Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates
Federal RegisterApr 25, 2006
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 409, 410, 412, 413, 424, 485, and 489
[CMS-1488-P]
RIN 0938-AO12
Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates
AGENCY:
Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION:
Proposed rule.
SUMMARY:
We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems, and to implement a number of changes made by the Deficit Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth proposed rate-of-increase limits as well as proposed policy changes for hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits. These proposed changes would be applicable to discharges occurring on or after October 1, 2006.
In this proposed rule, we discuss our proposals to refine the diagnosis-related group (DRG) system under the IPPS to better recognize severity of illness among patients—for FY 2007, we are proposing to use a hospital-specific relative value cost center weighting methodology to adjust DRG relative weights and in FY 2008 (if not earlier), to implement consolidated severity-adjusted DRGs or alternative severity adjustment methods.
Among the other policy changes that we are proposing to make are changes related to: limited revisions of the reclassification of cases to DRGs; the long-term care (LTC)-DRGs and relative weights; the wage data, including the occupational mix data, used to compute the wage index; applications for new technologies and medical services add-on payments; payments to hospitals for the direct and indirect costs of graduate medical education; submission of hospital quality data; payments to sole community hospitals and Medicare-dependent, small rural hospitals; and provisions governing emergency services under the Emergency Medical Treatment and Labor Act of 1986 (EMTALA).
We are also inviting comments on a number of issues including performance-based hospital payments for services and health information technology, as well as how to improve data transparency for consumers.
DATES:
To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 12, 2006.
ADDRESSES:
In commenting, please refer to file code CMS-1488-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.
You may submit comments in one of three ways (no duplicates, please):
1.
Electronically.
You may submit electronic comments on specific issues in this regulation to
http://www.cms.hhs.gov/eRulemaking.
Click on the link “Submit electronic comments on CMS regulations with an open comment period”. (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word.)
2.
By regular mail.
You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1488-P, P.O. Box 8011, Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received before the close of the comment period.
3.
By express or overnight mail.
You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-1488-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4.
By hand or courier.
If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-1850.
(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)
Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.
Submission of comments on paperwork requirements.
You may submit comments on this document's paperwork requirements by mailing your comments to the addresses provided at the end of the “Collection of Information Requirements” section in this document.
For information on viewing public comments, see the beginning of the
SUPPLEMENTARY INFORMATION
section.
FOR FURTHER INFORMATION CONTACT:
Marc Hartstein, (410) 786-4548, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and Technology Add-On Payments, Hospital Geographic Reclassifications, Sole Community Hospital, Disproportionate Share Hospital, and Medicare-Dependent, Small Rural Hospital Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education, Critical Access Hospitals, and Long-Term Care (LTC)-DRG Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital Demonstration Issues.
Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment Update Issues.
Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues.
Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues.
Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues.
SUPPLEMENTARY INFORMATION:
Submitting Comments:
We welcome comments from the public on all issues set forth in this rule to assist us in fully considering issues and developing policies. You can assist us by referencing the file code CMS-1488-P and the specific “issue identifier” that precedes the section on which you choose to comment.
Inspection of Public Comments:
All comments received before the close of
the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:
http://www.cms.hhs.gov/eRulemaking.
Click on the link “Electronic Comments on CMS Regulations” on that Web site to view public comments.
Comments received timely will also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.
Electronic Access
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http://www.gpoaccess.gov/,
by using local WAIS client software, or by telnet to swais.access.gpo.gov, then login as guest (no password required). Dial-in users should use communications software and modem to call (202) 512-1661; type swais, then login as guest (no password required).
Acronyms
AHA American Hospital Association
AHIMA American Health Information Management Association
AHRO Agency for Health Care Research and Quality
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ASC Ambulatory surgical center
ASP Average sales price
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Public Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CDAC Clinical Data Abstraction Center
CIPI Capital input price index
CPI Consumer price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272
CPI Consumer price index
CRNA Certified registered nurse anesthetist
CY Calendar year
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 99-272
FDA Food and Drug Administration
FFY Federal fiscal year
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
HIPAA Health Insurance Portability and Accountability Act of 1996, Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HSA Health savings account
HSCRC Maryland Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HwH Hospital-within-a-hospital
ICD-9-CM International Classification of Diseases, Ninth Revision, Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition, Procedure Coding System
ICU Intensive care unit
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient rehabilitation facility
JCAHO Joint Commission on Accreditation of Healthcare Organizations
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108-173
MRHFP Medicare Rural Hospital Flexibility Program
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NICU Neonatal intensive care unit
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PRM Provider Reimbursement Manual
PPI Producer price index
PMSAs Primary metropolitan statistical areas
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious Nonmedical Health care Institution
RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSA Social Security Administration
SSI Supplemental Security Income
TAG Technical Advisory Group
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
UHDDS Uniform hospital discharge data set
Table of Contents
I. Background
A. Summary
1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
2. Hospitals and Hospital Units Excluded From the IPPS
a. Inpatient Rehabilitation Facilities (IRFs)
b. Long-Term Care Hospitals (LTCHs)
c. Inpatient Psychiatric Facilities (IPFs)
3. Critical Access Hospitals (CAHs)
4. Payments for Graduate Medical Education (GME)
B. Provisions of the Deficit Reduction Act of 2005 (DRA)
C. Major Contents of this Proposed Rule
1. Proposed DRG Reclassifications and Recalibrations of Relative Weights
2. Proposed Changes to the Hospital Wage Index
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs
4. Proposed Changes to the PPS for Capital-Related Costs
5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS
6. Payment for Services Furnished Outside the United States
7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia
8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt
9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits
10. Impact Analysis
11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services
12. Discussion of Medicare Payment Advisory Commission Recommendations
13. Appendix C—Combinations of Consolidated Severity-Adjusted DRGs and Appendix D—Crosswalk of Consolidated Severity-Adjusted DRGs to Respective APR DRGs
II. Proposed Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
1. General
2. Yearly Review for Making DRG Changes
3. Refinement of DRGs Based on Severity of Illness
C. Proposals for Revisions to the DRG System Used Under the IPPS
1. MedPAC Recommendations
2. Refinement of the Relative Weight Calculation
3. Refinement of DRGs Based on Severity of Illness
a. Comparison of the CMS DRG System and the APR DRG System
b. Consolidated Severity-Adjusted DRGs for Use in the IPPS
c. Changes to Case-Mix Index (CMI) From a New DRG System
4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier Threshold
5. Impact of Refinement of DRG System on Payments
6. Conclusions
D. Proposed Changes to Specific DRG Classifications
1. Pre-MDCs: Pancreas Transplants
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep Brain Stimulation (DBS)
b. Carotid Artery Stents
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
b. Application of Major Cardiovascular Diagnoses (MCVs) List to Defibrillator DRGs
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)
a. Hip and Knee Replacements
b. Spinal Fusion
c. Charite
TM
Spinal Disc Replacement Device
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis
6. Medicare Code Editor (MCE) Changes
a. Newborn Diagnoses Edit
b. Diagnoses Allowed for Females Only Edit
c. Diagnoses Allowed for Males Only Edit
d. Manifestations Not Allowed as Principal Diagnosis Edit
e. Nonspecific Principal Diagnosis Edit
f. Unacceptable Principal Diagnosis Edit
g. Nonspecific O.R. Procedures Edit
h. Noncovered Procedures Edit
i. Bilateral Procedure Edit
7. Surgical Hierarchies
8. Refinement of Complications and Comorbidities (CC) List
a. Background
b. Comprehensive Review of the CC List
c. CC Exclusions List Proposed for FY 2007
9. Review of Procedure Codes in DRGs 468, 476, and 477
a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
b. Reassignment of Procedures Among DRGs 468, 476, and 477
c. Adding Diagnosis or Procedure Codes to MDCs
10. Changes to the ICD-9-CM Coding System
E. Proposed Recalibration of DRG Weights
F. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007
1. Background
2. Proposed Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the Proposed FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Proposed Low-Volume LTC-DRGs
4. Steps for Determining the Proposed FY 2007 LTC-DRG Relative Weights
G. Proposed Add-On Payments for New Services and Technologies
1. Background
2. Public Input Before Publication of This Notice of Proposed Rulemaking on Add-On Payments
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments
a. Kinetra® Implantable Neurostimulator for Deep Brain Stimulation
b. Endovascular Graft Repair of the Thoracic Aorta
c. Restore® Rechargeable Implantable Neurostimulator
4. FY 2007 Applicants for New Technology Add-On Payments
a. C-Port® Distal Anastomosis System
b. NovoSeven® for Intracerebral Hemorrhage
c. X STOP Interspinous Process Decompression System
III. Proposed Changes to the Hospital Wage Index
A. Background
B. Core-Based Statistical Areas for the Proposed Hospital Wage Index
C. Proposed Occupational Mix Adjustment to the Proposed FY 2007 Index
1. Development of Data for the Proposed Occupational Mix Adjustment
2. Calculation of the Proposed FY 2007 Occupational Mix Adjustment Factor and the Proposed FY 2007 Occupational Mix Adjusted Wage Index
D. Worksheet S-3 Wage Data for the Proposed FY 2007 Wage Index Update
E. Verification of Worksheet S-3 Wage Data
F. Computation of the Proposed FY 2007 Unadjusted Wage Index
G. Computation of the Proposed FY 2007 Blended Wage Index
H. Proposed Revisions to the Wage Index Based on Hospital Redesignations
1. General
2. Effects of Reclassification
3. FY 2007 MGCRB Reclassifications
4. Proposed FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act
5. Reclassifications Under Section 508 of Pub. L. 108-173
6. Proposed Wage Indices for Reclassified Hospitals and Proposed Reclassification Budget Neutrality Factor
I. Proposed FY 2007 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees
J. Process for Requests for Wage Index Data Corrections
K. Labor-Related Share for the Wage Index for FY 2007
L. Proxy for the Hospital Market Basket
IV. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs
A. Reporting of Hospital Quality Data for Annual Hospital Payment Update
1. Background
2. New Procedures for Hospital Reporting of Quality Data
3. Electronic Medical Records
B. Value-Based Purchasing
1. Introduction
2. Premier Hospital Quality Incentive Demonstration
3. RHQDAPU Program
a. Section 501(b) of Pub. L. 108-173 (MMA)
b. Section 5001(a) of Pub. L. 109-171 (DRA)
4. Plan for Implementing Hospital Value-Based Purchasing Beginning With FY 2009
a. Measure Development and Refinement
b. Data Infrastructure
c. Incentive Methodology
d. Public Reporting
5. Considerations Related to Certain Conditions, Including Hospital-Acquired Infections
6. Promoting Effective Use of Health Information Technology
C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs)
1. Background
2. Volume Decrease Adjustment for SCHs and MDHs
a. HAS/Monitrend Data
b. HAS/Monitrend Data Book Replacement Alternative
3. Mandatory Reporting Requirements for Any Changes in the Circumstances Under Which a Hospital Was Designated as an SCH or MDH
4. Proposed Payment Changes for MDHs Under the DRA of 2005
a. Background
b. Proposed Regulation Changes
5. Proposed Technical Change
D. Rural Referral Centers
1. Case-Mix Index
2. Discharges
E. Indirect Medical Education (IME) Adjustment
1. Background
2. IME Adjustment Factor for FY 2007
3. Technical Change to Revise Cross-Reference
F. Payment Adjustment for Disproportionate Share Hospitals (DSHs)
1. Background
2. Technical Corrections
3. Proposed Reinstatement of Inadvertently Deleted Provisions on DSH Payment Adjustment Factors
4. Enhanced DSH Adjustment for MDHs
G. Geographic Reclassifications
1. Background
2. Reclassifications under Section 508 of Pub. L. 108-173
3. Multicampus Hospitals
4. Urban Group Hospital Reclassifications
5. Effect of Change of Ownership on Urban County Group Reclassifications
6. Requested Reclassification for Hospitals Located in a Single Hospital MSA Surrounded by Rural Counties
H. Payment for Direct Graduate Medical Education
1. Background
2. Determination of Weighted Average Per Resident Amounts (PRAs) for Merged Teaching Hospitals
3. Determination of Per Resident Amounts (PRAs) for New Teaching Hospitals
