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Medicare Inpatient Hospital Payment: What Changes Can Your Hospital Expect?. Presenters. Claudia Sanders Sr. Vice President Policy Development WSHA. Caroline Steinberg Vice President Trends Analysis AHA. Will Callicoat Director Financial Policy WSHA. Topics.

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Medicare inpatient hospital payment what changes can your hospital expect

Medicare Inpatient Hospital Payment:What Changes Can Your Hospital Expect?


Claudia Sanders

Sr. Vice President Policy Development


Caroline Steinberg

Vice PresidentTrends Analysis


Will Callicoat

Director Financial Policy



  • Why are Hospitals Concerned?

  • Background

  • Severity Adjustment Systems

  • Overall Impact

  • Policy Options

  • Impact on Washington Hospitals

  • Questions

Why are hospitals concerned1
Why Are Hospitals Concerned?

  • Medicare as major payer

  • Specialty hospitals and proper payment

    • Prevent cream skimming

    • Appropriate payment by service

  • Predictability for future decisions

  • Transitions

Many changes in proposed rule
Many Changes In Proposed Rule

  • Operating payment update

  • Wage index

  • New DRG system

  • Cuts for Behavioral Offset

  • Continuation of transition to cost based weights

  • Capital cuts

  • Quality requirements

Medpac report to congress
MedPAC Report to Congress

  • Opportunity for patient selection

    • Some services pay better than others

    • Current system doesn’t adequately adjust for severity of illness

  • Strong evidence physician-owned limited-service hospitals benefit

  • “Improving payment accuracy” will make competition more equitable

Medpac recommendations
MedPAC Recommendations

  • Use hospital specific relative values to set DRG weights

  • Use All Patient Refined DRGs (APR-DRGs)

  • Base DRG weights on costs

  • Use DRG specific outlier offsets to fund outlier pool

Last year s proposed rule
Last Year’s Proposed Rule

  • New DRG Weights (FY 2007)

    • Cost-based weights vs. charge-based weights

  • New DRG Classifications (FY 2008 or earlier)

    • Consolidate severity-adjusted DRGs

    • Refine DRG weights based on severity of illness

Last year s final rule
Last Year’s Final Rule

  • New DRG weights (FY 2007)

    • Used cost-based weights

    • Altered methodology

    • Fixed mathematical errors

    • Three year transition

  • Modest changes in DRG classifications (FY 2007)

    • Added 20 new DRGs, deleted 8, and modified 32

This year s fy 2008 proposed rule
This Year’s (FY 2008) Proposed Rule

  • Continues transition to cost-based weights

    • Moves from 1/3 to 2/3 cost-based blend

    • No methodological changes

  • Adopts Medicare Severity-adjusted DRGs (MS-DRGs)

    • Moves from 538 DRGs to 745 MS-DRGs

  • Cuts base payment rate by 2.4% in FY 2008 and FY 2009 – “behavioral offset”

    • Eliminates effect of coding changes on case mix

Severity adjustment in the current payment system
Severity Adjustment in the Current Payment System

  • Paired DRGs with and without complications and comorbidities (335 base/538 total)

  • New DRGs added over time to capture greater complexity (e.g. bilateral hip replacement)

What alternatives are being considered
What Alternatives Are Being Considered?

  • MedPAC: All-Patient Refined DRGs

  • CMS (FY 2007 Proposed Rule): Consolidated Severity-adjusted DRGs

  • CMS (FY 2008 Proposed Rule): Medicare Severity-adjusted DRGs

Apr drgs medpac recommendation
APR-DRGs(MedPAC Recommendation)

  • 1258 All Patient Refined DRGs (APR-DRGs)

    • 270 base and 863 severity-adjusted DRGs

  • Up to four tiers of payment

  • Complicated multi-step process for assigning APR-DRG assignment

Cs drgs last year s fy 2007 proposed rule
CS-DRGs: Last Year’s FY 2007 Proposed Rule

  • Starts with APR-DRGs

  • Adapts to suit Medicare population

  • Consolidates APR-DRGs by having 3 severity of illness subclasses off a base DRG and a single subclass off each major diagnostic category

  • More aggressive consolidation where volumes are low

  • Results in 861 CS-DRGs

Cs drgs issues identified in comments
CS-DRGs: Issues Identified in Comments

  • Uses proprietary grouper

    • Logic is not transparent

    • Logic is proprietary

  • Does not build on current DRGs

    • Does not recognize recent refinements of DRGs to capture complexity

Ms drgs this year s fy 2008 proposed rule
MS-DRGs: This Year’s FY 2008 Proposed Rule

