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

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

2. Presenters Claudia Sanders Sr. Vice President Policy Development WSHA Caroline Steinberg Vice PresidentTrends Analysis AHA Will Callicoat Director Financial Policy WSHA

3. Topics • Why are Hospitals Concerned? • Background • Severity Adjustment Systems • Overall Impact • Policy Options • Impact on Washington Hospitals • Questions

4. Why Are Hospitals Concerned?

5. 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

6. 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

7. Background

8. 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

9. 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

10. 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

11. 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

12. 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

13. Severity Adjustment Systems

14. 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)

15. 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

16. 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

17. 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

18. 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

19. 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

20. Example: Current DRG Assignment Principal Diagnosis Simple Pneumonia and Pleurisy Age 18 and Over 17 and Under DRG 91 Simple Pneumonia & Pleurisy Age 0 - 17 Comorbidities and/or Complications Yes No DRG 89 Simple Pneumonia & Pleurisy Age>17 With CC DRG 90 Simple Pneumonia & Pleurisy Age>17 Without CC

21. Example: MS-DRG Assignment* Principal Diagnosis Simple Pneumonia and Pleurisy Comorbidities and/or Complications Yes No 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

22. Distribution of Cases by Severity Level Current vs. MS-DRGs In a DRG w/CC MS- DRG w/MCC MS-DRG w/CC Not in a DRG w/CC or MCC Not in a DRG w/CC Source: Moran Company

23. 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

24. Overall Impact

25. Impact of Severity Adjustment • 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

26. Impact of Severity Adjustment • 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

27. Percent Change in Payment by Hospital Type Non- Minor teaching Teaching Change to MS-DRGs Only 500+ 50-99 25-50 Rural Major Other Large Urban Urban 400-499 100-199 200-299 300-399 Under 25 Teaching By Bed Size Source: Moran Company analysis of MedPAR and cost report data. Uses 2/3 cost-based weights.

28. Percent of U.S. Hospitals by Range in Gain or Loss Lose 5-9.9% Gain 1-4.9% Lose 1-4.9% Gain or Lose Less than 1% Change to MS-DRGs Only Lose 10% or More Hospitals With Losses 51% Gain 5-9.9% Hospitals with Gains 22% Roughly the Same 27%

29. Percent of Washington State Hospitals by 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 Hospitals With Gains 8% Hospitals With Losses 57% Roughly the Same 35%

30. Policy Options

31. As Good as It’s Going to Get? • 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

32. Policy Options • Oppose severity adjustment • Delay and develop alternative • Support MS-DRGs with: • Delay • Transition • Protection from losses • Support immediate implementation

33. AHA Position • 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

34. Impact on Washington Hospitals

35. Hospital Specific Impact Analysis • An impact analysis was e-mailed to CFOs on April 26, 2007 • New impact forthcoming • Includes all changes, including MS- DRGs • Contact Will at willc@wsha.org or 206-216-2533 if you would like a copy

40. Change in Case Mix • 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

43. Next Steps and Future • 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?

44. Questions?

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