They have the power to change hospital utilization patterns and hospital balance sheets. They are Medicare's diagnosis-related groups, or DRGs, and with the start of the government's fiscal 2006 on Oct. 1, hospitals have more of them to contend with.
On the surface, the CMS added 16 DRGs, deleted at least 10 and tweaked the rest in an attempt to better align Medicare reimbursements with the types of practices that have become common today. Now, hospitals have a total of 526 classifications to dictate payments. But buried within those little nips and tucks are directives that could have a major effect on a hospital's bottom line, depending on facility type, patient mix and the services it provides.
What's more, the changes could benefit some manufacturers and vendors who, under the revised edition, could see a spike in the use of everything from medicated stents to the use of a thrombolytic agent in the treatment of stroke.
In interviews with hospital executives, federal policy wonks and device manufacturers, two main changes have emerged as carrying the most weight: the adoption of 12 new cardiac DRGs and changing the status of 182 DRGs so they cover post-acute-care transfers. Previously only 30 covered such transfers. The former has been lauded by some for offering more equal reimbursements for general and specialty hospitals; the latter, however, has earned decidedly more mixed reviews.
What's at potentially stake are millions of dollars in the Medicare kitty-allotted by a complicated formula that is technically budget-neutral, meaning that any change in the weighting of a DRG isn't necessarily a loss or a gain, but rather a shift of monies from one set of procedures to the next.
Though the CMS annually tweaks its DRGs, Danielle Lloyd, associate director for policy development at the American Hospital Association, said the CMS far outdid itself for this go-round, calling the latest revision "the most financially significant."
The AHA's biggest complaint is the sixfold expansion of DRGs that determine payment for post-acute-care transfers. Move a patient from one level of care to the next before he reaches the average length of stay for that diagnosis-say from acute care to rehab-then the hospital won't get reimbursed for the full DRG but rather on a per diem basis, Lloyd said.
"That's going to cost us a billion dollars over fiscal year 2006," she said, adding that, "this is an actual cut."
The Medicare statute allows the CMS to treat a discharge to a post-acute-care provider as a transfer, which may result in a decreased payment to the hospital under the inpatient prospective payment system, or PPS, according to a CMS news release. DRGs with a high volume of discharges to post-acute-care facilities and a disproportionate use of post-acute-care services are affected by the transfer policy.
The CMS predicts that 223 DRGs, less than 50% of all DRGs, would be subject to the post-acute-care transfer policy, according to the release. But providers say they are readying for a hit. Linda Pearson, chief financial officer for Medical College of Virginia Hospitals, in Richmond, part of the Virginia Commonwealth University Health System, said that financial models that factor in her hospital's patient mix show the hospital losing money under the amended DRGs.
"For us, it's going to be a negative," Pearson said. "When we looked at the changes going into the new (fiscal) year, the payments that we're getting are not keeping up with our inflation." Pearson said the key factor causing a pull on the hospital's finances centers squarely on inpatient transfers.
"It reduces our reimbursement for our DRGs on a per-case basis," Pearson said, adding that the hospital has to "share" reimbursements with the facility that eventually admits the patient. "Our payments are eroding compared to our costs."
The CMS, however, counters that the purpose of the DRG expansion is to protect Medicare from paying providers for the same care twice; once as part of the hospital's payment for the DRG and then as a separate payment to the post-acute facility. The CMS said in a news release that the change would save Medicare $780 million, though the AHA contends the number is actually higher.
Larry Goldberg, director of healthcare national affairs at Deloitte & Touche, said that the move meets head-on what the CMS saw as a gaming of the system. "People who transferred to rehab don't need rehab (half) the time," he said in explaining the CMS' view.
Of equal significance, sources say, is the scrapping of nine cardiac DRGs in favor of 12 new ones designed to more accurately account for the severity of the diagnosis, as well as the clinical wherewithal to treat it. The 12 DRGs differentiate payment based on the presence or absence of a major cardiac condition.
In cardiology, the new DRGs appear to be at least an initial response to the controversy created by specialty hospitals, said Karen Hartman, president of Corazon Consulting, a firm that focuses on cardiovascular programs.
Cherry-picking the simplest cardiac cases will not be as lucrative for specialty hospitals under the changes, she said. By expanding the codes related to bypass surgery and angioplasty, the CMS will reimburse more money to hospitals that treat patients with more-complex illnesses and carefully document those cases. For example, in some cases related to coronary artery bypass grafts, the new codes could make about a $4,000 difference per case, she said. The CMS is similarly starting to "differentiate the diagnosis codes" in electrophysiology to adjust reimbursement for more-complex patients, she said.