4. Requirements for Counting and Appropriate Documentation of FTE Residents: Clarification
5. Resident Time Spent in Nonpatient Care Activities as Part of Approved Residency Programs
6. Medicare GME Affiliated Groups: Technical Changes to Regulations
I. Payment for the Costs of Nursing and Allied Health Education Activities: Clarification
J. Hospital Emergency Services Under EMTALA
1. Background
2. Role of the EMTALA Technical Advisory Group (TAG)
3. Definition of “Labor”
4. Application of EMTALA Requirements to Hospitals Without Dedicated Emergency Departments
5. Clarification of Reference to “Referral Centers”
K. Other Proposed Technical Changes
1. Proposed Cross-Reference Correction in Regulations on Limitations on Beneficiary Charges
2. Proposed Cross-Reference Corrections in Regulations on Payment Denials Based on Admissions and Quality Reviews
3. Proposed Cross-Reference Correction in Regulations on Outlier Payments
4. Removing References to Two Paper Claims Forms
L. Rural Community Hospital Demonstration Program
M. Health Care Information Transparency Initiative
V. Proposed Changes to the PPS for Capital-Related Costs
A. Background
B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals Under § 412.103
C. Other Technical Corrections Relating to the Capital PPS Geographic Adjustment Factors
VI. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS
A. Payments to Existing Hospitals and Hospital Units
1. Payments to Existing Excluded Hospitals and Hospital Units
2. Separate PPS for IRFs
3. Separate PPS for LTCHs
4. Separate PPS for IPFs
5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite Facilities
6. Proposed Changes to the Methodology for Determining LTCH Cost-to-Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay Outlier Payments Under the LTCH PPS
a. Background
b. High-Cost Outliers
c. Short-Stay Outliers
7. Technical Corrections Relating to LTCHs
8. Proposed Cross-Reference Correction in Authority Citations for 42 CFR 412 and 413
B. Critical Access Hospitals (CAHs)
1. Background
2. Sunset of Designation of CAHs as Necessary Providers: Technical Correction
VII. Payment for Services Furnished Outside the United States
A. Background
B. Proposed Clarification of Regulations
VIII. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia
IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt
A. Background
B. Changes Made by Section 5004 of the DRA
C. Proposed Regulation Changes
X. MedPAC Recommendations
XI. Other Required Information
A. Requests for Data From the Public
B. Collection of Information Requirements
C. Public Comments
XII. Regulation Text
Addendum—Proposed Schedule of Standardized Amounts Effective With Discharges Occurring On or After October 1, 2006 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning on or After October 1, 2006
I. Summary and Background
II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2007
A. Calculation of the Adjusted Standardized Amount
1. Standardization of Base-Year Costs or Target Amounts
2. Computing the Average Standardized Amount
3. Updating the Average Standardized Amount
4. Other Adjustments to the Average Standardized Amount
a. Recalibration of DRG Weights and Updated Wage Index—Budget Neutrality Adjustment
b. Reclassified Hospitals—Budget Neutrality Adjustment
c. Outliers
d. Rural Community Hospital Demonstration Program Adjustment (Section 410A of Pub. L. 108-173)
5. Proposed FY 2007 Standardized Amount
B. Adjustments for Area Wage Levels and Cost-of-Living
1. Adjustment for Area Wage Levels
2. Adjustment for Cost-of-Living in Alaska and Hawaii
C. DRG Relative Weights
D. Calculation of the Proposed Prospective Payment Rates for FY 2007
1. Federal Rate
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-Specific Rates for FY 2007
3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2006 and Before October 1, 2007
a. Puerto Rico Rate
b. National Rate
III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2007
A. Determination of Proposed Federal Hospital Inpatient Capital-Related Prospective Payment Rate Update
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
b. Comparison of CMS and MedPAC Update Recommendation
2. Proposed Outlier Payment Adjustment Factor
3. Proposed Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF
4. Proposed Exceptions Payment Adjustment Factor
5. Proposed Capital Standard Federal Rate for FY 2007
6. Proposed Special Capital Rate for Puerto Rico Hospitals
B. Calculation of the Proposed Inpatient Capital-Related Prospective Payments for FY 2007
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2007
IV. Payment Rates for Excluded Hospitals and Hospital Units: Proposed Rate-of-Increase Percentages
A. Payments to Existing Excluded Hospitals and Units
B. New Excluded Hospitals and Units
V. Proposed Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia
Tables
Table 1A—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1)
Table 1B—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1)
Table 1C—Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor
Table 1D—Capital Standard Federal Payment Rate
Table 2—Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2005; Hospital Wage Indexes for Federal Fiscal Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years 2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage Data); Wage Indexes and 3-Year Average of Hospital Average Hourly Wages
Table 3A—FY 2007 and 3-Year Average Hourly Wage for Urban Areas by CBSA
Table 3B—FY 2007 and 3-Year Average Hourly Wage for Rural Areas by CBSA
Table 4A-1—Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA—FY2007
Table 4A-2—Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Urban Areas by CBSA for the Period April 1 through September 30, 2007
Table 4B—Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA—FY 2007
Table 4C-1—Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA—FY 2007
Table 4C-2—Wage Index and Capital Geographic Adjustment Factor (GAF) for Certain Hospitals That Are Reclassified by CBSA for the Period April 1 Through September 30, 2007
Table 4F—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA—FY 2007
Table 4J—Out-Migration Wage Adjustment—FY 2007
Table 5—List of Diagnosis-Related Groups (DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
Table 6A—New Diagnosis Codes
Table 6B—New Procedure Codes
Table 6C—Invalid Diagnosis Codes
Table 6D—Invalid Procedure Codes
Table 6E—Revised Diagnosis Code Titles
Table 6F—Revised Procedure Code Titles
Table 6G—Additions to the CC Exclusions List
Table 6H—Deletions from the CC Exclusions List
Table 7A—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V23.0
Table 7B—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2005 MedPAR Update December 2005 GROUPER V24.0
Table 8A—Statewide Average Operating Cost-to-Charge Ratios—March 2006
Table 8B—Statewide Average Capital Cost-to-Charge Ratios—March 2006
Table 8C—Proposed Statewide Average Total Cost-to-Charge Ratios for LTCHs—March 2006
Table 9A—Hospital Reclassifications and Redesignations by Individual Hospital and CBSA—FY 2007
Table 9B—Hospital Reclassifications and Redesignation by Individual Hospital Under Section 508 of Pub. L. 108-173—FY 2007
Table 9C—Hospitals Redesignated as Rural Under Section 1886(d)(8)(E) of the Act—FY 2007
Table 10—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)—March 2006
Table 11—Proposed FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and
5/6
ths of the Geometric Average Length of Stay
Appendix A—Regulatory Impact Analysis
I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
VI. Quantitative Effects of the Proposed Policy Changes Under the IPPS for Operating Costs
A. Basis and Methodology of Estimates
B. Analysis of Table I
C. Effects on the Hospitals that Failed the Quality Data Submission Process (Column 2)
D. Effects of the DRA Provision Related to MDHs (Column 3)
E. Effects of the Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 4)
F. Effects of Proposed Wage Index Changes (Column 5)
G. Combined Effects of Proposed DRG and Wage Index Changes, Including Budget Neutrality Adjustment (Column 6)
H. Effects of the 3-Year Provision Allowing Urban Hospitals that Were Converted to Rural as a Result of the FY 2005 Labor Market Area Changes to Maintain the Wage Index of the Urban Labor Market Area in Which They Were Formerly Located (Column 7)
I. Effects of MGCRB Reclassifications (Column 8)
J. Effects of the Proposed Wage Index Adjustment for Out-Migration (Column 9)
K. Effects of All Changes (Column 10)
L. Effects of Policy on Payment Adjustments for Low-Volume Hospitals
M. Impact Analysis of Table II
VII. Effects of Other Proposed Policy Changes
A. Effects of LTC-DRG Reclassifications and Relative Weights for LTCHs
B. Effects of Proposed New Technology Add-On Payments
C. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update
D. Effects of Other Proposed Policy Changes Affecting Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals (MDHs)
E. Effects of Proposed Policy on Payment for Direct Costs of Graduate Medical Education
1. Determination of Weighted Average GME PRAs for Merged Teaching Hospitals
2. Determination of PRAs for New Teaching Hospitals
3. Requirements for Counting and Appropriate Documentation of FTE Residents
4. Resident Time Spent in Nonpatient Care Activities as Part of an Approved Residency Program
F. Effects of Proposed Policy Changes Relating to Emergency Services Under EMTALA
G. Effects of Policy on Rural Community Hospital Demonstration Program
H. Effects of Proposed Policy on Hospitals-Within-Hospitals and Satellite Facilities
I. Effects of Proposed Policy Changes to the Methodology for Determining LTCH CCRs and the Reconciliation LTCH PPS Outlier Payments
J. Effects of Proposed Policy on Payment for Services Furnished Outside the United States
K. Effects of Proposed Policy on Limitation on Payments to SNFs
VIII. Effects of Proposed Changes in the Capital PPS
A. General Considerations
B. Results
IX. Alternatives Considered
X. Overall Conclusion
XI. Accounting Statement
XII. Executive Order 12866
Appendix B—Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services
I. Background
II. Inpatient Hospital Update for FY 2007
III. Secretary's Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare
Appendix C—Combinations of Proposed Consolidated Severity-Adjusted DRGs
Appendix D—Crosswalk of Proposed Consolidated Severity-Adjusted DRGs to Respective APR DRGs
I. Background
A. Summary
1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups (DRGs).
The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located; and if the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living adjustment factor. This base payment rate is multiplied by the DRG relative weight.
If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations.
If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS, known as the indirect medical education (IME) adjustment. This percentage varies, depending on the ratio of residents to beds.
Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add-on payment, it would be inadequately paid under the regular DRG payment.
The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.
Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare-dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. (Until FY 2007, an MDH has received the IPPS rate plus 50 percent of the difference between the IPPS rate and its hospital-specific rate if the hospital-specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital-specific rate. As discussed below, for discharges occurring on or after October 1, 2007, but before October 1, 2011, an MDH will receive the IPPS rate plus 75 percent of the difference between the IPPS rate and its hospital-specific rate, if the hospital-specific rate is higher than the IPPS rate.)
Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services “in accordance with a prospective payment system established by the Secretary.” The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital PPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital PPS payments are also adjusted for IME and DSH, similar to the adjustments made under the operating IPPS. In addition, hospitals may receive outlier payments for those cases that have unusually high costs.
The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: rehabilitation hospitals and units; long-term care hospitals (LTCHs); psychiatric hospitals and units; children's hospitals; and cancer hospitals. Religious nonmedical health care institutions (RNHCIs) are also excluded from the IPPS. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and units (referred to as
inpatient psychiatric facilities (IPFs)), as discussed below. Children's hospitals, cancer hospitals, and RNHCIs continue to be paid solely under a reasonable cost-based system.
The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning on or after January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002. IRFs subject to the blend were also permitted to elect payment based on 100 percent of the Federal rate. The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, LTCHs that do not meet the definition of “new” under § 412.23(e)(4) are being transitioned from being paid for inpatient hospital services based on a blend of reasonable cost-based reimbursement under section 1886(b) of the Act to 100 percent of the Federal rate during a 5-year period, beginning with cost reporting periods that start on or after October 1, 2002. These LTCHs that do not meet the definition of “new” may elect to be paid based on 100 percent of the Federal prospective payment rate instead of a blended payment in any year during the 5-year transition. For cost reporting periods beginning on or after October 1, 2006, LTCHs will be paid 100 percent of the Federal rate. The existing regulations governing payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O.
c. Inpatient Psychiatric Facilities (IPFs)
Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005 (November 15, 2004 IPF PPS final rule (69 FR 66922) and January 23, 2006 IPF PPS proposed rule (71 FR 3616)). For cost reporting periods beginning on or after January 1, 2008, all IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education (GME)
Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act; the amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR Part 413.
B. Provisions of the Deficit Reduction Act of 2005 (DRA)
On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. This proposed rule would implement amendments made by the following sections of Pub. L. 109-171:
• Section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting.
• Section 5003, which makes various improvements to the MDH program. It extends special payment provisions, requires MDHs to use FY 2002 as their base year for determining whether use of their hospital-specific rate enhances payment (but permits them to continue to use either their 1982 or 1987 hospital-specific rate if using either of those rates results in higher payments), and removes the application of the 12-percent cap on the DSH payment adjustment factor for MDHs.
