Fact Sheets

FY 2007 HOSPITAL IPPS PROPOSED RULE - DRG REFINEMENTS

On April 12, 2006, the Centers for Medicare & Medicaid Services (CMS) issued the hospital inpatient prospective payment system (IPPS) proposed rule for fiscal year (FY) 2007, which includes a thorough analysis of the Medicare Payment Advisory Commission’s (MedPAC) recommendations regarding refinements to the hospital payment system included in the March 2005 Report to Congress on Physician-owned Specialty Hospitals. 

To improve the accuracy of the hospital payment system and lead to better incentives for hospital quality and efficiency, CMS is proposing to implement hospital-specific cost weights in FY 2007 and to adopt a consolidated severity diagnosis-related group (DRG) system in FY 2008 (if not earlier).      

MedPAC Recommendations

In its March 2005 Report to Congress, MedPAC recommended that the Secretary should improve payment accuracy in the IPPS by:

• Refining the current DRGs to more fully capture differences in severity of illness among patients,
• Basing the DRG relative weights on the estimated cost of providing care rather than on charges,
• Basing the weights on the national average of hospitals' relative values in each DRG,
• Adjusting the DRG relative weights to account for differences in the prevalence of high cost outlier cases, and
• Implementing the case-mix measurement and outlier policies over a transitional period.

Following publication of the FY 2006 IPPS final rule, CMS contracted with 3M to further analyze the MedPAC recommendations and their impacts on various types of hospitals. 

FY 2007 Hospital IPPS Proposed Rule

In the FY 2007 IPPS proposed rule, CMS’ analysis focuses on four of the five recommendations in the MedPAC report.   CMS’ analysis suggests that the current, charge-based weights and the current DRG classifications result in notable distortions between payments and the relative costs of care. 

• Severity of Illness:   CMS looked at refining the current DRG system to better recognize severity of illness.  Based on the analysis of Medicare claims data, CMS developed a consolidated severity grouper that could be an alternative to the current DRG system to better recognize severity of illness among the Medicare population.  CMS is proposing to adopt a consolidated severity DRG system in FY 2008 (if not earlier).  Because moving to a new DRG system represents a major change to how hospitals are paid for Medicare inpatient services, it may be appropriate to provide hospitals with additional time to plan for these changes.  Further, revising the DRGs to better recognize severity of illness may have implications for the outlier threshold, the measurement of real case-mix versus apparent case-mix, and the indirect medical education (IME) and the disproportionate share hospital (DSH) adjustments that necessitate further analysis.

• Hospital-Specific Cost Weights:   CMS analyzed hospital cost report data, departmental cost-to-charge ratios, MedPAC claims data, as well as MedPAC’s suggested method for adopting hospital-specific cost relative weights.  Like MedPAC, CMS found that using charges to develop the relative weights creates bias in Medicare’s payments.  CMS made some important changes to MedPAC’s recommendation that will make it an administratively feasible approach to improving the accuracy of the DRG weights.  CMS is proposing to implement hospital-specific cost relative weights in FY 2007.

• Outliers:   CMS does not have the authority to adopt MedPAC’s outlier recommendation.  While CMS focused its analysis on the areas where it has authority to make changes, it does intend to examine this issue in more detail in the future.

• Transitional Period:   CMS is proposing to implement hospital-specific cost relative weights in FY 2007.  However, the proposed changes to the relative weights, in some cases, could result in significant changes to hospital payments.  For this reason, we are seeking public comments on whether to provide a transition to the hospital-specific cost weights.  Further, CMS has considered the possibility of blending the current DRG system and the proposed consolidated severity DRGs.  Although CMS does not believe there is a practical and simple mechanism to implement such a transition, we welcome public comments on this issue.

Specialty Hospitals

The objective of these proposed revisions is to improve the accuracy of payments, leading to better incentives for hospital quality and efficiency and ensuring that payment rates relate more closely to patient resource needs.  More specifically, these changes are expected to reduce incentives for hospitals to “cherry pick” or treat only the most profitable patients.

Other Potential DRG Refinements in FY 2007

For the FY 2006 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.  By identifying certain conditions that would lead to a more complicated patient stay requiring greater resource use, called Major Cardiovascular Conditions (MCV), CMS found a sound analytical basis for replacing nine cardiovascular DRGs, which account for nearly 700,000 cases annually, with 12 new DRGs that better recognize severity of illness.

CMS is currently studying whether a similar approach can be applied to other DRGs to better identify subgroups of more severely ill patients who use greater hospital resources and will make any necessary changes that are identified as a result of this analysis for FY 2007. 

EMTALA Requirements

Over the past year, CMS has considered how provisions of the Emergency Medical Treatment and Labor Act (EMTALA) should apply to specialty hospitals.   CMS held a special Open Door Forum to solicit comments on this issue.  Additionally, the EMTALA Technical Advisory Group (TAG) was asked to consider: (1) whether there should be a Federal requirement that all hospitals must have an emergency department; (2) whether EMTALA should be interpreted as meaning that all hospitals (including specialty hospitals) with specialized capabilities or facilities must accept appropriate transfers; and (3) whether specialty hospitals are exacerbating problems with “on-call” coverage for emergency departments. 

• After taking into account the EMTALA TAG’s deliberations and public comments from the EMTALA TAG meeting and the Open Door Forum, CMS does not currently intend to recommend to Congress that all hospitals must have an emergency department; or require, as a condition of Medicare participation, that all hospitals have an emergency department.  Furthermore, CMS is not proposing, at this time, any statutory or regulatory changes regarding on-call requirements.

• However, in the FY 2007 IPPS proposed rule, CMS is proposing to require that all Medicare-participating hospitals (including specialty hospitals) with specialized capabilities must accept appropriate transfers of unstable individuals, regardless of whether the hospital with specialized capabilities has an emergency department.  CMS has, in the past, taken enforcement actions based on its policy that all participating hospitals with specialized capabilities have an EMTALA obligation to accept an appropriate transfer of an unstable individual protected by EMTALA.  This clarification of current policy may result in an increase in the number of specialty hospitals accepting transfers of emergency patients on nights and weekends.