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Sanford USD Medical Center has seen an increase in the number of patients seeking cancer treatment and vascular procedures.
Sanford USD Medical Center has seen an increase in the number of patients seeking cancer treatment and vascular procedures.
Photo credit: Sanford Health

How sick are we?

It's hospitals vs. the CMS and MedPAC in ongoing dispute over the fairness of new patient-severity payment system

By Jennifer Lubell
Posted: August 9, 2010 - 12:01 am ET

From the 10th Annual 100 Top Hospitals supplement, published on August 9, 2010.

Charles O'Brien, president of Sanford USD Medical Center, Sioux Falls, S.D., says his patients are getting older and sicker. And he has the data to prove it.

“If you put all of our payers together—Medicare, plus the private payers and Medicaid, mortality, risk and severity of disease is up across all DRGs,” O'Brien says. All of these metrics are measured on a scale of one to four, he says. In 2006, the mortality risk was 1.35; today it's 1.4. Over the same time period, patient severity rose from 1.65 to 1.72.

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In general, the case-mix index—which reflects a hospital's overall Medicare DRG patient caseload—from 2006 to the present has increased from 1.33 to 1.39, “which means we're seeing sicker patients,” he says.

The hospital has been treating more inpatient cancer patients than it did a few years ago, as well as more inpatient vascular procedures. “Those two service lines along with trauma have grown for us, and those patients tend to be severe, which elevates our case mix index in terms of severity,” O'Brien says.

The patient population of the hospital has also gotten older.

“We live in South Dakota, which is an elderly state by demographic standards,” O'Brien says. At his 451-bed hospital alone, the average age from 2006 to the present increased from 43.7 to 45, “which doesn't sound like much—but during this time period we also expanded our NICU and our children's hospital, which should have diluted that number” of older patients and, still, the number went up, he says.

In and out of the nation's capital, the hospital lobby maintains that sicker patients are the reason why the industry is getting paid more under Medicare's new coding system for inpatient claims, otherwise known as the Medicare severity-adjusted diagnosis-related groups, or MS-DRGs.

Federal officials in Washington don't necessarily agree.

On July 30, the CMS in its final inpatient hospital rule for fiscal 2011 followed through on a decision to recoup “excess spending” that took place in fiscal 2008 and fiscal 2009 as a result of hospital coding practices. Overall, the agency's final rule to set hospital inpatient rates in fiscal 2011 will result in a 0.4% reduction in payments on average, or roughly $440 million, across the industry.

The CMS, in analyzing inpatient claims data, says the MS-DRG system has resulted in hospitals coding for more severe care than what patients are actually getting. Hospitals may have been getting paid more, but changes in their coding practices “did not reflect increases in patients' severity of illness,” the agency has stated in explaining the reasons why it was recouping payments from the industry.

Overall, CMS actuaries estimate that the MS-DRGs and related coding changes increased payments by $6.9 billion over the two years.

The proposed 0.4% reduction for 2011 is the net result of a negative 2.9% adjustment to recoup about half, or $3.7 billion, of the overpayments made in 2008 and 2009; an increase of 2.6% tied to inflation; a 0.25% mandated marketbasket cut that was included in the new health reform law; and other factors that would affect spending, such as hospital outlier payments.

America's hospitals strongly disagree with the CMS' decision, Richard Umbdenstock, president and CEO of the American Hospital Association, says in a written statement. “The rule cuts billions of dollars from the healthcare system at a time when patients are sicker, more people are losing coverage due to the economic downturn and hospitals are dealing with significant changes contained in the health reform bill. The changes also will have unintended consequences; hospitals have been an economic mainstay during the recession, but the cuts create real potential to harm hospitals' ability to provide jobs.”

The CMS, however, doesn't consider the 0.4% adjustment a “cut.” According to an agency spokeswoman, “It is a projection of aggregate payments to hospitals based on all of the policy changes in the proposed rule.”

This squabbling over the purported effects of paying hospitals based on severity of illness has been taking place between the federal government and the hospital industry for several years. Even before the MS-DRG system was launched in 2008, the CMS had taken steps to adjust inpatient rates in anticipation of “upcoding” under the new system, adjustments that Congress later ratcheted down.

The AHA says that this latest adjustment set by the 2011 rulemaking is unwarranted and that the CMS failed to look at real patient severity in crafting this payment adjustment. Hospitals aren't “upcoding”; they're coding more accurately under a system that was designed to pay hospitals accordingly for sicker patients in the first place, the industry says.