• Section 5004, which reduces certain allowable SNF bad debt payments by 30 percent. Payments for the bad debts of full-benefit, dual eligible individuals are not reduced.
In this proposed rule, we also discuss and invite comments on the requirements of section 5001(b) of Pub. L. 109-171, which require us to develop a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals. This discussion also includes the provisions of section 5001(c) of Pub. L. 109-171, which requires a quality adjustment in DRG payments for certain hospital-acquired conditions, effective for FY 2008.
C. Major Contents of This Proposed Rule
In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2007. We also are setting forth proposed changes relating to payments for GME costs, payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis, and payments for SCHs and MDHs. The changes being proposed would be effective for discharges occurring on or after October 1, 2006, unless otherwise noted.
The following is a summary of the major changes that we are proposing to make:
1. Proposed DRG Reclassifications and Recalibrations of Relative Weights
In section II. of the preamble to this proposed rule, as required by section 1886(d)(4)(C) of the Act, we are proposing limited revisions to the DRG classifications structure. In this section, we respond to several recommendations made by MedPAC intended to improve the DRG system. We are also proposing to use, for FY 2007, hospital-specific relative values for 10 cost centers to compute DRG relative weights. In addition, we are proposing to use consolidated severity-adjusted DRGs or alternative severity adjustment methods in FY 2008 (if not earlier).
We also are presenting our reevaluation of certain FY 2006 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of FY 2007 applicants (including public input,
as directed by Pub. L. 108-173, obtained in a town hall meeting).
We are proposing the annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2007.
2. Proposed Changes to the Hospital Wage Index
In section III. of the preamble to this proposed rule, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed include the following:
• The FY 2007 wage index update, using wage data from cost reporting periods that began during FY 2003.
• The proposed FY 2007 occupational mix adjustment to the wage index.
• The proposed revisions to the wage index based on hospital redesignations and reclassifications.
• The proposed adjustment to the wage index for FY 2007 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.
• The timetable for reviewing and verifying the wage data that will be in effect for the proposed FY 2007 wage index.
• The labor-related share for the FY 2007 wage index, including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs, GME Costs, and Promoting Hospitals' Effective Use of Health Information Technology
In section IV. of the preamble to this proposed rule, we discuss a number of provisions of the regulations in 42 CFR Parts 412 and 413 including the following:
• The reporting of hospital quality data as a condition for receiving the full annual payment update increase.
• Proposed changes in payments to SCHs and MDHs.
• Proposed updated national and regional case-mix values and discharges for purposes of determining rural referral center status.
• The statutorily-required IME adjustment factor for FY 2007.
• Proposed changes relating to hospitals' geographic classifications, including reclassifications under section 508 of Pub. L. 108-173, multicampus hospitals, urban group hospital reclassification and the effect of change in ownership on urban county group reclassifications.
• Proposed changes and clarifications relating to GME that address determining the per resident amounts (PRAs) for merged hospitals and new teaching hospitals, counting and appropriate documentation of FTE residents, and counting of resident time spent in nonpatient care activities as part of approved residency programs.
• Proposed changes relating to payment for costs of nursing and allied health education programs.
• Proposed changes relating to requirements for emergency services for hospitals under EMTALA.
• Discussion of the third year of implementation of the Rural Community Hospital Demonstration Program.
We also are inviting comments on promoting hospitals' effective use of health information technology.
4. Proposed Changes to the PPS for Capital-Related Costs
In section V. of the preamble to this proposed rule, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals and propose several technical corrections to the regulations.
5. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS
In section VI. of the preamble to this proposed rule, we discuss payments to excluded hospitals and hospital units, proposed policy changes regarding increases or decreases in square footage or decreases in the number of beds of the “grandfathering” HwHs and satellite facilities, proposed changes to the methodology for determining LTCH CCRs and the reconciliation of high-cost and short-stay outlier payments under the LTCH PPS, and a proposed technical change relating to the designation of CAHs as necessary providers.
6. Payments for Services Furnished Outside the United States
In section VII. of the preamble to this proposed rule, we set forth proposed changes to clarify what is considered “outside the United States” for Medicare payment purposes.
7. Payment for Blood Clotting Factor Administered to Inpatients With Hemophilia
In section VIII. of the preamble to this proposed rule, we discuss the proposed changes in payment for blood clotting factor administered to Medicare beneficiaries with hemophilia for FY 2007.
8. Limitation on Payments to Skilled Nursing Facilities for Bad Debt
In section IX. of the preamble to this proposed rule, we propose to implement section 5004 of Pub. L. 109-171 relating to reduction in payments to SNFs for bad debt.
9. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits
In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2007 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2007 for hospitals and hospital units excluded from the PPS.
10. Impact Analysis
In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals.
11. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services
In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2007 for the following:
• A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs).
• Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS.
12. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, MedPAC is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2006 recommendation concerning hospital inpatient payment policies addressed the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. This recommendation is addressed in Appendix B of this proposed rule. For further information relating specifically to the MedPAC March 2006 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit
MedPAC's Web site at:
www.medpac.gov.
13. Appendix C and Appendix D
In Appendix C of this proposed rule, we list the combinations of the consolidated severity-adjusted DRGs that we are proposing to implement on FY 2008 (if not earlier), as discussed in section II.C. of the preamble of this proposed rule. In Appendix D of this proposed rule, we provide a crosswalk of the proposed consolidated severity-adjusted DRG system to the respective All Patient Related Diagnosis-Related Group (APR DRG) system.
II. Proposed Changes to DRG Classifications and Relative Weights
(If you choose to comment on issues in this section, please include the caption “DRG Reclassifications” at the beginning of your comment.)
A. Background
Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs.
Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.
B. DRG Reclassifications
1. General
For FY 2007, we are proposing only limited changes to the current DRG classifications, as discussed in section II.D. of the preamble to this proposed rule, that would be applicable to discharges occurring on or after October 1, 2006. We are limiting our proposed changes because, as discussed in detail in section II.C. of the preamble to this proposed rule, we are focusing our efforts on addressing the recommendations made last year by MedPAC to refine the entire CMS DRG system by taking into account severity of illness (if not earlier) and applying hospital-specific relative value (HSRV) weights to DRGs.
Currently, cases are classified into CMS DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM).
The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels as the first step toward ensuring that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2006, cases are assigned to one of 526 DRGs in 25 MDCs. The table below lists the 25 MDCs.
Major Diagnostic Categories (MDCs)
1
Diseases and Disorders of the Nervous System.
2
Diseases and Disorders of the Eye.
3
Diseases and Disorders of the Ear, Nose, Mouth, and Throat.
4
Diseases and Disorders of the Respiratory System.
5
Diseases and Disorders of the Circulatory System.
6
Diseases and Disorders of the Digestive System.
7
Diseases and Disorders of the Hepatobiliary System and Pancreas.
8
Diseases and Disorders of the Musculoskeletal System and Connective Tissue.
9
Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast.
10
Endocrine, Nutritional and Metabolic Diseases and Disorders.
11
Diseases and Disorders of the Kidney and Urinary Tract.
12
Diseases and Disorders of the Male Reproductive System.
13
Diseases and Disorders of the Female Reproductive System.
14
Pregnancy, Childbirth, and the Puerperium.
15
Newborns and Other Neonates with Conditions Originating in the Perinatal Period.
16
Diseases and Disorders of the Blood and Blood Forming Organs and Immunological Disorders.
17
Myeloproliferative Diseases and Disorders and Poorly Differentiated Neoplasms.
18
Infectious and Parasitic Diseases (Systemic or Unspecified Sites).
19
Mental Diseases and Disorders.
20
Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders.
21
Injuries, Poisonings, and Toxic Effects of Drugs.
22
Burns.
23
Factors Influencing Health Status and Other Contacts with Health Services.
24
Multiple Significant Trauma.
25
Human Immunodeficiency Virus Infections.
In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2006, there are nine DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow transplants, lung transplants, simultaneous pancreas/kidney transplants, and pancreas transplants, and for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the nine current pre-MDCs.
Pre-Major Diagnostic Categories (Pre-MDCs)
DRG 103
Heart Transplant or Implant of Heart Assist System.
DRG 480
Liver Transplant and/or Intestinal Transplant.
DRG 481
Bone Marrow Transplant.
DRG 482
Tracheostomy for Face, Mouth, and Neck Diagnoses.
DRG 495
Lung Transplant.
DRG 512
Simultaneous Pancreas/Kidney Transplant.
DRG 513
Pancreas Transplant.
DRG 541
ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis with Major O.R.
DRG 542
Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except for Face, Mouth, and Neck Diagnosis without Major O.R.
Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Because the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (0 to 17 years of age or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or a comorbidity (CC).
Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect DRG assignment for certain principal diagnoses, for example, extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones.
Once the medical and surgical classes for an MDC were formed, each class of diagnoses was evaluated to determine if complications, comorbidities, or the patient's age would consistently affect the consumption of hospital resources. Physician panels classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial CC. A substantial CC was defined as a condition which, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least one day in at least 75 percent of the patients. Each medical and surgical class within an MDC was tested to determine if the presence of any substantial CC would consistently affect the consumption of hospital resources.
A patient's diagnosis, procedure, discharge status, and demographic information is fed into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into a DRG.
After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into a DRG on the basis of the diagnosis and procedure codes and, for a limited number of DRGs, demographic information (that is, sex, age, and discharge status).
After cases are screened through the MCE and assigned to a DRG by the GROUPER, the PRICER software calculates a base DRG payment. The PRICER calculates the payment for each case covered by the IPPS based on the DRG relative weight and additional factors associated with each hospital, such as IME and DSH adjustments. These additional factors increase the payment amount to hospitals above the base DRG payment.
The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights. However, in the July 30, 1999 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.
The limited changes that we are proposing to the DRG classification system for FY 2007 for the FY 2007 GROUPER, version 24.0 and to the methodology used to recalibrate the DRG weights are set forth under section II.E. of this proposed rule. Unless otherwise noted in this proposed rule, our DRG analysis is based on data from the December 2005 update of the FY 2005 MedPAR file, which contains hospital bills received through December 31, 2005, for discharges occurring in FY 2005.
2. Yearly Review for Making DRG Changes
Many of the changes to the DRG classifications are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible
inclusion in the annual proposed rule and, if included, may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the DRG recalibration process, concerns about DRG classification issues should be brought to our attention no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS.
The actual process of forming the DRGs was, and continues to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. For purposes of this proposed rule, in deciding whether to create a separate DRG, we consider whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the existing DRG. We evaluate patient care costs using average charges and lengths of stay as proxies for costs and rely on the judgment of our medical officers to decide whether patients are clinically distinct or similar to other patients in the DRG. In evaluating resource costs, we consider both the absolute and percentage differences in average charges between the cases we are selecting for review and the remainder of cases in the DRG. We also consider variation in charges within these groups; that is, whether observed average differences are consistent across patients or attributable to cases that are extreme in terms of charges or length of stay, or both. Further, we also consider the number of patients who will have a given set of characteristics and generally prefer not to create a new DRG unless it will include a substantial number of cases.
C. Proposals for Revisions to the DRG System Used Under the IPPS
1. MedPAC Recommendations
In the FY 2006 IPPS final rule, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482).
In Recommendation 1-3 in the 2005 Report to Congress on Physician-Owned Specialty Hospitals, MedPAC recommended that CMS:
• Refine the current DRGs to more fully capture differences in severity of illness among patients, including—
• Base the DRG relative weights on the estimated cost of providing care.
• Base the weights on the national average of the hospital-specific relative values (HSRVs) for each DRG (using hospital-specific costs to derive the HSRVs).
• Adjust the DRG relative weights to account for differences in the prevalence of high-cost outlier cases.
• Implement the case-mix measurement and outlier policies over a transitional period.
As we noted in the FY 2006 IPPS final rule, we had insufficient time to complete a thorough evaluation of these recommendations for full implementation in FY 2006. However, we did adopt severity-weighted cardiac DRGs in FY 2006 to address public comments on this issue and the specific concerns of MedPAC regarding cardiac surgery DRGs. We also indicated that we planned to further consider all of MedPAC's recommendations and thoroughly analyze options and their impacts on the various types of hospitals in the FY 2007 IPPS proposed rule. Following the publication of the FY 2006 IPPS final rule, we contracted with 3M Health Information Systems to assist us in performing this analysis.
