Medicare Inpatient Hospital Payment:

What Changes Can Your Hospital

Expect?

Medicare Inpatient Hospital Payment:

What Changes Can Your Hospital

Expect?

Claudia SandersSr. Vice President Policy DevelopmentWSHA

PresentersPresenters

Caroline SteinbergVice PresidentTrends AnalysisAHA

Will CallicoatDirector Financial PolicyWSHA

TopicsTopics

• Why are Hospitals Concerned?

• Background

• Severity Adjustment Systems

• Overall Impact

• Policy Options

• Impact on Washington Hospitals

• Questions

Why Are Hospitals Concerned?

Why Are Hospitals Concerned?

Why Are Hospitals Concerned?Why Are Hospitals Concerned?

• Medicare as major payer

• Specialty hospitals and proper payment– Prevent cream skimming

– Appropriate payment by service

• Predictability for future decisions

• Transitions

Many Changes In Proposed RuleMany Changes In Proposed Rule

• Operating payment update

• Wage index

• New DRG system

• Cuts for Behavioral Offset

• Continuation of transition to cost based weights

• Capital cuts

• Quality requirements

BackgroundBackground

MedPAC Report to CongressMedPAC Report to Congress

• Opportunity for patient selection– Some services pay better than others– Current system doesn’t adequately

adjust for severity of illness Strong evidence physician-owned

limited-service hospitals benefit “Improving payment accuracy” will

make competition more equitable

MedPAC RecommendationsMedPAC Recommendations

• Use hospital specific relative values to set DRG weights

• Use All Patient Refined DRGs (APR-DRGs)

• Base DRG weights on costs • Use DRG specific outlier offsets to

fund outlier pool

Last Year’s Proposed RuleLast Year’s Proposed Rule

• New DRG Weights (FY 2007)– Cost-based weights vs. charge-based

weights

• New DRG Classifications (FY 2008 or earlier)– Consolidate severity-adjusted DRGs – Refine DRG weights based on

severity of illness

Last Year’s Final RuleLast Year’s Final Rule

• New DRG weights (FY 2007)– Used cost-based weights – Altered methodology – Fixed mathematical errors– Three year transition

• Modest changes in DRG classifications (FY 2007)– Added 20 new DRGs, deleted 8,

and modified 32

This Year’s (FY 2008) Proposed Rule This Year’s (FY 2008) Proposed Rule

• Continues transition to cost-based weights– Moves from 1/3 to 2/3 cost-based blend– No methodological changes

• Adopts Medicare Severity-adjusted DRGs (MS-DRGs)– Moves from 538 DRGs to 745 MS-DRGs

• Cuts base payment rate by 2.4% in FY 2008 and FY 2009 – “behavioral offset”– Eliminates effect of coding changes on case

mix

Severity Adjustment Systems

Severity Adjustment Systems

Severity Adjustment in the Current Payment SystemSeverity Adjustment in the Current Payment System

• Paired DRGs with and without complications and comorbidities (335 base/538 total)

• New DRGs added over time to capture greater complexity (e.g. bilateral hip replacement)

What Alternatives Are Being Considered?What Alternatives Are Being Considered?

• MedPAC: All-Patient Refined DRGs

• CMS (FY 2007 Proposed Rule): Consolidated Severity-adjusted DRGs

• CMS (FY 2008 Proposed Rule): Medicare Severity-adjusted DRGs

APR-DRGs(MedPAC Recommendation)APR-DRGs(MedPAC Recommendation)

• 1258 All Patient Refined DRGs (APR-DRGs)– 270 base and 863 severity-adjusted

DRGs

• Up to four tiers of payment

• Complicated multi-step process for assigning APR-DRG assignment

CS-DRGs: Last Year’s FY 2007 Proposed RuleCS-DRGs: Last Year’s FY 2007 Proposed Rule

• Starts with APR-DRGs

• Adapts to suit Medicare population

• Consolidates APR-DRGs by having 3 severity of illness subclasses off a base DRG and a single subclass off each major diagnostic category

• More aggressive consolidation where volumes are low

• Results in 861 CS-DRGs

CS-DRGs: Issues Identified in CommentsCS-DRGs: Issues Identified in Comments

• Uses proprietary grouper– Logic is not transparent

– Logic is proprietary

• Does not build on current DRGs– Does not recognize recent refinements

of DRGs to capture complexity

MS-DRGs: This Year’s FY 2008 Proposed RuleMS-DRGs: This Year’s FY 2008 Proposed Rule

• Rooted in current DRG system

• Up to three tiers of payments– A major complication or comorbidity

– A complication or comorbidity

– No complication or comorbidity

• 745 MS-DRGs

Example: Current DRG AssignmentExample: Current DRG Assignment

Principal Principal DiagnosisDiagnosis

Simple Simple Pneumonia and Pneumonia and

PleurisyPleurisyAgeAge

Comorbidities Comorbidities and/or and/or

ComplicationsComplications

DRG 91DRG 91Simple Pneumonia & Simple Pneumonia & Pleurisy Age 0 - 17Pleurisy Age 0 - 17

17 and 17 and UnderUnder

18 and Over18 and Over

YesYes NoNo

DRG 90DRG 90Simple Pneumonia & Simple Pneumonia &

Pleurisy Age>17 Pleurisy Age>17 Without CCWithout CC

DRG 89DRG 89Simple Pneumonia & Simple Pneumonia & Pleurisy Age>17 With Pleurisy Age>17 With

