CMS Issues Inpatient PPS Proposed Rules for Federal Fiscal Year 2008

27 April 2007 Publication
Authors: Maria E. Gonzalez Knavel Chris E. Rossman Lawrence W. Vernaglia

Legal News Alert: Health Care

On April 13, 2007, the Centers for Medicare & Medicaid Services (CMS) posted proposed rules that would make major changes to Medicare inpatient hospital payments. The most significant change is a fundamental redesign of the hospital inpatient prospective payment system (IPPS). Also significant is the provision of additional incentives for hospitals to engage in quality improvement efforts.

The proposed rules would change inpatient diagnosis related groups (DRGs) to account more fully for the severity of the patient’s condition. They would also take the first steps toward preventing Medicare from making higher hospital payments for additional costs of hospital-acquired conditions, including infections. The proposed rules would expand the list of publicly reported quality measures, and would reduce payment for a DRG involving the implantation of a device when a hospital replaces a device and the replacement is supplied to the hospital at reduced or no cost. 

The proposed rules would create 745 new severity adjusted DRGs, replacing the 538 DRGs now in effect. CMS states that the changes are intended to be budget-neutral nation-wide. However, CMS also indicates that payments would increase for hospitals serving more severely ill patients and decrease for hospitals serving patients who are less severely ill. 

CMS mentions that the changes reflect recommendations from the Medicare Payment Advisory Commission. “By more accurately recognizing the costs of caring for a patient, the new MS-DRGs [medical-severity DRGs] will further reduce incentives for hospitals to ‘cherry pick,’ the practice of treating only the healthiest and most profitable patients.” CMS is concerned that hospitals will improve their coding and documentation practices and that this will result in a higher case mix index. CMS has proposed to “eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix,” by reducing the standard rate by 2.4 percent each year for FY 2008 and FY 2009.

The proposed rules address concerns of some that specialty hospitals may selectively provide only more profitable services. CMS stated, “Last year, we estimated that payment reforms for 2006 and 2007 reduced payments to cardiac specialty hospitals by over 5 percent. The reforms for FY 2008 are estimated to reduce payments an additional 4 percent.”

With regard to Indirect Medical Education reimbursement, the proposed rules continue the agency’s quest to reduce resident FTE counts by allowing only the time residents spend engaged in patient care activities. In the 2007 IPPS Final Rule, CMS made a dramatic amendment to its regulations mandating that only resident time in patient care activities may be counted. In this proposed rule, CMS has gone further, and is reducing FTE counts by removing resident sick leave and vacation time.

There are many other significant changes set forth in the proposed rules. If adopted, these rules will result in the most significant changes in Medicare hospital payments since the adoption of DRGs in 1983. Comments on the proposed rules will be accepted until June 12, 2007. A final rule, effective for discharges on or after October 1, 2007, will be published later this summer.

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