Beginning with MedPAC's relative weight recommendations, we analyzed MedPAC's recommendations to move to a cost-based HSRV weighting methodology. In performing this portion of the analysis, we studied hospital cost report data, departmental cost-to-charge ratios (CCRs), MedPAR claims data, and HSRV weighting methodology. Our intention in undertaking this portion of the analysis was to find an administratively feasible approach to improving the accuracy of the DRG weights. As we describe in detail below, we believe some changes can be made to MedPAC's methodology for determining the relative weights that will make it more feasible to replicate on an annual basis but will result in similar impacts.
In conjunction with analyzing MedPAC's relative weight recommendations, we looked at refining the current DRG system to better recognize severity of illness. Starting with the APR DRG GROUPER used by MedPAC in its analysis, we studied Medicare claims data. Based on this analysis, we developed a consolidated severity-adjusted DRG GROUPER that we believe could be a better alternative for recognizing severity of illness among the Medicare population. We note that MedPAC's recommendations with regard to 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 IME and the DSH adjustments. We will discuss these implications in more detail in the following sections.
As we present below, we believe that the recommendations made by MedPAC, or some variants of them, have significant promise to improve the accuracy of the payment rates in the IPPS. For instance, the percent of DRGs with payment-to-cost ratios between 0.95 and 1.05 will increase substantially from adoption of these recommendations.
1
We agree with MedPAC about exploring possible refinements to our payment methodology even in the absence of concerns about the proliferation of specialty hospitals. In the FY 2006 final rule, we indicated that until we had completed further analysis of the options and their effects, we could not predict the extent to which changing to APR DRGs would provide payment equity between specialty and general hospitals. In fact, we cautioned that any system that groups cases will always present some opportunities for providers to specialize in cases they believe to have higher margins. We believe that improving payment accuracy should reduce these opportunities, and potentially reduce the incentives that Medicare payments may provide for the further development of specialty hospitals.
1
Medicare Payment Advisory Commission: Report to the Congress; Physician-Owned Specialty Hospitals, March 2005, p. 37.
We considered MedPAC's recommendation to adjust the relative weights to account for differences in the prevalence of outlier cases. However, we placed most of our attention and resources on the recommendations related to refinement of the current DRGs to more fully capture differences in severity of illness among patients as we do not have the statutory authority to make the specific changes to our outlier policy that MedPAC recommended. While we have not made MedPAC's recommendation regarding outliers a central focus of our analysis, we do intend to examine this issue in more detail in the future. In the following sections II.C.2. through C.6. of this proposed rule, we present our analysis and discuss a number of issues related to the MedPAC recommendations. We also present the estimated impacts of implementing the recommendations and conclude with a specific proposal for FY 2007 and some proposed intended actions for implementation for FY 2008. We also are soliciting comments on other possible proposals or actions in FY 2007, FY 2008, or a combination of both.
2. Refinement of the Relative Weight Calculation
(If you choose to comment on issues in this section, please include the caption “HSRV Weights” at the beginning of your comment.)
MedPAC made two recommendations with respect to the DRG relative weight calculation. First, MedPAC recommended that CMS base the DRG relative weights on the estimated cost of providing care. Second, MedPAC recommended that CMS base the weights on the national average of the HSRVs in each DRG (using hospital-specific costs to derive the HSRVs). Because both of these recommendations address the relative weight calculation, we are addressing them together. The work we have done to address these recommendations is discussed below.
MedPAC recommended that CMS replace its charge-based relative weight methodology with cost-based HSRV weights as it believed that the charge-based relative weight methodology that CMS has utilized since 1983 has introduced bias into the weights due to differential markups for ancillary services among the DRGs. In analyzing claims data, it is evident to us that some hospital types (for example, teaching hospitals) are systematically more expensive overall than the average hospital and certain case types are more commonly treated at these more expensive facilities. This fact results in an upward bias in the weights for these types of cases. The HSRV methodology recommended by MedPAC would help reduce the bias that may be present in the national relative weights due to differences in case-mix adjusted costs.
Under the HSRV method recommended by MedPAC, charges are standardized for each provider by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the hospital's case-mix. The first step in this process involves dividing the charge for each case at the hospital by the average charge for all cases at the hospital in which the case was treated. The hospital-specific relative charge value, by definition, averages 1.0 for each hospital. The resulting ratio is then multiplied by the hospital's case-mix index (CMI). In this way, each hospital's relative charge value is adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other hospitals.
Our analysis of departmental-level CCRs from the Medicare cost report data has shown that charges for routine days, intensive care days, and various ancillary services are not marked up by a consistent amount. For example, the markup amounts for cardiology services are higher than average. Because charges are the current basis for the DRG relative weights, the practice of differential markups can lead to bias in the DRG weights because various DRGs use, on average, more or less of particular ancillary services. MedPAC believes that the bias in the national DRG relative weights that may arise as a result of differential markups across various cost centers can be removed by moving from charge-based to cost-based weights.
Based on the analysis we have conducted, we agree that it may be appropriate to adjust the DRG relative weights to account for the differences in charge markups across cost centers and to adopt an HSRV methodology. However, we have several concerns about the methodology used by MedPAC. MedPAC's methodology to reduce hospital charges to cost is administratively burdensome, not only to develop, but also to maintain.
First, MedPAC developed CCRs for individual hospitals at the most detailed department level. Specifically, in calculating costs as the basis for the relative weights, MedPAC applied hospital-specific CCRs from each provider's cost report to the line item charges on the claims that the hospital submitted during the same time period. This methodology required matching cost report data to claims data, and because cost report data take longer to compile and file, the method necessitates using older claims data to set relative weights. The most recent complete set of Medicare cost reports available to us is from FY 2003. Thus, if we were to model the exact approach used by MedPAC and use claims data for a matching year, we would be using claims data from FY 2003. If we set DRG weights for FY 2007 using our current charge-based method, we would use FY 2005 hospital claims to set the proposed relative weights. In addition, MedPAC's hospital-specific approach required detailed cost center distinctions for each hospital that are difficult to define, map, and apply. This approach also required the use of the Standard Analytic File (SAF) because MedPAR data that we currently use to set DRG weights did not have the necessary level of detail. Using the SAF increases processing time and adds further complexity to the process of setting the relative weights.
Second, because MedPAC applied these CCRs at the individual claim level, missing or invalid data resulted in MedPAC deleting a large number of claims (approximately 10 percent) from the relative weight calculation. Lastly, MedPAC acknowledged that its method was too difficult to replicate on an annual basis and suggested that the weights be recalculated once every 5 years with other adjustments based on charges during the intervening years.
We have developed an alternative to MedPAC's approach that we believe would achieve similar results in a more administratively feasible manner. This method involves developing hospital-specific charge relative weights at the cost center level to remove the bias introduced by hospital characteristics (that is, teaching, disproportionate share, location, and size, among others) and then scaling the weights to costs using the national cost center charge ratios developed from the cost report data. After studying Medicare cost report data, we established 10 cost center categories based upon broad hospital accounting definitions. In our cost center categories, there are 8 ancillary cost groups in addition to routine day costs and intensive care day costs, and each category represents at least 5 percent of the charges in the claims data. The specific cost report lines that contribute to each category and the corresponding charge lines from the MedPAR claims data are itemized in Table A below.
We believe this alternative approach, which we are labeling as the HSRV cost center (HSRVcc) methodology, has several advantages. First, the use of national average rather than hospital-specific CCRs avoids the complexity encountered with cost center CCRs at the hospital level and allows us to retain more data for use in the relative weight calculation. In addition, the methodology eliminates the need to match claims to the time period of the CCRs, resulting in the ability to use more timely claims data. Furthermore, the alternative approach makes it more feasible to update the relative weights annually using a single methodology. We do not have to replicate the methodology once every 5 years and make adjustments based on changes in charges in the intervening years.
In developing an alternative method of calculating DRG weights, we utilized two data sources: claims data and cost report data. The claims data are taken from the FY 2004 MedPAR file. This file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2004 MedPAR data include discharges occurring between October 1, 2003, and September 30, 2004, based on bills received by CMS through March 30, 2005, from all hospitals subject to the IPPS. The full FY 2004 MedPAR file
includes data for approximately 13,673,607 Medicare discharges. We excluded discharges for Medicare beneficiaries enrolled in a Medicare+Choice managed care plan from the analysis. In addition, we excluded data for any hospital that was paid under the IPPS during FY 2004 but became a CAH at any time before February 28, 2005; data from IPFs, IRFs, and LTCHs; data from Maryland hospitals; data from Indian Health Service hospitals; and data from all-inclusive rate providers. The Medicare cost report data used in the analysis were from FY 2003, the most recent full set of data available. Under our alternative methodology, we calculated DRG weights from MedPAR and cost report data as follows:
a. Step One: Clean the Data
(1) All of the claims were grouped using Version 23.0 of the CMS DRGs.
• The transplant cases that were used to establish the alternative relative weights for heart and heart-lung, liver and/or intestinal, and lung transplants (DRGs 103, 480, and 495 under the current Version 23.0 GROUPER) were limited to those Medicare-approved transplant centers that have cases in the FY 2004 MedPAR file. (Medicare coverage for heart, heart and lung, liver and/or intestinal, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)
• Organ acquisition for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before adjusting the charges under the HSRVcc methodology and before eliminating statistical outliers.
(2) The FY 2004 MedPAR data were edited to exclude claims for hospitals with no cost report data. Claims with total charges or total length of stay less than or equal to zero were eliminated. Claims that had an amount in the total charge field that differed by more or less than $10 from the sum of charges for routine days, intensive care, pharmacy, special equipment, therapy, operating room, cardiology, laboratory, radiology, and other services were deleted. In addition, we deleted claims for providers that had charges only in the routine days and intensive care days cost centers and had no charges in any of the eight ancillary cost centers. These claims were deleted because we believe the charges for the eight ancillary cost centers were included in the routine days and intensive care days cost centers. Had we included these claims, the charges for the routine days and intensive care days would have been inflated. After applying these edits, we identified 11,142,651 claims that we used in this analysis.
(3) Statistical outliers were eliminated by removing all cases that were beyond 3.0 standard deviations from the mean of the log distribution of both the charges per case and the charges per day for each DRG.
b. Step Two: Compute HSRVs for Each Cost Center for Each DRG
Once the MedPAR data were edited, we sorted the data by provider so that charges could be standardized under the HSRVcc methodology. To do this, an average charge was computed for each provider for each of 10 proposed cost centers (see Table A). The average charge was computed by summing the charges for each cost center and dividing by the transfer-adjusted case count for each provider. A transfer case, identified by discharge code, DRG, and length of stay, was counted as a fraction of a case based on the ratio of its length of stay plus 1 day relative to the geometric mean length of stay for that DRG. That is, a transfer case with a length of stay of 2 days in a DRG with a geometric mean length of stay of 6 days would be counted as 3 (2 days plus 1 extra day) divided by 6 or 0.5 of a total case. This treatment of transfer cases is consistent with payment rules.
After computing the average charge for each provider for each cost center, the cost center charges on each claim were divided by the provider's average charge for the matching cost center across all services. For example, the routine day charges on each individual claim were divided by the average routine day charge for the provider across all services, the intensive care unit charges on the same claim were divided by the average intensive care unit charge for the provider across all services, and so on.
By using a hospital's relative charge structure, we found that the resulting weights did not reflect differences in charges among providers for factors such as location, size, wages, relative efficiency, average markup, IME adjustment, DSH adjustment, and the variety of cases treated. Therefore, once charge weights were computed at the hospital cost center level, they were multiplied by the provider's CMI. We made this adjustment for the CMI to rescale the hospital-specific relative charge values which, by definition, averaged to 1.0 for each cost center. We believed that the CMI was a reasonable scale factor to use to further adjust the relative charges to reflect the complexity of cases treated by the provider. We assigned a starting CMI of 1 to the cost center for each provider. However, an alternative starting CMI could have been assigned because the algorithm is not sensitive to starting values of CMI.