  • Rooted in current DRG system

  • Up to three tiers of payments

    • A major complication or comorbidity

    • A complication or comorbidity

    • No complication or comorbidity

  • 745 MS-DRGs

Example current drg assignment
Example: Current DRG Assignment

Principal Diagnosis

Simple Pneumonia and Pleurisy


18 and Over

17 and Under

DRG 91

Simple Pneumonia & Pleurisy Age 0 - 17

Comorbidities and/or Complications



DRG 89

Simple Pneumonia & Pleurisy Age>17 With CC

DRG 90

Simple Pneumonia & Pleurisy Age>17 Without CC

Example ms drg assignment
Example: MS-DRG Assignment*

Principal Diagnosis

Simple Pneumonia and Pleurisy

Comorbidities and/or Complications



MS-DRG 195

Simple Pneumonia & Pleurisy

Without CC

MS-DRG 194

Simple Pneumonia & Pleurisy

With CC

MS-DRG 193

Simple Pneumonia & Pleurisy With MCC

* Proposed for FY 2008

Distribution of cases by severity level
Distribution of Cases by Severity Level

Current vs. MS-DRGs

In a DRG w/CC



Not in a DRG

w/CC or MCC

Not in a DRG


Source: Moran Company

Fixes several problems identified with last year s proposal
Fixes Several Problems Identified with Last Year’s Proposal

  • Builds on current DRG system rather than APR-DRGs

    • Easier to understand; transparent

    • Benefits from past refinements to DRGs lost in CS-DRG system

    • Captures complexity as well as severity

  • Logic of MS-DRG grouper will be open to all

Overall impact

Overall Impact Proposal

Impact of severity adjustment
Impact of Severity Adjustment Proposal

  • Total dollars stay the same — money just shifts

  • How an individual hospital does depends on its patients’ characteristics

  • A hospital with the national average mix of severity levels would see no change in payment

Impact of severity adjustment1
Impact of Severity Adjustment Proposal

  • Reductions for less severe cases

  • Increases for more severe cases

  • On average, payments:

    • Decrease for small and rural hospitals

    • Increase for large, urban and teaching hospitals

  • Specific severity adjustment systems differ in the level of dollars redistributed

Percent change in payment by hospital type
Percent Change in Payment Proposalby Hospital Type





Change to MS-DRGs Only














Under 25


By Bed Size

Source: Moran Company analysis of MedPAR and cost report data. Uses 2/3 cost-based weights.

Percent of u s hospitals by range in gain or loss
Percent of U.S. Hospitals Proposalby Range in Gain or Loss



Gain 1-4.9%

Lose 1-4.9%

Gain or Lose

Less than 1%

Change to MS-DRGs Only

Lose 10%

or More


With Losses


Gain 5-9.9%


with Gains


Roughly the



Percent of washington state hospitals by range in gain or loss
Percent of Washington State Hospitals Proposalby Range in Gain or Loss

Lose 5-9.9%

Gain 5-9.9%

Gain 1-4.9%

Gain or Lose

Less than 1%

Lose 1-4.9%

Change to MS-DRGs Only


With Gains



With Losses


Roughly the



Policy options

Policy Options Proposal

As good as it s going to get
As Good as It’s Going to Get? Proposal

  • CMS likely to implement a severity-adjusted system

  • MS-DRGs fix several issues identified with last year’s CS-DRGs

  • Additional refinement poses risks

    • Greater levels of redistribution

    • More complexity

  • Arguments against “behavioral offset” stronger with this system

Policy options1
Policy Options Proposal

  • Oppose severity adjustment

  • Delay and develop alternative

  • Support MS-DRGs with:

    • Delay

    • Transition

    • Protection from losses

  • Support immediate implementation

Aha position
AHA Position Proposal

  • AHA strongly against “behavioral offset”

    • A cut of $24 billion over 5 years

  • Advocacy steps to date:

    • Impact data sent to all members

    • HALO letter to CMS opposing cut

    • “Dear Colleague” letter circulating

  • Workgroup of state association executives to look at MS-DRGs

Hospital specific impact analysis
Hospital Specific Impact Analysis Proposal

  • An impact analysis was e-mailed to CFOs on April 26, 2007

  • New impact forthcoming

  • Includes all changes, including MS- DRGs

  • Contact Will at [email protected] or 206-216-2533 if you would like a copy

Change in case mix
Change in Case Mix Proposal

  • Increase/decrease was affected by:

    • Increase in cost based weights (now 67% based on costs and 33% on charges)

    • Change to MS-DRGs

  • WSHA is sending a breakdown showing changes related to each variable

Next steps and future
Next Steps and Future Proposal

  • Need advocacy on cuts for capital and behavioral offset

  • WSHA will send additional information on impacts

  • Final rule in August and new system in October

  • Impact on service lines or specialty hospitals?


Questions? Proposal

Thank you for participating please fill out the evaluation

Thank you for participating! ProposalPlease fill out the evaluation.