The agency, in crafting the MS-DRGs, observed that money wasn't being distributed evenly among hospitals under the old system—that some were treating the more costly and sicker patients—but the payment system wasn't reimbursing these hospitals appropriately for their care, says Caroline Steinberg, vice president of trends analysis with the AHA.

The MS-DRG tool was ultimately chosen, which analysts such as RAND Corp. “showed was clearly superior and everybody agreed that this tool did a better job of capturing acuity among patients,” Steinberg says. The AHA supported the new system as well. “It's widely accepted that chronic conditions were on the rise and that patients were getting sicker and the DRG coding system was not recognizing that,” Steinberg adds.

Hospitals acknowledged that they needed a tool like this to capture acuity differences among patients across time for different DRGs, she says.

As an example, a hospital under the new system would be able to record that a person having knee surgery might have had a history of heart problems, thus raising the acuity of that patient, Steinberg explains.

“The rub is that hospitals are getting penalized because CMS is unwilling to recognize that their tool is doing exactly what it was designed to do—better capture the increasing resource needs of a sicker Medicare population,” Steinberg says.

In the weeks leading up to the final rule's release, the CMS was subjected to intense questioning from all sides on Capitol Hill—from providers and members of Congress—on whether its reasoning for recouping payments from hospitals was sound and just.

Support in Congres

Letters sent by members of the House and Senate to the CMS added some grist to the hospital lobby's platform. While it's true that hospital payments may increase because of coding changes, other factors may play a part, such as a rise in more seriously ill patients, 52 senators wrote in a July 16 letter to CMS Administrator Donald Berwick several weeks before the final rule was issued. Before this adjustment goes into effect, “we need to confirm that the appropriate and correct methodology has been adopted,” the letter stated. A similar letter was sent by 240 members of the House.

Berwick also heard from the hospital industry, which offered up a plethora of evidence to show that severely ill Medicare patients were in fact accumulating in hospital beds, and that the CMS' methodology for reducing its inpatient reimbursement was flawed.

“In its analysis, the CMS states that the increase in payments it found could not be due to ‘real' case-mix change because its analysis looks at only one year of patient claims. However, we assert that the increase cannot be deemed documentation and coding change either, because, again, the analysis looks at only one year of patient claims,” the AHA wrote in its comment letter to the CMS on the 2011 proposed rule.

In a July 20 letter, the AHA, Association of American Medical Colleges and Federation of American Hospitals summarized the findings of two reports, urging the CMS to change its methodology for determining documentation and coding changes to better account for increasing patient severity and to reduce the proposed cut.

The first report, prepared by the Arlington, Va.-based research firm the Moran Co. on behalf of the medical organizations, found that the CMS' methodology failed to account for historical trends in patient severity, which may be continuing. The other report, conducted by Partha Deb, an economics professor at Hunter College and the University of New York Graduate Center, for the three medical organizations, determined that the Medicare population is indeed getting sicker, based on multiple data sets and different measurement tools.

To find evidence of a sicker inpatient population, hospital officials say one place to look is in America's intensive-care units. In one particular analysis conducted by the AHA using Medicare claims—cited by the AHA in its comment letter to the CMS on the 2011 rule—it was reported that the number of Medicare discharges involving the ICU increased from about 22% in fiscal 2000 to about 27% in 2009.

This offers some logical evidence “that change is going on,” says Chip Kahn, president of the Federation of American Hospitals. While the hospitals aren't arguing that none of it is due to coding changes, “to attribute all of it to coding is misguided.”

The hospital industry, in conducting its own analysis of DRGs, offered that only a 0.45% reduction was warranted to recoup overpayments from fiscal 2008 and fiscal 2009, as opposed to the CMS' 2.9% cut.

In issuing this final rule, Umbdenstock asserted that the CMS chose to ignore the concerns of Congress, plus the evidence in these independent studies, which show that hospitals are in fact treating sicker patients.

Individual hospitals such as Sanford USD have been tracking their own data to show that patients are getting older and sicker, and the less-complex cases are gravitating toward the hospital's outpatient facilities. Other providers have seen evidence of this trend through anecdotal cases.