After the relative charges (cost center claim charge divided by the average cost center charge for the provider) were multiplied by the hospital's matching cost center CMI, they were summed by DRG. The transfer adjusted case count for each DRG was also summed. Average charges by DRG were calculated for each cost center by taking the sum of the relative CMI-adjusted charges for that DRG and dividing by the transfer-adjusted case count for that DRG. A national average charge for each cost center was calculated summing all relative CMI-adjusted charges in the trimmed MedPAR data set and dividing by the total transfer-adjusted case count. We then created a set of cost center DRG weights by dividing the national average charge for each DRG for each cost center by the national average charge for that cost center. The result was a set of 10 weights for each DRG. These 10 weights are then assigned to each claim, and a new CMI is created for each provider. Then the relative charges for each cost center on the claim (total charge for cost center is divided by the provider's average charge for that cost center) are multiplied by this new CMI and the weights are iterated until the national average CMI for each cost center stops changing between iterations. In preparing the proposed weights for their simulation, we used a transfer-adjusted CMI that was computed by taking the sum of the transfer-adjusted weights and dividing by a full case count, where the transfer-adjusted weight is computed by multiplying the transfer-adjusted case count (length of stay for the claim plus 1 day divided by geometric mean length of stay for the DRG) by the DRG weight.
Table A below illustrates the charge line items from MedPAR that were included in each cost center charge group. In addition, it shows the corresponding line items from Worksheet C, Part 1, columns 5, 6, and 7 of the Medicare cost reports. The name of each cost report line item appears as it is listed in the Hospital Cost Report Information System (HCRIS) cost report database record layout which is available for download via the Web site:
www.cms.hhs.gov.
BILLING CODE 4120-01-P
EP25AP06.000
EP25AP06.001
[BILCOD]BILLING CODE 4120-01-C
c. Step Three: Compute CCRs From the Cost Reports for Each of the 10 Cost Center Groups Identified in Table A
After the iteration process was completed, we removed the effects of differential markups within cost centers. The first step in this process was to develop national cost center CCRs. Taking FY 2003 cost report data, we edited the data to remove data for CAHs, IPFs, IRFs, LTCHs, Maryland hospitals, Indian Health Service hospitals, and all inclusive rate hospitals, and cost reports that represented time periods of less than 1 year (365 days). We then created CCRs for each provider for each group of cost centers (see Table A for line items used in the calculations) while removing any cost center CCRs that were greater than 10 or less than .01, as we believe that these CCRs are outside of a reasonable range. We then took the logs of all of the cost center CCRs and removed any cost center CCRs where the log of the cost center CCR was greater or less than the mean log plus/minus 1.96 standard deviations of the log of that cost center CCR. We used 1.96 standard deviations as a trim factor because the logs of the cost center CCRs are normally distributed and 1.96 standard deviations represent the 95th percentile of the T-Distribution for large sample size, for which 2,000 to 3,000 hospitals qualify. Once the cost report data were trimmed, we calculated the geometric mean CCR for each cost center.
d. Step Four: Sum the Average Charge for Each Cost Center From the MedPAR Data and Apply the National CCRs From the MedPAR File
Once the national average CCRs from Step Three were computed, they were multiplied by the total unadjusted charges for the matching cost centers in the MedPAR file. The estimated costs were then summed to derive a total cost for all cases across the Nation. The percentage that each cost center was contributing to the overall total costs is calculated by dividing the individual cost center cost by the total. For example, the total cost for routine days was divided by the total cost for all cases to arrive at 0.29, which indicated that routine costs were responsible for approximately 29 percent of total costs. The 10 scaling factors sum to 1.0.
e. Step Five: Adjust Relative Weights From Step Two to Cost by Applying Scaling Factors From Step Four
For each DRG, the cost center weights are multiplied by these scaling factors (that is, the routine day weight is multiplied by the routine day scaling factor, the intensive care unit weight is multiplied by the intensive care unit scaling factor, and so on). After the weights are adjusted by the scaling factor, they are summed by DRG to create one final weight for each DRG.
f. Step Six: Normalize the Weights
In order to compare the weights calculated in Step Five to the charge-based weights that are in effect in FY 2006, the weights were normalized by the FY 2006 normalization factor of 1.47462 (70 FR 47332). This factor was applied to the charge-based weights from FY 2006 to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS. We used the same normalization factor that we applied for purposes of calculating the DRG relative weights in the FY 2006 IPPS final rule because we used the same FY 2004 MedPAR data and FY 2003 cost report data that we used to set the FY 2006 DRG relative weights. We note that we likely will have more recent data available when we determine the DRG relative weights for the FY 2007 IPPS final rule.
3. Refinement of DRGs Based on Severity of Illness
(If you choose to comment on issues in this section, please include the caption “DRGs: Severity of Illness” at the beginning of your comment.)
For purposes of the following discussions, the term “CMS DRGs” means the DRG system we currently use under the IPPS; the term “APR DRGs” means the severity DRG system designed by 3M Health Information Systems that currently is used by the State of Maryland; and the term “consolidated severity-adjusted DRGs” means the DRG system based on a consolidated version of the APR DRGs (as described in detail below). Although we discuss the consolidated severity-adjusted DRGs in this proposed rule, we are interested in public comments on whether there are alternative DRG systems that could result in better recognition of severity than the consolidated severity-adjusted DRGs we are proposing. We refer to adopting consolidated severity-adjusted DRGs numerous times in this proposed rule. As we make clear in the detailed discussion below, there are still further changes that we believe may be important to make to this proposed system before it is ready for adoption. In the remainder of this proposed rule, “consolidated severity-adjusted DRGs” refers to the DRG system we have analyzed. However, it is possible that the public comment process will present compelling evidence that there are potential alternatives to the consolidated severity-adjusted DRG system for us to consider that could more effectively recognize severity of illness.
In the FY 2006 IPPS final rule (70 FR 47474), we stated that we would consider making changes to the CMS DRGs to better reflect severity of illness among patients. We indicated that we would conduct a comprehensive review of the CC list as well as consider the possibility of using the APR DRGs for FY 2007. We did not adopt APR DRGs for FY 2006 because such an adoption would represent a significant undertaking that could have a substantial effect on all hospitals. There was insufficient time between the release of the MedPAC reports in March 2005 and the publication of the FY 2006 IPPS final rule for us to analyze fully a change of this magnitude. Instead, we adopted a more limited policy by implementing severity-adjusted cardiac DRGs.
After publication of the FY 2006 IPPS final rule, CMS contracted with 3M Health Information Systems to further analyze the MedPAC recommendations in support of our consideration of possible changes to the IPPS for FY 2007. Under one task of this contract, 3M Health Information Systems analyzed the feasibility of using a revised DRG system under the IPPS that is modeled on the APR DRGs Version 23 to better recognize severity of illness. The APR DRGs have been used successfully as the basis of Belgium's hospital prospective global budgeting system since 2002. The State of Maryland began using APR DRGs as the basis of its all-payer hospital payment system in July 2005. More than a third of the hospitals in the United States are already using APR DRG software to analyze comparative hospital performance. Many major health information system vendors have integrated this system into their products. Several State agencies utilize the APR DRGs for the public dissemination of comparative hospital performance reports. APR DRGs have been widely applied in policy and health services research. In addition to being used in research by MedPAC, the APR DRGs also contain a separate measure of risk of mortality that is used in the Quality Indicators of the Agency for Healthcare Research and Quality, the Premier Hospital Quality Incentive Demonstration discussed in section IV.B. of this preamble, and the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) hospital accreditation survey process (Shared Visions-New Pathways).
Below we present a comparison of the CMS DRG system and the APR DRG system.
a. Comparison of the CMS DRG System and the APR DRG System
The CMS DRG and APR DRG systems have a similar basic structure. There are 25 MDCs in both systems. The DRG assignments for both systems are based on the reporting of ICD-9-CM diagnosis and procedure codes. Both DRG systems are composed of a base DRG that describes the reason for hospital admission and a subdivision of the base DRG based on other patient attributes that affect the care of the patient. For surgical patients, the base DRG is defined based on the type of procedure performed. For medical patients, the base DRG is defined based on the principal diagnosis. In Version 23.0 of the CMS DRG system, there are 367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system, there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs in the two systems are virtually identical. For example, there is no significant difference between the base DRG under both systems for medical treatment of congestive heart failure. For other base DRGs, there are substantial differences. For example, in the CMS DRG system, there are two base DRGs for appendectomy (simple and complex); in the APR DRG system, there is only one base DRG for appendectomy (the relative complexity of the patient is addressed in the subsequent subdivision
of the base DRG into severity of illness subclasses).
The focus of the CMS DRGs is on complexity. Complexity is defined as the relative volume and types of diagnostic, therapeutic, and bed services required for the treatment of a particular illness. Thus, the focus of payment in the CMS DRG system reflects the relative resource use needed by the patient in one DRG group compared to another. Resource use is generally correlated with severity of illness but an intensive resource use does not necessarily indicate a high level of severity in every case. It is possible that some patients will be resource-intensive and require high-cost services even though they are less severely ill than other patients. The CMS DRG system subdivides the base DRGs using age and the presence of a secondary diagnosis that represents a CC. The age subdivisions primarily relate to pediatric patients (those who are less than 18 years of age). Patients are assigned to the CC subgroup if they have at least one secondary diagnosis that is considered a CC. The diagnoses that are designated as CCs are the same across all base DRGs. The subdivisions of the base CMS DRGs are not uniform: some base DRGs have no subdivision; some base DRGs have a two-way subdivision based on the presence of a CC; and other base DRGs have a three-way subdivision based on a pediatric subdivision followed by a CC subdivision of the adult patients. In addition, some base DRGs in MDC 5 (Diseases and Disorders of the Circulatory System) have a subdivision based on the presence of a major cardiovascular condition or complex diagnosis.
The APR DRG system subdivides the base DRGs by adding four severity of illness subclasses to each DRG. Under the APR DRG system, severity of illness is defined as the extent of physiologic decompensation or organ system loss of function. The underlying clinical principle of APR DRGs is that the severity of illness of a patient is highly dependent on the patient's underlying problem and that patients with high severity of illness are usually characterized by multiple serious diseases or illnesses. The assessment of the severity of illness of a patient is specific to the base APR DRG to which a patient is assigned. In other words, the determination of the severity of illness is disease-specific. High severity of illness is primarily determined by the interaction of multiple diseases. Patients with multiple comorbid conditions involving multiple organ systems are assigned to the higher severity of illness subclasses. The four severity of illness subclasses under the APR DRG system are numbered sequentially from 1 to 4, indicating minor (1), moderate (2), major (3), and extreme (4) severity of illness.
The APR DRG system does not subdivide base DRGs based on the age of the patient. Instead, patient age is used in the determination of the severity of illness subclass. In the CMS DRG system, the CC list is generally the same across all base DRGs. However, there are CC list exclusions for secondary diagnoses that are related to the principal diagnosis. In the APR DRG system, the significance of a secondary diagnosis is dependent on the base DRG. For example, an infection is considered more significant for an immune-suppressed patient than for a patient with a broken arm. The logic of the CC subdivision in the CMS DRG system is a simple binary split for the presence or absence of a CC. In the APR DRG system, the determination of the severity subclass is based on an 18-step process that takes into account secondary diagnoses, principal diagnosis, age, and procedures. The 18 steps are divided into three phases. There are six steps in Phase I, three steps in Phase II, and nine steps in Phase III.
The diagram below illustrates the three-phase process for determining patient severity of illness subclass.
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EP25AP06.002
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Under the CMS DRG system, a patient is assigned to the DRG with CC if there is at least one secondary diagnosis present that is a CC. There is no recognition of the impact of multiple CCs. Under the APR DRG system, high severity of illness is primarily determined by the interaction of multiple diseases. Under the CMS DRG system, patients are assigned to an MDC based on their principal diagnosis. While the principal diagnosis is generally used to assign the patient to an MDC in the APR DRG system, there is a rerouting step that assigns some patients to another MDC. For example, lower leg amputations can be performed for circulatory, endocrine, or musculoskeletal principal diagnoses. Instead of having three separate amputation base DRGs in different MDCs as is done in the CMS DRG system, the APR DRG system reroutes all of these amputation patients into a single base APR DRG in the musculoskeletal MDC. The CMS DRG system uses death as a variable in the DRG definitions but the APR DRG system does not. Both DRG systems are based on the information contained in the Medicare Uniform Bill. The APR DRG system requires the same information used by the current CMS DRG system. No changes to the claims form or the data reported would be necessary if CMS were to adopt APR DRGs or a variant of them.
