Medicare 2007 Final Inpatient PPS Rule

On April 14, 2006, CMS proposed several changes to the Medicare inpatient prospective payment system (IPPS) for FY2007 that would represent the most sweeping reforms to the system since its inception in 1983. The proposal included a new methodology for “rebasing” DRG relative weights in an effort to make hospital payments more accurately reflect the cost of care with the intent to reduce financial incentives for specialty hospitals. Effectively, this proposal would elevate payment rates for medical admissions at the expense of surgical cases (particularly cardiac orthopedic procedures).

CMS’ proposal focused on two factors that, in their estimation, bias payments under the current system: variation in charge-setting policies across hospital departments that favor procedural cost centers over routine cost centers, and differences in the severity of illness among patients within a given DRG. CMS proposed to move from a charge-based to a hospital specific relative value cost center cost-based methodology for calculating DRG weights from fiscal year 2007 onward, and to implement a new consolidated severity adjusted DRG grouper no later than fiscal year 2008.

On August 1, 2006, CMS published its Final Rule outlining changes to the IPPS for fiscal year 2007. In acknowledgement of numerous public comments questioning the validity and accuracy of the hospital specific relative value cost center cost-based methodology, CMS postponed the full implementation of this approach to allow for additional time to study and refine the system. Instead, CMS opted to implement a lesser approach of simply adjusting charges to account for costs without employing the proposed hospital-specific relative cost center methodology. Moreover, in order to mitigate the impact of this change on DRG relative weights, CMS instituted a three-year transition to this new cost-based weight methodology in which only 33% of the DRG weights calculated for FY07 will be based on the new cost-based weighting scheme. As expected, CMS delayed the transition to a severity-adjusted DRG system until FY08 at the earliest.

The net effect of the Final Rule is a far less severe impact on inpatient Medicare reimbursement than was initially proposed. While the Proposed Rule threatened deep cuts in reimbursement for surgical (and in particular cardiac) procedures, the final rates for FY07 minimize the year-to-year change in projected Medicare inpatient revenue for most institutions. Nevertheless, these changes did result in a modest shift in reimbursement out of cardiac and other surgical procedures and into medical cases.

If you would like our help in measuring the impact of this final rule on your institution for 2007 please contact us. Utilizing your current mix of medicare discharges by DRG, we can calculate the expected change in Medicare payments for 2007 as well as in 2009 under the fully implemented cost based relative weight system.

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