Rebecca Craig, vice president of finance and chief financial officer at 269-bed Wayne Memorial Hospital, a general hospital in Goldsboro, N.C., recounts the case of a 74-year-old man with a history of congestive heart failure and chronic pulmonary disease. He had been experiencing symptoms of increased heart failure, symptoms that once would have met the criteria for admission in a hospital. He went to see his primary-care physician, who did some diagnostic testing and treated him with drugs in the office, monitoring him for an entire day.

The outcome: The patient avoided a hospital admission that probably would have occurred in past years.

Instead, hospital beds are being filled with patients too sick to be monitored in a doctor's office, Craig says.

“Patients are truly sicker. Many patients who were admitted five years ago for simple pneumonia are treated at home these days,” she says. “They simply do not meet Medicare's criteria for admission, and each potential patient is being screened more carefully than ever before. Lower-acuity patients are not in hospitals in the proportions they used to be.”

They're not buying it

Other entities within the Beltway, namely the influential Medicare Payment Advisory Commission, aren't buying what the hospitals are saying.

The independent commission believes the CMS is correctly handling what has become an “unintended increase” in Medicare inpatient payments, resulting from the MS-DRGs.

MedPAC was essentially a catalyst for the MS-DRG system, concluding in a 2005 report that certain types of specialty hospitals were “cherry-picking” more profitable patients, and avoiding high-severity patients because of their higher-than-average costs.

The CMS adopted the MS-DRGs “to improve the distribution of payments among hospitals by shifting payments toward hospitals to treat more costly types of cases,” wrote MedPAC Chairman Glenn Hackbarth in comments to the CMS on the proposed 2011 inpatient rule.

At the same time, MS-DRGs should not be leading to increases or decreases in aggregate hospital payments, he wrote. “While documentation and coding improvements help hospitals measure patient severity more accurately, they also increase payments without a real increase in patient severity or the resources hospitals must use to furnish inpatient care,” Hackbarth stated, a position that the federation's Kahn calls “extreme.”

MedPAC research has long maintained that the MS-DRGs have led to documentation and coding improvements, resulting in higher payments to hospitals without any changes in patient complexity or the cost of care. Mark Miller, MedPAC's executive director, has promoted the notion that less-complex cases are being seen in the outpatient setting.

While it's generally true that hospitals continue to treat high-severity patients, recent data point to the fact that “there are much more surgery patients, some with the highest-severity cases, leaving the hospital and going to the outpatient setting than they used to,” Miller said at a news conference earlier this year. In his view, Congress should be putting more pressure on hospitals and other providers to increase efficiency and improve quality.

MedPAC also states that the CMS is trying to maintain budget neutrality. The AHA's take is that the MS-DRGs are working as they intended, and the CMS doesn't like the results and doesn't “want to pay for it,” Steinberg asserts.

Stephen Weiner, based in Boston, who chairs the national health law practice at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, offers the view that there's validity to both sides of the argument. “Hospitals are undoubtedly seeing an increase in acute patients. Whether any ‘coding creep' is directly proportional to a rise in sicker patients, or to some other discrepancies in coding practices, is unclear,” he says. “I do think the statement that there's increasing severity of patients in hospitals is accurate,” Weiner says. “It's a trend that's been progressing naturally, as more ancillary services are spun out of hospital settings, coupled with a pressure to reduce hospital readmissions.”

On the other hand, the CMS' assumption that “upcoding” has been taking place under the MS-DRGs might not be entirely invalid either, he says. “I can't tell you the extent of it, but it's likely that some consultants are assisting hospitals in more accurate coding, and there may very well be something of a natural impulse to go higher where there is an opportunity to exercise discretion.”

How much upcoding is actually taking place is difficult to answer, but the CMS' calculations seem to be somewhat arbitrary, Weiner says. “Its decisions seem more policy- and budget-driven than quantitative,” Weiner adds. Much of this approach relates to the Obama administration's push to reduce fraud and abuse and reduce erroneous payments, he says. From the hospitals' point of view, “they're getting hammered in a lot of different directions.”

And more negative adjustments to inpatient reimbursement may be ahead. The CMS has yet to recoup the full $6.9 billion for fiscal 2008 and fiscal 2009. And, another $4.8 billion in overpayments has been calculated for fiscal 2010.

Overpayments will continue “until CMS makes a prospective offsetting adjustment to the IPPS payment rates,” MedPAC's Hackbarth said in his comments to the agency.

O'Brien of Sanford USD hopes this isn't the case. Ultimately, he says, the CMS needs to ensure that the payment schedule reflects change in delivery of medicine “and that we are compensated adequately.”



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