Fact Sheets

CMS MODIFIES CARDIAC DRGS TO IMPROVE PAYMENT ACCURACY

CMS MODIFIES CARDIAC DRGS TO IMPROVE PAYMENT ACCURACY
ADDRESSES SEVERITY DIFFERENCES BETWEEN COMMUNITY AND SPECIALTY HOSPITALS

Overview:  In a May 12, 2005, Report to Congress on specialty hospitals, the Centers for Medicare & Medicaid  Services (CMS) set out its findings on the impact on community hospitals of specialty hospitals that focus only on treatment of certain illnesses, as well as its findings on quality of care provided by these hospitals.  One of the questions addressed by the report was whether specialty hospitals are able to profit by taking the less costly cases within a Diagnosis Related Group (DRG), leaving the more complex and more costly cases to the community hospitals.  Another question involved whether certain specialty hospitals, particularly orthopedic and surgical specialty hospitals, have sufficient inpatient activity to be classified as an inpatient hospital rather than an ambulatory surgical center.

The report outlined four recommendations  intended to afford Medicare beneficiaries continued access to the care provided in these facilities, but eliminate incentives that could give specialty hospitals an unfair advantage over the community hospitals with which they compete for certain types of patients.  These recommendations are:

• Reform payment rates for inpatient hospital services through changes to the DRG system.
• Reform payment rates for ambulatory surgical centers (ASCs).
• Scrutinize more closely whether facilities meet the definition of a hospital.
• Review procedures for approval for participation in Medicare.

In the 2006 Inpatient Prospective Payment System final rule, CMS is implementing one of the key recommendations -- revising the cardiac diagnosis related groups (DRGs) to better reflect the severity of the patient’s illness and to permit more accurate payment for the care of these patients.

Background:  Specialty hospitals are those with a specific focus on treating certain conditions, such as cardiac, orthopedic or surgical cases.  They are often owned by physicians who refer patients to them.  The Report to Congress found evidence that cardiac hospitals offered high patient satisfaction and quality care, and could offer a valuable option for many patients so long as the playing field was even. 

Cardiac hospitals resemble full service hospitals because of their size (50–80 beds, with an average daily census (ADC) of 40.4 for hospitals open more than a year), the frequent presence of emergency departments, and their community outreach programs. In 2003, 17 cardiac hospitals were operational, of which 16 had been in operation for more than one year. They treated about 38,000 Medicare cases, which represented about 80 percent of the cases treated by the physician owned specialty hospitals in 2003.

Medicare patients have accounted for a very high proportion of inpatient days for cardiac hospitals, averaging 67 percent nationwide. For cardiac hospitals nationwide, physicians reportedly own a 49 percent share.  Typically, a corporation or a local nonprofit hospital owns the majority share.

CMS’ specialty hospital report did show that, although referral patterns for owner- and non-owner-physicians did not differ substantially, there is evidence that physician-owned cardiac hospitals had a lower proportion of severely ill cases on average within certain DRGs compared to competitor hospitals.  (However, severity differences were not consistent across all hospitals.) 

Key Actions Taken By CMS In The FY 2006 IPPS Rule:  In the proposed rule, we indicated that CMS plans to conduct a comprehensive review of the IPPS DRG system to better recognize severity.   During the public comment period, we received comment indicating that the cardiac surgery DRGs have high relative profitability ratios and strong encouragement to revise the cardiac DRGs through patient severity refinement as part of the IPPS final rule effective for FY 2006.  For the FY 2006 Inpatient Prospective Payment System (IPPS) final rule, CMS performed an extensive review of the cardiovascular DRGs in MDC 5 (Diseases and Disorders of the Circulatory System), particularly those DRGs that are commonly billed by specialty hospitals. 

CMS identified conditions that would lead to a more complicated patient stay requiring greater resource use.  These conditions are called Major Cardiovascular Conditions (MCV). Using the MCV approach, CMS found a sound analytical basis for revising 9 cardiovascular DRGs that account for nearly 700,000 cases.  CMS is replacing those DRGs that are commonly billed by specialty hospitals with 12 new DRGs that better recognize severity of illness.

CMS believes the changes will address a portion of the disproportionately higher payments that are accruing to specialty hospitals under the current DRG system.  CMS has analyzed a sample of specialty hospitals and found that by linking DRG assignment to case severity, the DRG changes will help to ensure that payments more accurately reflect the resources necessary to care for patients.

Upcoming Activities:  The refinements to the DRGs represent a significant step in better recognizing severity differences for cardiac specialty hospitals in the DRG system for FY 2006. Over the next year, CMS will complete a more comprehensive analysis of the of the MedPAC recommendations.  In particular, CMS expects to propose changes for FY 2007 if its analysis suggests that adopting MedPAC's recommendations would lead to further improvements in the DRG system beyond those being implemented now.

CMS also plans to better recognize severity of illness by doing a comprehensive review of the list of complications and comorbidities (CC) that are used to assign patients to a higher weighted DRG.  There are currently 3,285 diagnosis codes on the CC list.  There are 121-paired DRGs that are split on the presence or absence of a CC.  CMS expects this review to lead to a revision of the DRG classification system to better reflect resource utilization and remove conditions from the CC list that only have a marginal impact on a hospital’s costs.

The CMS study of specialty hospitals found that orthopedic and surgical specialty hospitals tend to have few inpatient beds and raised the question of whether these entities concentrate primarily on outpatient care.   Physician-owners may seek the specialty hospital designation because payment rates for hospital outpatient services under the outpatient prospective payment system are often higher than those for the same procedures when performed in ASCs.  CMS is already planning to reform the ASC payment system to diminish these differences.  CMS will implement the ASC payment reforms by January 2008.  Also, as discussed in the May 4, 2005 proposed rule, an entity must be primarily engaged in inpatient care to meet Medicare’s definition of a hospital.  If specialty hospitals are not primarily engaged in inpatient care, new applications for hospital provider agreements will be denied and existing provider agreements may be terminated. 

CMS is currently conducting a review of its current standards for approval for participation and payment, to determine whether additional or different standards should apply to specialty hospitals in light of the focused nature of their services.    To obtain as much information and as many views as possible, CMS will seek input from the public in an Open Door Forum in September 2005.  Open Door Forums provide an opportunity for live dialogue between CMS and the provider community at large, in order to understand and then help find solutions to contemporary program issues.  The date and time of the Open Door Forum will be announced later on the Open Door website at: www.cms.hhs.gov/opendoor