Overall the CMS is trying to make adjustments to make angioplasty and bypass surgery more financially sound for hospitals, Hartman said.
At Mount Sinai Medical Center in New York, where nearly 400 angioplasties and 100 bypass surgeries are performed each month, payments will be reduced but not as much as payments will be cut for hospitals treating simpler cases, said Samin Sharma, director of the hospital's cardiac catheterization laboratory.
"It seems as a matter of principle (the CMS wants) to reduce the already compromised payment physicians are getting, but what they are trying to say is that because of various complexities, maybe some differential reimbursement might help to narrow the gap," Sharma said. In stenting for coronary angioplasty, for example, two DRGs have been expanded to six. Sharma said he could not predict what the financial impact would be for Mount Sinai, but he guessed that it would ultimately decrease reimbursement by up to 10%.
But another force for change has been the device manufacturers themselves, some of whom lobbied the CMS for the modifications. Boston Scientific Corp., whose drug-eluting and bare metal stents could receive a boost in the marketplace because of the changes, first approached the CMS in 2003 about broadening the DRG definitions, said Tom Meskan, director of reimbursement and outcomes planning for the company.
Changes to cardiovascular DRGs mean a 10% rise in the number of procedures that fall into the higher paying category.
Likewise, Brian Firth, vice president of medical affairs and health economics at Cordis Corp., said his company has helped shape cardiac DRGs going back 10 years, working with the CMS to do so. Like Meskan, he said that in many instances the manufacturers are more in tune with the newest procedures than the CMS and often have to sway the government to keep reimbursements up as a way to ensure that physicians continue to push forward.
"It's not a major change in payment to the hospital as a result of the restructuring, but it's more appropriate because more patients with higher costs (will) get reimbursed, not just the (myocardial infarction) patients," Firth said. "It's certainly not a big win and it's certainly not a big loss."
Sharma seems to agree. "I'm satisfied that it's not a major change. We all know it's the cost of doing business-that reimbursement is going down-but it is going down very little."
John Casey, chairman and CEO of MedCath Corp., which operates 12 heart hospitals, also said that the overall impact of the cardiac DRGs would be negligible. Casey said that earlier predictions by some that the changes in the DRGs would spell the end for specialty hospitals rings false. "It's more a reaction to the general rhetoric to recalculating the DRGs," he said.
Nevertheless, MedCath has taken about a $3 million hit on the cardiac side because of the recalculations, Casey said, adding that the "marketbasket changes more than compensate for" the losses. "There are slight negatives and slight positives," Casey said. "It doesn't have a dramatic impact either way."
"Hospitals that take on increasingly complicated cases are winners," Meskan said. "The ones who have sick patients, who have a variety of one or more complications, will be the winners."
The DRG system began in 1983 with 470 groupings. Now, Medicare has 526 DRGs, up nearly 12%; Goldberg, who helped shape the original PPS while at the AHA, said that it might be a system worth scrapping in the future.
Goldberg said DRGs are inher-ently flawed because, theoretically, some hospitals have learned how to work the system. The sense is that by modifying the DRGs-tailoring them to reflect care for higher acuity patients-on average means that some hospitals are going to get paid more than others. And that's bad news for rural hospitals, which likely will give way to larger, tertiary facilities, he said.
According to the CMS, urban hospitals' payments are expected to increase by 0.1% and rural hospital payments are expected to decrease by 0.1%. In addition, the CMS analyzed a sample of specialty hospitals and estimated that the changes to the cardiac DRGs may reduce their Medicare payments by about 1%.
Tom Watson, a partner with BKD, an accounting firm that specializes in healthcare reimbursement, said he agrees that small and rural hospitals likely will feel the pinch, but to varying degrees of severity. "It's not going to be anything like the (Balanced Budget Act of 1997). That almost put people out of business," he said. "It won't make anyone close, but at the same time, it won't make things easier."
Still, the CMS' revisions, on the whole, have generally been cheered. "Any attempt by the government to refine the DRGs by expanding their numbers to account for more-complex and more-difficult cases that require more resources, will wind up paying for those services more accurately," Goldberg said.
Historically, the CMS has kept its additions to the DRGs to only a handful each year.
"Generally, this is not a bad thing when CMS does this," said Cherilyn Murer, president of Murer Consultants. "Although it always affects some providers, the intent of CMS is a good one when relating to DRGs."
-with Cinda Becker
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