Final Rule for Inpatient Prospective Payment System (IPPS) Includes Reforms

(PYA Alert daetd October 18, 2006)


On August 1, 2006, the CMS displayed an advance copy of the final rule for Medicare's IPPS effective for discharges on or after October 1, 2006. This final rule stated certain inpatient payment methodologies have been reformed.

A new weighting system for inpatient DRG’s will phase in over three years rather than fully convert to a cost-based system in FY 2007 as previously proposed. This payment reform aligns hospital payments more closely with the costs of a patient's care by using hospital costs rather than charges, and by accounting more fully for the severity of the patient's condition. According to the CMS, about 2% of hospitals will see their payments fall as a result of the new weighting system.

The CMS also refined the methods used to determine average costs per case at the DRG level. The methodology expanded the number of hospital departments used in the calculations from 10 to 13; included more hospital data in the final calculations by applying less stringent criteria for eliminating statistical outliers; and accounted for hospital size when evaluating the markup of charges over costs. In addition, the CMS announced it would further evaluate hospital charging practices--particularly for expensive items like medical devices--as part of reforms for FY 2008.

On September 29, 2006, a notice was put on display (issue date is October 11, 2006) which set forth the final wage indices and payment rates effective October 1, 2006. This notice reflects application of the Occupational Mix Adjustment within the wage index. Hospital payments now fully reflect the occupational mix. Occupational mix adjustments reflect the type of employees a hospital utilizes; such as the percentage of RN’s compared to that of its peers. The CMS applied an occupational mix adjustment to only 10% of the wage index in fiscal 2005 and 2006 because of concerns about the data.

A CMS impact analysis shows payments to all hospitals will increase by an average 3.5% for FY 2007 when all provisions of the rule are taken into account. Those hospitals that do not report the expanded set of quality data will receive 2.0% less than the full increase. While the reforms to some DRG’s have significant payment increases, no DRG has an FY 2007 payment reduction of more than 5.4%. Rural hospitals receive a slightly more favorable average increase of 3.7% in FY 2007; urban hospitals will see an average increase of 3.4%. About 2% of hospitals will experience payment decreases due to certain wage index changes. Overall, the final rule is estimated to increase payments to acute care hospitals by $3.4 billion.

The reimbursement professionals at PYA have analyzed the final rule and notice to identified expected payment changes resulting from revised standardized rates and a revised wage index. For the geographic areas we reviewed, wage index adjusted payment rate changes range from a 1.8% decrease to an 11% increase. Click here to view the selected areas and their respective change in payments.

If you would like PYA to evaluate the impact of the final rule on your hospital or review your budgeted revenue/contractual estimates, please contact Lisa Price or Butch Bullock at (800) 270-9629.

The information provided via PYA Alert, Tax Planning Alert, or Audit and Accounting Alert should not be construed as accounting, auditing, consulting, or legal advice on any specific facts or circumstances. The contents are intended for general information purposes only.  Please contact us at (800) 270-9629 to discuss your specific situation or to discuss any specific questions you may have.

back to PYA Alerts