CCCC

Example: MS-DRG Assignment*Example: MS-DRG Assignment*Principal Principal DiagnosisDiagnosis

Simple Simple Pneumonia and Pneumonia and

PleurisyPleurisyComorbidities Comorbidities

and/or and/or ComplicationsComplications

MS-DRG 195MS-DRG 195Simple Pneumonia & Simple Pneumonia &

Pleurisy Pleurisy

Without CCWithout CC

YesYes NoNo

MS-DRG 194MS-DRG 194Simple Pneumonia & Simple Pneumonia &

PleurisyPleurisy

With CCWith CC

MS-DRG 193MS-DRG 193Simple Pneumonia & Simple Pneumonia & Pleurisy With MCCPleurisy With MCC

* Proposed for FY 2008

Distribution of Cases by Severity Level

Distribution of Cases by Severity Level

62% 58%

22%

38%20%

Current DRGs MS-DRGs

Current vs. MS-DRGs

Not in a DRGw/CC

In a DRG w/CC

Not in a DRG w/CC or MCC

MS-DRG w/CC

MS- DRG w/MCC

Source: Moran Company

Fixes Several Problems Identified with Last Year’s ProposalFixes Several Problems Identified with Last Year’s Proposal

• Builds on current DRG system rather than APR-DRGs– Easier to understand; transparent

– Benefits from past refinements to DRGs lost in CS-DRG system

– Captures complexity as well as severity

• Logic of MS-DRG grouper will be open to all

Overall ImpactOverall Impact

Impact of Severity AdjustmentImpact of Severity Adjustment

• Total dollars stay the same — money just shifts

• How an individual hospital does depends on its patients’ characteristics

• A hospital with the national average mix of severity levels would see no change in payment

Impact of Severity AdjustmentImpact of Severity Adjustment

• Reductions for less severe cases• Increases for more severe cases• On average, payments:

– Decrease for small and rural hospitals– Increase for large, urban and teaching

hospitals

• Specific severity adjustment systems differ in the level of dollars redistributed

Percent Change in Payment by Hospital Type

Percent Change in Payment by Hospital Type

La

rge

Urb

an

Oth

er

Urb

an

Ru

ral

Ma

jor

Te

ac

hin

g

50

-99

10

0-1

99

20

0-2

99

Un

de

r 2

5

25

-50

30

0-3

99

40

0-4

99

50

0+

By Bed Size

Change to MS-DRGs Only

Source: Moran Company analysis of MedPAR and cost report data. Uses 2/3 cost-based weights.

0.9% 1.1%

0.2%

-0.7%

-4.6%

-3.8%

-2.6%

-0.6%

0.2%0.6% 0.5%

0.9%

-2.6%

-0.4%

Min

or

Te

ac

hin

g

No

n-

tea

ch

ing

Percent of U.S. Hospitals by Range in Gain or LossPercent of U.S. Hospitals by Range in Gain or Loss

Lose 10% or MoreGain 5-9.9%

Roughly theSame27%

Hospitals with Gains

22%

Hospitals With Losses

51%

Change to MS-DRGs Only

Lose5-9.9%

Lose 1-4.9%

Gain or Lose Less than 1%

Gain 1-4.9%

Percent of Washington State Hospitals by Range in Gain or Loss

Percent of Washington State Hospitals by Range in Gain or Loss

Roughly theSame35%

Hospitals With Gains

8%

Hospitals With Losses

57%

Change to MS-DRGs Only

Lose 5-9.9%

Lose 1-4.9% Gain or Lose Less than 1%

Gain 5-9.9%

Gain 1-4.9%

Policy OptionsPolicy Options

As Good as It’s Going to Get?As Good as It’s Going to Get?

• CMS likely to implement a severity-adjusted system

• MS-DRGs fix several issues identified with last year’s CS-DRGs

• Additional refinement poses risks– Greater levels of redistribution– More complexity

• Arguments against “behavioral offset” stronger with this system

Policy OptionsPolicy Options

• Oppose severity adjustment

• Delay and develop alternative

• Support MS-DRGs with:– Delay

– Transition

– Protection from losses

• Support immediate implementation

AHA Position AHA Position

• AHA strongly against “behavioral offset”– A cut of $24 billion over 5 years

• Advocacy steps to date:– Impact data sent to all members

– HALO letter to CMS opposing cut

– “Dear Colleague” letter circulating

• Workgroup of state association executives to look at MS-DRGs

Impact on Washington Hospitals

Impact on Washington Hospitals

Hospital Specific Impact AnalysisHospital Specific Impact Analysis

• An impact analysis was e-mailed to CFOs on April 26, 2007

• New impact forthcoming

• Includes all changes, including MS- DRGs

• Contact Will at willc@wsha.org or 206-216-2533 if you would like a copy

Change in Case MixChange in Case Mix

• Increase/decrease was affected by: – Increase in cost based weights (now

67% based on costs and 33% on charges)

– Change to MS-DRGs

• WSHA is sending a breakdown showing changes related to each variable

Next Steps and Future Next Steps and Future

• Need advocacy on cuts for capital and behavioral offset

• WSHA will send additional information on impacts

• Final rule in August and new system in October

• Impact on service lines or specialty hospitals?

Questions?Questions?

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