The CMS DRG structure makes some DRG modifications difficult to accommodate. For example, high severity diseases that occur in low volume are difficult to accommodate because the only choice is to form a separate base DRG with relatively few patients. Such an approach would lead to a proliferation of low-volume DRGs. Alternatively, these cases may be included in DRGs with other patients that are dissimilar clinically or in costs. Requests for new base DRGs formed on the use of a specific technology may also be difficult to accommodate. Base DRGs formed based on the use of a specific technology would result in the payment weight for the DRG being dominated by the price set by the manufacturer for the technology.
The structure of the APR DRGs provides a means of addressing high severity cases that occur in low volume through assignment of the case to a severity of illness subclass. However, the APR DRG structure does not currently accommodate distinctions based on complexity. Technologies that represent increased complexity, but not necessarily greater severity of illness, are not explicitly recognized in the APR DRG system. For example, in the CMS DRGs, there are separate DRGs for coronary angioplasty with or without insertion of stents. The APR DRGs do not make such a differentiation. The insertion of the stent makes the patient's case more complex but does not mean the patient is more severely ill. However, the inability to insert a stent may be indicative of a patient's more advanced coronary artery disease. Although such conflicts are relatively few in number, they do represent an underlying difference between the two systems. If Medicare were to adopt a severity DRG system based on the APR DRG logic but assign cases based on complexity as well as severity as we do under the current Medicare DRG system, such a distinction would represent a departure from the exclusive focus on severity of illness that currently forms the basis of assigning cases in the APR DRG system.
Section 1886(d)(4) of the Act specifies that the Secretary must adjust the classifications and weighting factors at least annually to reflect changes in treatment patterns, technology, and other factors that may change the relative use of hospital resources. Therefore, we believe a method of recognizing technologies that represent increased complexity, but not necessarily greater severity of illness, should be included in the system. We plan to develop criteria for determining when it is appropriate to recognize increased complexity in the structure of the DRG system and how these criteria interact with the existing statutory provisions for new technology add-on payments. We invite public comments on this particular issue.
Another difference between the CMS DRG system and the APR DRG system is the assignment of diagnosis codes in category 996 (Complications peculiar to certain specified procedures). The CMS DRG system treats virtually all of these codes as CCs. With the exceptions of complications of organ transplant and limb reattachments, these complication codes do not contribute to the severity of illness subclass in the APR DRG system. While these codes could be added to the severity logic, the appropriateness of recognizing codes such as code 998.4 (Foreign body accidentally left during a procedure) as a factor in payment calculation could create the appearance of incentives for less than optimal quality. Although there is no direct recognition of the codes under the 996 category, the precise complication, in general, can be coded separately and could contribute to the severity of illness subclass assignment.
Table B below summarizes the differences between the two DRG systems:
Table B.—Comparison of the CMS DRG System and the APR DRG System
Element
CMS DRG system
APR DRG system
Number of base DRGs
367
314.
Total number of DRGs
526
1,258.
Number of CC (severity) subclasses
2
4.
Multiple CCs recognized
No
Yes.
CC assignment specific to base DRG
No
Yes.
Logic of CC subdivision
Presence or absence
18-step process.
Logic of MDC assignment
Principal diagnosis
Principal diagnosis with rerouting.
Death used in DRG definitions
Yes
No.
Data requirements
Hospital claims
Hospital claims.
To illustrate the differences between the two DRG systems, we compare in Table C below four cases that have been assigned to CMS DRGs and APR DRGs. In all four cases, the patient is a 67-year-old who is admitted for diverticulitis of the colon and who has a multiple segmental resection of the large intestine performed. ICD-9-CM diagnosis code 562.11 (Diverticulitis of colon (without mention of hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental resection of large intestine) would be reported to capture this case. In both DRG systems, the patient would be assigned to the base DRG for major small and large bowel procedures. These four cases would fall
into two different CMS DRGs and four different APR DRGs. We include Medicare average charges in the table to illustrate the differences in hospital resource use.
Case 1:
The patient receives only a secondary diagnosis of an ulcer of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG system, the patient is assigned to base DRG 149 (Major Small and Large Bowel Procedures Without CC). Under the APR DRG system, the patient is assigned to base DRG 221 (Major Small and Large Bowel Procedures) with a severity of illness subclass of 1 (minor).
Case 2:
The patient receives a secondary diagnosis of an ulcer of anus and rectum and an additional secondary diagnosis of unspecified intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS DRG system, the patient is assigned to DRG 148 (Major Small and Large Bowel Procedures With CC). Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 2 (moderate).
Case 3:
The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 3 (major).
Case 4:
The patient receives multiple secondary diagnoses of an ulcer of anus and rectum, unspecified intestinal obstruction, acute myocarditis, atrioventricular block, complete, and the additional diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code 584.9). Under the CMS DRG system, the patient is assigned to DRG 148. Under the APR DRG system, the patient is assigned to base DRG 221 and the severity of illness subclass increases to 4 (extreme).
Table C.—Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System
Principal diagnosis code: 562.11
Procedure code: 45.71
CMS DRG system
DRG
assigned
Average charge
APR DRG system
DRG
assigned
Average charge
Case 1—Secondary Diagnosis: 569.41
149 without CC
$25,147
221 with severity of illness subclass 1
$25,988
Case 2—Secondary Diagnoses: 569.41, 560.9
148 with CC
59,519
221 with severity of illness subclass 2
38,209
Case 3—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0
148 with CC
59,519
221 with severity of illness subclass 3
66,597
Case 4—Secondary Diagnoses: 569.41, 560.9, 422.99, 426.0, 584.9
148 with CC
59,519
221 with severity of illness subclass 4
130,750
The largest significant difference in average charges is seen in case 4 where the average charge under the APR DRG assigned to the patient ($130,750) is more than double the average charge under the CMS DRG assigned to the patient ($59,519).
b. Consolidated Severity-Adjusted DRGs for Use in the IPPS
APR DRGs were developed to encompass all-payer patient populations. As a result, we found that, for the Medicare population, some of the APR DRGs have very low volume. MedPAC noted that the larger number of DRGs under a severity-weighted system might mean that CMS would be faced with establishing weights in many categories that have few cases and, thus, potentially creating unstable estimates. While volume is an important consideration in evaluating any potential consolidation of APR DRGs for use under the IPPS, we believe that hospital resource use and clinical interpretability also need to be taken into consideration. For example, any consolidation of severity of illness subclasses within a base DRG should be restricted to contiguous severity of illness subclasses. Thus, it would not be reasonable clinically to combine severity of illness subclasses 1 and 4 solely because both consist of low-volume cases. We analyzed consolidating APR DRGs by either combining the base DRGs or the severity of illness subclasses within a base DRG. For consolidation across base APR DRGs, we considered patient volume, similarity of hospital charges across all four severity of illness subclasses and clinical similarity of the base APR DRGs. For consolidations of severity of illness subclasses within a base DRG, we considered patient volume and the similarity of hospital charges between severity of illness subclasses. In considering how to consolidate severity of illness subclasses, we believed it was important to use uniform criteria across all DRGs to avoid creating confusing and difficult to interpret results. That is, we were concerned about inconsistencies in the number of severity levels across different DRGs.
The objective to simultaneously take into consideration patient volume and average charges often produced conflict. Table D below contains the overall patient volume and average charge by APR DRG severity of illness subclass. While severity of illness subclass 4 (extreme) has had the lowest patient volume of 5.80 percent, we found that the dramatically different average charges between severity of illness subclass 3 (major) and subclass 4 (extreme) patients of approximately $32,426 and $81,952, respectively, would make it difficult to consolidate severity of illness subclass 3 and 4 patients. Conversely, we found that, while the average charge difference between severity of illness subclass 1 (minor) and 2 (moderate) patients was much smaller, of approximately $17,649 and $20,021, respectively, the majority of patient volume (68.08 percent) is in these two subclasses. Thus, low patient volume and small average charge differences rarely coincided.
Table D.—Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass
All cases
APR DRG
severity of
illness
subclass 1
APR DRG
severity of
illness
subclass 2
APR DRG
severity of
illness
subclass 3
APR DRG
severity of
illness
subclass 4
Count
11,142,651
21.47%
46.61%
26.12%
5.80%
Average Charges
$26,342
$17,649
$20,021
$32,426
$81,952
There were also few opportunities to consolidate base DRGs. For base DRGs for which there was a clinical basis for considering a consolidation, there were usually significant differences in average charges for one or more of the severity of illness subclasses. APR DRGs already represented a considerable consolidation of base DRGs (314) compared to CMS DRGs (367). Thus, we expected that further base DRG consolidation would be difficult.
We reviewed the patient volume and average charges across APR DRGs and found that medical cases assigned severity of illness subclass 4 within an MDC have similar average charges. We observed the same pattern in average charges across severity of illness subclass 4 surgical patients within an MDC. The data suggest that, in cases with a severity of illness of subclass 4, the severity of the cases had more impact on hospital resource use than the reason for admission (that is, the base APR DRG within an MDC). Thus, we believe that, within each MDC, the severity of illness subclass 4 medical and surgical patients, respectively, could be consolidated into a single group.
In some MDCs, it was not possible to consolidate into a single medical and a single surgical severity of illness subclass 4 group. In these MDCs, more than one group was necessary. For instance, Table E below contains the patient volume and average charges for severity of illness subclass 4 cases in MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract). Taking into consideration volume and average charges, except for APR DRG 440 (Kidney Transplant), surgical cases assigned severity of illness subclass 4 in MDC 11 could be consolidated into a single group having 5,492 patients and an average charge of $107,258. However, we decided not to include kidney transplant patients in this severity of illness 4 subclass due to their very high average charges (approximately $203,732 or more than $100,000 greater than other patients in MDC 11 having a severity of illness 4 subclass). Average charges within the consolidated severity of illness 4 surgical DRG in MDC 11 show some variation but are much higher than the corresponding average charges for the severity of illness subgroup 3 patients of $48,863. Thus, our analysis suggests that the data support maintaining three severity of illness levels for each base DRG in MDC 11; a separate severity of illness 4 subclass for all patients other than those having kidney transplant; and a separate DRG for kidney transplants.
Table E.—Summary Statistics for Surgical Cases With Severity of Illness Subclass 4 in MDC 11
APR DRG
Number of cases
Average length of stay
Average total charges
440 (Kidney Transplant)
378
18.0
$203,732
441 (Major Bladder Procedures)
528
21.5
128,729
442 (Kidney & Urinary Tract Procedure for Malignancy)
833
16.6
101,501
443 (Kidney & Urinary Tract Procedure for Non-Malignancy)
966
18.4
103,905
444 (Renal Dialysis Access Device Procedure Only Severity of Illness Subclass 4)
935
18.3
104,249
445 (Other Bladder Procedures)
186
15.2
80,197
446 (Urethral & Transurethral Procedure—Severity of Illness Subclass 4)
492
13.4
73,110
447 (Other Kidney, Urinary Tract & Related Procedures)
1,552
19.3
121,011
The consolidation of severity of illness 4 subclass APR DRG into fewer groups was done for all MDCs except MDC 15 (Newborn and Other Neonates With Conditions Originating in the Perinatal Period), MDC 19 (Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which the severity of illness subclass 4 consolidation was applied, the number of separate severity of illness subclass 4 groups was reduced from 262 to 69.
For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR DRGs were consolidated from 12 to 6. Severity of illness subclass 1 through 3 were retained, and severity of illness subclass 4 was consolidated into a single APR DRG, except for cesarean section and vaginal deliveries, which were maintained as separate APR DRGs. This consolidation reduced the total number of obstetric APR DRGs from 48 to 22.
The Medicare patient volume in MDC 15 was very low, allowing for a more aggressive consolidation. For MDC 15, we consolidated 28 base APR DRGs into 7 base consolidated severity-adjusted DRGs. For each of the 7 consolidated base MDC 15 DRGs, we combined severity of illness subclasses 1 and 2 into one DRG and severity of illness subclass 3 and 4 into another one. This consolidation reduced the total number of MDC 15 DRGs from 112 in the APR DRG system to 14 consolidated severity-adjusted DRGs.
