Inpatient Prospective Payment System (IPPS) Final Rule Implements New MS-DRG's

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(PYA Alert dated August 10, 2007)

On August 1, 2007, CMS displayed an advance copy of the final rule for Medicare's IPPS effective for discharges on or after October 1, 2007. Approximately 900 public comments were submitted on the proposed rule published in April demonstrating this rule contains some of the most significant IPPS changes since 1983. The final rule will be published on August 22, 2007. It will contain annual updates to IPPS rates and wage index. The rule also continues to reform the diagnosis-related group (DRG) weighting system.

The final rule moves closer to basing DRG weights on hospital costs, rather than charges. During 2008, hospitals will be paid on a blend of 1/3 charge-based weights and 2/3 cost-based weights. In 2009, hospitals will be paid entirely on cost-based DRG weights. Additionally, CMS is further refining the DRG weighting system to more fully capture differences in severity of illness among patients. The rule replaces the current 538 DRG’s with 745 “new” Medicare Severity DRG’s (MS-DRG’s). The MS-DRG’s will be phased in over 2 years. CMS states the new MS-DRG’s will further reduce incentives for hospitals that attempt to treat only the healthiest and most profitable patients.

Despite consideration of a 1.2% reduction to ensure Medicare spending does not increase due to coding improvements, CMS estimates 2008 overall hospital payments will increase an average of 3.5% over 2007. CMS warns that future reductions for coding improvements may be required. The reimbursement professionals at PYA have analyzed the rule to quantify the financial impact resulting from changes to the standardized operating rates and geographic wage indices when applied to the most frequently utilized DRG’s and their corresponding new MS-DRG’s. If you would like to obtain a free evaluation of how your hospital may be impacted by these changes, please click here and submit your hospital’s provider number. We will utilize publicly available information to derive an estimate of how these changes will impact your reimbursement for highly utilized DRG’s and their corresponding MS-DRG’s.

The final rule also identifies other changes. The 2008 cost outlier threshold is $22,635, down 7.6% from $24,475 in 2007. The MS-DRGs are designed to reduce the cost variation within DRGs thus fewer cases will qualify for outliers. CMS lowered the threshold to meet regulatory requirements. The final rule adds one new quality measure (5 were proposed), which hospitals need to report in FY 2008 in order to qualify for the full hospital market basket update in FY 2009. Subject to public comment, the rule changes the way capital related costs are paid including the phases out of capital IME payments by 2010.

If you have questions on the final rule, please contact Lisa Price or Butch Bullock at (800) 270-9629.

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