CMS ANNOUNCES PAYMENT REFORMS FOR INPATIENT HOSPITAL SERVICES IN 2007

The Centers for Medicare & Medicaid Services (CMS) today issued a final rule that takes significant steps to improve the accuracy of Medicare’s payment for inpatient stays.   The payment reforms, which will be phased in over time, align 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.  The revised payments will become effective for discharges on or after October 1, 2006.

Medicare’s inpatient rates for operating expenses will increase by 3.4 percent in FY 2007 for those hospitals that report quality data to CMS.  Overall, the final rule is estimated to increase payments to acute care hospitals by $3.4 billion.

“These payment reforms respond to many constructive public comments to assure that hospitals get fair and appropriate financial support for all patients, with a smooth and gradual transition to more accurate payments.  Hospital payments should promote the best care for all patients, not the treatments that happen to be most profitable, and we are now on a path to making sure that happens,” said HHS Secretary Mike Leavitt.

The changes, which reflect recommendations from the Medicare Payment Advisory Commission (MedPAC), will reduce incentives for hospitals to invest in certain service areas because payment rates significantly exceed costs.   They also address concerns that specialty hospitals—hospitals that provide a limited range of services and typically are owned in whole or in significant part by physicians who serve as referral sources — may selectively provide such profitable services.  For example, some of the greatest concerns about inappropriate payments for specialty hospitals involved payments for certain elective cardiac admissions.  As a result of the payment reforms implemented in 2006 and now for 2007, payments to cardiac specialty hospitals are expected to decline by over 5 percent between 2005 and 2007.

“To assure quality care for all of our beneficiaries, it is absolutely essential that Medicare payments for hospital inpatient services accurately reflect the costs of providing the care they need, whatever their health status and treatment needs,” said CMS Administrator Mark B. McClellan, M.D., Ph.D.  

While the payment reforms will significantly improve accuracy, their effects generally balance out at the hospital level for hospitals other than specialty hospitals.   Payment to all hospitals will increase by an average 3.5 percent for FY 2007 when all provisions of the rule are taken into account.  No hospital will experience an estimated decrease in payment for FY 2007 from the improvements to Medicare’s inpatient hospital system after including the update for inflation.  In addition, while some diagnosis related groups (DRGs) have significant payment increases, no DRG has a FY 2007 payment reduction more than 5.4 percent.  More than 1000 hospitals in rural areas will see an average increase of 3.7 percent in FY 2007; urban hospitals will see an average increase of 3.4 percent in FY 2007.  Cardiac specialty hospitals will see an average increase of only 1.2 percent in FY 2007 because of the refinements CMS is making to improve payment accuracy. 

The payment reforms consist of two major parts which do not save money, but better align payment with the costs of care by increasing payments for some admissions and decreasing payments for others.  The first part begins a transition to using estimated hospital costs, rather than list charges, to set payment.  The reform will eliminate biases in the current system arising from the hospital practice of having list charges that disproportionately exceed costs for some services. 

Based on public comments, CMS has refined the methods used to determine average costs per case at the DRG level.   For example, CMS expanded the number of distinct 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 mark-up of charges over costs.  The change will go into effect October 1, 2006 and will be phased in over a 3-year period.  Together, these refinements result in substantially smaller changes in payment than CMS proposed earlier this year.  In addition, CMS is announcing steps to further evaluate hospital charging practices—particularly for expensive items like medical devices—as part of considering further improvements for 2008.

The second major part of the payment reforms involves more accurate accounting for the severity of a patient’s illness, which has a significant impact on costs of care.   In 2007, CMS is beginning the process of moving to more complete severity adjustment by adding 20 new groups to the current DRG system.  In preparation for FY 2008, CMS will conduct an evaluation, with public input, of alternative systems for more comprehensive severity adjustment as a prelude to making more comprehensive changes to better account for severity in the DRG system by FY 2008.  In selecting an alternative to the current system, CMS will require that hospital stakeholders have easy access to the new system.

CMS is also implementing a significantly lower threshold for cost “outlier” status than had been proposed earlier this year.  The law requires that Medicare provide additional payment if a hospital’s costs for treating a case exceed the usual Medicare payment for that case by a set threshold.  In FY 2006, a hospital had to lose more than $23,600 on a case to receive the additional payment.  For FY 2007, CMS had proposed to increase this threshold to $25,530.   The final rule for 2007 sets a threshold of $24,475.  Further, CMS also changed how it calculates the loss threshold based on comments from hospital stakeholders.  Consistent with the law, Medicare expects the additional payments for high cost cases will equal 5.1 percent of total inpatient payments.

In addition to accurate payment for existing technologies, CMS is committed to ensuring that Medicare beneficiaries have rapid access to new technologies by providing for temporary add-on payments for appropriate technologies.  In order to be eligible for additional reimbursement, a product must be:

1. New – that is, less than two to three years old;
2. Expensive – meeting a defined cost threshold in relation to the underlying DRG; and
3. A substantial clinical improvement for the Medicare patient population.

CMS approved new technology add-on payments for an innovative new treatment for back pain in this final rule.   The technology — the X STOP Interspinous Process Decompression System — relieves pain, numbness and weakness caused when nerves coming from the spinal cord become compressed.  The device prevents the patient’s nerves from being compressed while preserving motion.  It is the first technology to treat this condition that offers a minimally invasive alternative to conservative treatments (exercise, physical therapy and medication) and major back surgery. 

Additionally, CMS will continue to make add-on payments in FY 2007 for two technologies that were approved for new technology payments in FY 2006: Restore® Rechargeable Implantable Neurostimulator and GORE TAG.

With respect to payments for Graduate Medical Education (GME), the rule finalizes the clarification to the CMS policy that only time spent in patient care activities may be counted for IME purposes in the hospital complex.   This policy also applies for IME and direct GME purposes for residency training in nonhospital sites.  However, CMS is sympathetic to the fact that up to this point, hospitals have been inconsistent in their reporting of nonpatient care activities, either because of confusion surrounding CMS’s FTE-counting policy, or because of differing approaches to developing and maintaining rotation schedules.  Therefore, for cost reporting periods beginning on or after October 1, 2006, CMS is implementing a “one workday” approach to streamline documentation of residents’ time.  Under this approach, only if the entire workday for the resident consists of scheduled non-patient care activities will that workday have to be identified as non-patient care time and subtracted from the allowable count of residents (for IME, if the training occurred in the hospital complex, and for both IME and direct GME, if the training occurred in a non-hospital site).

The final rule will appear in the August 18, 2006 Federal Register and will be effective for discharges on or after October 1, 2006.