In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We retained the 4 severity of illness subclasses in MDC 19 for each of the 4 base DRGs. In MDC 20, the base APR DRG for patients who left against medical advice has severity of illness subclass 1 and 2 consolidated and severity of illness subclass 3 and 4 consolidated. The remaining 4 base DRGs were consolidated into 1 base DRG and retained in 4 severity of illness subclasses.
We did not consolidate any of the pre-MDC subclass 4 APR DRGs such as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for liver and/or intestinal transplants, heart and/or lung
transplants, bone marrow transplants, pancreas transplants, and tracheotomies. For the pre-MDC DRGs, except for Bone Marrow Transplant, we consolidated severity of illness subclasses 1 and 2 into one DRG. In addition, the three base APR DRGs for Human Immunodeficiency Virus (HIV) with multiple or major HIV-related conditions had severity of illness subclasses 1 and 2 consolidated.
In total, we reduced 1,258 APR DRGs to 861 consolidated severity-adjusted DRGs. In Appendix C of this proposed rule, we present the 861 unique combinations of consolidated severity-adjusted DRGs.
Table F below includes a description of the consolidations that we did within each individual MDC and includes information about the total number of DRGs that were eliminated from the APR DRGs to develop the consolidated severity-adjusted DRGs.
BILLING CODE 4120-01-P
EP25AP06.003
BILLING CODE 4120-01-C
Appendix D of this proposed rule shows the crosswalk of each consolidated severity-adjusted DRG to its respective APR DRG. We numbered the DRGs sequentially and incorporated the severity of illness subclass into the DRG description. However, within the range of sequential numbers used for an MDC, we retained some unused numbers to allow for future DRG expansion. By using a three-digit number for the consolidated severity-adjusted DRGs, we also avoid the need for reprogramming of computer systems that would be necessary to accommodate a change from the current three-digit DRG number to separate fields for the base consolidated severity-adjusted DRG number and the severity of illness subclass.
Severity DRGs represent a significant change from our current DRG system. In addition to changing the way claims are grouped, severity DRGs introduce other issues requiring additional analysis, including possible increases in reported case-mix and changes to the outlier threshold. Our analysis of these issues is outlined below.
c. Changes to CMI From a New DRG System
After the 1983 implementation of the IPPS DRG classification system, CMS observed unanticipated growth in inpatient hospital case-mix (the average relative weight of all inpatient hospital cases) that is used as proxy measurement for severity of illness. There are three factors that determine changes in a hospital's CMI:
(1) Admitting and treating a more resource intensive patient-mix (due, for example, to technical changes that allow treatment of previously untreatable conditions and/or an aging population);
(2) Providing services (such as higher cost surgical treatments, medical devices, and imaging services) on an inpatient basis that previously were more commonly furnished in an outpatient setting; and
(3) Changes in documentation (more complete medical records) and coding practice (more accurate and complete coding of the information contained in the medical record).
Changes in CMI as a result of improved documentation and coding do not represent real increases in underlying resource demands. For the implementation of the IPPS in 1983, improved documentation and coding were found to be the primary cause in the underprojection of CMI increases, accounting for as much as 2 percent in the annual rate of CMI growth observed post-PPS.
2
2
Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand, 1985.
We believe that adoption of consolidated severity-adjusted DRGs would create a risk of increased aggregate levels of payment as a result of increased documentation and coding. MedPAC notes that “refinements in DRG definitions have sometimes led to substantial unwarranted increase in payments to hospitals, reflecting more complete reporting of patients' diagnoses and procedures.” MedPAC further notes that “refinements to the DRG definitions and weights would substantially strengthen providers' incentives to accurately report patients' comorbidities and complications.” To address this issue, MedPAC recommended that the Secretary “project the likely effect of reporting improvements on total payments and make an offsetting adjustment to the national average base payment amounts.”
3
3
Medicare Payment Advisory Commission: Report to Congress on Physician-Owned Specialty Hospitals, March 2005, p. 42.
The Secretary has broad discretion under section 1886(d)(3)(A)(vi) of the Act to adjust the standardized amount so as to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix. While we modeled the changes to the DRG system and relative weights to ensure budget neutrality, we are concerned that the large increase in the number of DRGs will provide opportunities for hospitals to do more accurate documentation and coding of information contained in the medical record. Coding that has no effect on payment under the current DRG system may result in a case being assigned to a higher paid DRG under the consolidated severity-adjusted system. Thus, more accurate and complete documentation and coding may occur under the consolidated severity-adjusted system because it will result in higher payments under the more sophisticated DRG system. We are soliciting comments on this issue.
4. Effect of Consolidated Severity-Adjusted DRGs on the Outlier Threshold
(If you choose to comment on issues in this section, please include the caption “Cost-Based Weights: Outlier Threshold” at the beginning of your comment.)
In its March 2005 Report to Congress on Physician-Owned Specialty Hospitals, MedPAC recommended that Congress amend the law to give the Secretary authority to adjust the DRG relative weights to account for the differences in the prevalence of high-cost outlier cases. MedPAC recommended DRG-specific outlier thresholds that are financed by each DRG rather than through an across-the-board adjustment to the standardized amounts. Furthermore, in comments that MedPAC submitted during the comment period for the FY 2006 IPPS proposed rule, MedPAC stated its belief that the current policy makes DRGs with a high prevalence of outliers profitable for two reasons: (1) These DRGs receive more in outlier payments than the 5.1 percent that is removed from the national standardized amount; and (2) the relative weight calculation results in these DRGs being overvalued because of the high standardized charges of outlier cases. MedPAC also noted that, under its recommendations, outlier thresholds in each DRG would reduce the distortion in the relative weights that comes from including the outlier cases in the calculation of the weight and would correct the differences in profitability that stem from using a uniform outlier offset for all cases. MedPAC added that its recommendation would help make relative profitability more uniform across all DRGs.
In the FY 2006 IPPS final rule (70 FR 47481), we responded to MedPAC's recommendation on outliers by noting that a change in policy to replace the 5.1 percent offset to the standardized amount would require a change in law. However, because the Secretary has broad discretion to consider all factors that change the relative use of hospital resources in the calculation of the DRG relative weights, we stated we would consider changes that would reduce or eliminate the effect of high-cost outliers on the DRG relative weights. At this time, we have not completed a detailed analysis of MedPAC's outlier recommendation because we do not have the authority to adopt such a change under current law. Instead, we have focused our resources on analyzing MedPAC's recommendations with respect to adopting severity DRGs and calculating cost-based HSRV weights that can be adopted without a change in law. While we intend to study MedPAC's recommendation in more detail at a future date, we note that the changes described above with respect to adopting a consolidated severity-adjusted DRG system would have important implications for the outlier threshold.
As noted above, we have completed a detailed analysis that would increase
the number of DRGs from 526 under the current CMS DRG system to 861 under a consolidated severity-adjusted DRG system. Using FY 2004 Medicare charge data, 3M Health Information Systems simulated the effect of adopting consolidated severity-adjusted DRGs in conjunction with cost-based HSRV weights (described below) on the FY 2006 outlier threshold using the same estimation parameters used by CMS in the FY 2006 final rule (that is, the charge inflation factor of 14.94 percent) (70 FR 47494). Under these assumptions, 3M Health Information Systems estimated that the outlier threshold would be reduced from $23,600 under the current system to $18,758 under a consolidated severity-adjusted DRG system. By increasing the number of DRGs to better recognize severity, the DRG system itself would provide better recognition for cases that are currently paid as outliers. That is, many cases that are high-cost outlier cases under the current DRG system would be paid using a severity of illness subclass 3 or 4 under the consolidated severity-adjusted DRGs and could potentially be paid as nonoutlier cases.
5. Impact of Refinement of DRG System on Payments
Using the FY 2004 MedPAR claims data, we simulated the payment impacts of moving to the consolidated severity-adjusted DRG GROUPER and the alternative HSRVcc method for developing HSRV weights. These payment simulations do not make any adjustments for changes in coding or case-mix. For purposes of this analysis, estimated payments were held budget neutral to the estimated FY 2006 payments because we have a statutory requirement to make any changes to the weights or GROUPER budget neutral. Based on the results of this impact analysis, we are proposing to adopt both the HSRVcc weighting methodology and the consolidated severity-adjusted DRGs. However, for reasons described in more detail below, we are proposing to implement the HSRVcc weighting methodology we described above for FY 2007 and future fiscal years and the consolidated severity-adjusted DRG GROUPER for implementation in FY 2008 (if not earlier). Although we are proposing to adopt each of these changes to the IPPS sequentially, the changes should be viewed as part of a unified effort to improve Medicare's inpatient hospital payment system. Our findings in support of these proposals are discussed below.
In examining the effects of moving to consolidated severity-adjusted DRGs with HSRVcc relative weights, the primary impact of the changes generally results from a redistribution of the relative weights from the surgical DRGs to the medical DRGs. In Table G below, we show an analysis of the total case-mix change for the medical and surgical DRGs. We are comparing the percent change in case-mix between the FY 2006 DRGs with HSRVcc relative weights and the FY 2006 GROUPER with the FY 2006 charge-based relative weights. We also show the percent change in case-mix between the consolidated severity-adjusted DRGs with HSRVcc relative weights and the FY 2006 GROUPER with the FY 2006 charge-based relative weights and the percent change between the consolidated severity-adjusted DRGs with HSRVcc relative weights and the FY 2006 DRGs with HSRVcc relative weights.
Table G.—Percent Change in Case-Mix Among Medical and Surgical DRGs by MDC
MDC description
Cases
Percent change in case-mix due to HSRVcc
Percent change in case-mix due to consolidated severity-adjusted DRGs
Total impact all changes
(percent)
Medical
7,832,185
6.0
1.3
7.3
Surgical
3,301,570
−5.7
−1.3
−6.9
Surgical DRGs experience a decline of 5.7 percent in weights, while medical DRGs overall increase by approximately 6 percent when we apply the HSRVcc method to the FY6 DRGs. Adoption of the consolidated severity-adjusted DRGs also shows a redistribution of payment from the surgical to the medical DRGs, but to a much lesser extent. The redistribution of payments from adopting the HSRVcc weighting methodology can be explained by the much lower CCRs for ancillary cost centers that account for a higher proportion of total charges in the surgical DRGs than the medical DRGs. Table H below shows department charges as a percent of total charges and the CCRs for the two routine cost centers (routine days and intensive care unit) and eight ancillary cost centers that we used to develop the cost-based weights.
Table H.—Departmental Charges as Percent of Total Charges for Medical and Surgical DRGs and Departmental Cost-to-Charge Ratios (CCRs)
[In percent]
Routine days
Intensive care unit
Supplies & equipment
Therapy
Lab
Radiology
Other
O.R.
Pharmacy
Cardiac
Cost-to-Charge Ratio
85
72
34
35
25
24
51
37
26
20
Medical
24
12
5
7
14
10
7
1
16
5
Surgical
10
10
23
4
8
5
4
17
13
6
As the above Table H shows, the routine cost centers account for 36 percent (24 percent for routine days and 12 percent for intensive care unit) and 20 percent (10 percent for routine days and 10 percent for intensive care unit) of total charges in the medical and surgical DRGs, respectively. These departments have CCRs that range from
85 (routine days) to 72 percent (intensive care unit). However, the markup over costs is much higher in the ancillary than in the routine cost centers. The CCRs in the ancillary departments range from 20 percent (cardiac) to 51 percent (other). Ancillary cost centers account for 64 percent of total charges in the medical and 80 percent of total charges in the surgical DRGs. Thus, because ancillary departments have higher markups and account for a larger proportion of total charges in the medical than the surgical DRGs, adopting HSRVcc redistributes payments to the more routine-intensive medical DRGs. Table H supports the hypothesis that the charge-based relative weight methodology results in high payments to surgical DRGs that use more ancillary services relative to medical DRGs that use more routine services. By changing the relative weight methodology from the charge-based to the HSRVcc method, the weights will more closely reflect actual relative costs.
