% increase they received for fiscal 2007.
Rural hospitals can't provide the technology and attract the specialists that could accommodate sicker patients, Raske said. As a result, many complex cases in rural areas are often transferred to regional medical centers or major metropolitan teaching hospitals, he noted.
"I would hope that CMS would continue to support payment policies to ensure access to care in rural communities," said Alan Morgan, chief executive officer of the National Rural Health Association. "Now is not the time for CMS to back away from their support of our rural hospitals."
But Greg Weiss, president of USMD, Arlington, Texas, countered that the rule "makes a lot of sense if cardiology (hospitals) are getting way overpaid for procedures they get and some other DRG or specialty isn't getting adequately reimbursed." USMD owns one physician-owned hospital, USMD Hospital in Arlington, that focuses on surgeries, and has several others under construction in other states.
The agency also wants to pay hospitals during 2008 based on a blend of one-third charge-based weights and two-thirds cost-based weights for DRGs. In 2009, hospitals would be paid 100% based on cost-based DRG weights, according to the proposed rule.
Stephen Ubl, president of the Advanced Medical Technology Association, in a written statement praised the agency's proposed choice of MS-DRGs, but said the CMS failed to address charge compression in the proposed rule. Charge compression refers to the practice of assigning a lower markup to relatively high-cost items and a higher markup to lower-cost ones. In a recent analysis of the cost-based weighting system, RTI International determined that charge compression could underestimate or overestimate costs for specific DRGs, biasing the weights.
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