In addition to examining the change in weights by MDC for the medical and surgical DRGs, we also looked at the percent change to the relative weights for several DRGs that account for the high Medicare spending. Again, the payment impacts illustrate that a change from the charge-based relative weights to the HSRVcc weighting methodology will result in significant payment redistribution for selected DRGs. Table I below also shows payment reductions from adopting HSRVcc for several DRGs where ancillary charges represent a high proportion of total charges and the ancillary department has a low CCR. For instance, Table I shows a 30-percent reduction in payment for DRG 558 from adopting HSRVcc weights. For this DRG, charges for the medical supplies and the cardiac care represent over 60 percent of average total hospital charges. These cost centers have low CCRs (34 and 20 percent for medical supplies and cardiology respectively). For this DRG, routine cost center charges account for only 7 percent of total hospital charges. Thus, similar to the MDC analysis presented above, payment for this DRG can be expected to decline because ancillary departments with higher markups account for a larger proportion of total charges.
The data are similar for many of the other DRGs presented in Table I that are showing large reductions in the relative weights from adopting the HSRVcc weighting methodology. Conversely, Table I shows payment increases from adopting HSRVcc for DRGs where routine charges represent a high proportion of total charges. These departments have high CCRs. Below we illustrate the charges by cost center as a percent of total charges for DRGs 558 and 089.
Illustration
Routine days
(percent)
ICU
(percent)
Supplies and
equipment
(percent)
Therapy
(percent)
Laboratory
(percent)
Radiology
(percent)
Other
(percent)
O.R.
(percent)
Pharmacy
(percent)
Cardiac
(percent)
CCRs
85
72
34
35
25
24
51
37
26
20
DRG 558
2
5
39
0
3
2
1
2
8
29
DRG 089
25
9
7
9
14
8
6
1
19
3
Table I below shows a 30-percent reduction in payment for DRG 558 from adopting HSRVcc weights. For this DRG, charges for the medical supplies and the cardiac care represent nearly 80 percent of average total hospital charges. These cost centers have low CCRs (34 percent and 20 percent for medical supplies and cardiology, respectively). For this DRG, routine cost center charges account for only 7 percent of total hospital charges. Thus, similar to the MDC analysis presented above, payment for this DRG can be expected to decline because ancillary departments with higher markups account for a larger proportion of total charges. The data are similar for many of the other DRGs presented in Table I that are showing large reductions in the relative weights from adopting HSRVcc. Conversely, routine charges account for a higher proportion of total charges for the DRGs that are showing large increases in payments. For instance, payment for DRG 089 is increasing nearly 10 percent from adoption of HSRVcc weights. Routine day charges account for 34 percent of total charges for DRG 089. Thus, because routine charges represent a high proportion of total charges and these cost centers have relatively low markups, the HSRVcc methodology will lead to higher payments for this DRG.
BILLING CODE 4120-01-P
EP25AP06.004
EP25AP06.005
BILLING CODE 4120-01-C
Our payment impacts were similar to MedPAC's in both magnitude and direction. Table J below compares our impact estimates to those simulated by MedPAC
4
using our alternative HSRVcc weighting methodology and the consolidated severity-adjusted DRG GROUPER.
4
Medicare Payment Advisory Commission: Report to Congress on Physician-Owned Specialty Hospitals, March 2005, p. 39.
Table J.—Comparison of MedPAC's Table of Combined Payment Impact of Severity-Adjusted DRGs and Cost-Based, Hospital-Specific Relative Values (HSRVs) to the CMS/3M Analysis
[The percent changes estimated by CMS/3M are shown in parenthesis.]
Type of hospital
Decrease greater than −5%
Decrease between −5% and −1%
Decrease/increase between −1% and 1%
Increase between +1% and +5%
Increase greater than +5%
Specialty:
Heart
87% (95%)
13% (5%)
0% (0%)
0% (0%)
0% (0%)
Orthopedic
76% (91%)
24% (2%)
0% (2%)
0% (2%)
0% (2%)
Surgical
N/A (67%)
N/A (17%)
N/A (0%)
N/A (17%)
N/A (0%)
All Other IPPS:
Urban
7% (8%)
22% (25%)
16% (19%)
33% (31%)
22% (17%)
Rural
8% (11%)
25% (35%)
17% (20%)
33% (26%)
16% (9%)
High IME/DSH
8% (10%)
28% (25%)
14% (15%)
25% (28%)
24% (23%)
**Numbers may not add to 100 percent due to rounding.
As shown in Table J above, the shifts in payment from MedPAC's method compared to the alternative approach that we developed are fairly similar. Both methods introduce refinements to the DRG GROUPER and relative weight methods that expand the DRG groups and create greater homogeneity among the cases within each DRG. These changes will significantly reduce payments to hospitals that specialize in certain DRGs experiencing a reduction in payment. There are also payment impacts across all other hospitals. Although some urban (17 percent) and rural (9 percent) providers are estimated to receive increases of greater than 5 percent from these combined changes, 8 percent of urban hospitals and 11 percent of rural hospitals are expected to experience decreases of greater than 5 percent in payment and an additional 25 percent of urban providers and 35 percent of rural providers are expected to experience a decrease of between 1 and 5 percent.
Table K below shows the impact on specific categories of hospitals of adopting HSRVcc weights and the consolidated severity-adjusted DRGs. As illustrated in Table K, cardiac specialty hospitals and orthopedic specialty hospitals may experience an 11.2 and 4.4 percent decline in payments, respectively, from the move to the HSRVcc weighting method alone. Urban hospitals experience a small decline of 0.3 but rural hospitals experience a gain of 2.7 percent. While urban hospitals as a group are not expected to experience a change in overall payments with the combined introduction of the consolidated severity-adjusted DRGs and the HSRVcc weighting methodology, rural hospitals would likely experience a 0.4 percent decline in payments.
Table K.—Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital Type
Number of hospitals
Cases
Percent change in case-mix due to HSRVcc
Percent change in case-mix due to consolidated severity-adjusted DRGs
Total impact all changes
Specialty Hospital Type:
Cardiac
19
44,203
−11.2
−0.5
−11.7
Orthopedic
43
11,097
−4.4
−5.2
−9.4
Surgery
12
1,840
0.3
−7.4
−7.2
All Other IPPS:
Urban
1,959
7,148,362
−0.3
0.3
0
Rural
880
1,444,664
2.7
−3.1
−0.4
High IME/DSH
734
2,492,485
0
0.4
0.4
In Table L, we provide a more detailed impact analysis by hospital type. Column 1 shows the estimated impact of moving from the current charge-based relative weight methodology to the HSRVcc method. Hospitals with more than 60 percent of Medicare patients are projected to receive the greatest benefit in payments with a 7.6 percent increase. Hospitals with less than 50 beds are estimated to experience an additional 4.1 percent increase, and hospitals with 50 to 100 beds are also projected to benefit with a 2.54 percent increase.
Payments to major and other teaching hospitals are estimated to decrease by 1.1 percent and 1 percent, respectively,
while payments to nonteaching hospitals are estimated to increase by 1.3 percent. Hospitals with less than 20 percent DSH payments will experience declines in payment from 0.48 to 1.45 percent, while hospitals with DSH payments greater than 50 percent will experience a 2.3 percent increase. Because we are proposing to implement the HSRVcc weighting methodology for FY 2007, we are also showing the impact of this proposal on FY 2007 payments in the impact section in the Addendum to this proposed rule. We note that the impact section models adopting the HSRVcc in isolation using FY 2005 Medicare charge data. The impacts shown here were simulated with FY 2004 Medicare charge data. Thus, the payment changes shown in this section from adopting HSRVcc may differ from those shown in the impact section in the Addendum to this proposed rule.
Column 2 shows the estimated incremental impacts of transitioning from the FY 2006 GROUPER with HSRVcc relative weights to the consolidated severity-adjusted DRG GROUPER with HSRVcc relative weights. Hospitals with high Medicare patient percentages experience the largest payment increases of 1.1 percent, followed by hospitals in the East North Central Region where increases are estimated at 0.9 percent. Hospitals with less than 50 beds, rural hospitals, and hospitals with 50 to 100 beds experience the greatest estimated decreases in payment of 5.2, 3.1, and 2.8 percent, respectively.
Column 3 shows the estimated total impact of moving from the FY 2006 GROUPER with the current charge-based relative weights to the consolidated severity-adjusted DRG GROUPER with HSRVcc relative weights. While large urban hospitals are expected to gain 0.7 percent from the combined changes, other urban hospitals and rural hospitals are projected to experience declines of 0.7 percent and 0.4 percent, respectively. Hospitals with high percentages of Medicare patients would see the greatest increase in payments, while hospitals with low DSH percentages, hospitals with under 50 beds, and hospitals in the West North Central Region are projected to experience the greatest decreases.
Table L.—Payment Impact of Hospital-Specific Cost Weights and Consolidated Severity-Adjusted DRGs by Hospital Category
Number of hospitals
Cases
Percent change in case mix due to HSRVcc (1)
Percent change in case-mix due to consolidated severity-adjusted DRGs (2)
Total impact all changes (3)
Geographic Location:
Large Urban
1,454
5,159,405
−0.1
0.7
0.7
Other Urban
1,158
4,313,598
−0.7
0.0
−0.7
Rural
1,035
1,669,648
2.8
−3.1
−0.4
Census:
New England
150
550,391
0.3
−0.5
−0.2
Middle Atlantic
473
1,750,452
0.1
−0.5
−0.4
South Atlantic
556
2,191,787
−0.2
0.4
0.2
East North Central
541
1,973,092
−0.1
0.9
0.8
East South Central
368
973,664
0.3
−1.3
−1.0
West North Central
314
846,046
−0.5
−0.8
−1.3
West South Central
572
1,332,819
−0.1
−0.1
−0.2
Mountain
234
502,128
−0.6
0.6
−0.1
Pacific
439
1,022,272
0.6
0.3
0.9
Bed Size:
Less than 50 beds
761
423,096
4.1
−5.2
−1.3
50-100 beds
717
1,028,840
2.5
−2.8
−0.3
100-200 beds
1,096
2,895,808
1.8
−0.6
1.2
200-300 beds
509
2,396,739
0.0
0.5
0.5
300-400 beds
269
1,666,872
−0.9
0.7
−0.2
400-500 beds
138
1,017,724
−1.5
0.7
−0.8
Greater than 500 beds
157
1,713,572
−1.8
0.8
−1.0
Teaching Status:
Major Teaching
268
1,552,985
−1.1
0.5
−0.5
Other Teaching
760
3,856,302
−0.9
0.6
−0.3
Non Teaching
2,619
5,733,364
1.3
−0.8
0.5
Disproportionate Share:
%DSH Less than 5%
202
339,171
−1.4
−0.8
−2.2
%DSH 5-10%
335
1,048,420
−0.6
−0.1
−0.7
%DSH 10-15%
460
1,429,319
−0.6
0.1
−0.4
%DSH 15-20%
582
2,061,387
−0.5
−0.1
−0.6
%DSH 20-25%
528
1,812,743
0.1
−0.1
0.0
%DSH 25-30%
455
1,497,940
0.0
0.2
0.2
%DSH 30-40%
516
1,586,376
0.0
0.0
−0.1
%DSH 40-50%
262
693,815
0.6
−0.1
0.4
%DSH Greater than 50%
307
673,480
2.3
0.5
2.9
Percent Medicare Discharges:
Less than 10% Medicare Cases
1,194
3,210,704
−0.7
−0.1
−0.8
10%-20% Medicare Cases
1,471
5,109,042
0.1
0.0
0.0
20%-30% Medicare Cases
617
1,934,947
−0.1
0.1
−0.1
30%-40% Medicare Cases
226
617,518
0.9
0.1
1.0
40%-50% Medicare Cases
86
197,882
2.0
0.8
2.8
50%-60% Medicare Cases
39
55,346
5.2
1.1
6.4
Greater than 60% Medicare Cases
14
17,212
7.6
−0.2
7.4
6. Conclusions
As we describe in more detail below, we believe that adopting HSRVcc weights and the consolidated severity-adjusted DRGs as recommended by MedPAC has the potential to result in significant improvements to Medicare's IPPS payments. This rule proposes the HSRVcc methodology effective for FY 2007.
Because we believe that accounting more appropriately for severity of illness may significantly improve the effectiveness of the IPPS, we are also proposing implementation of the consolidated severity-adjusted DRGs or alternative severity adjustment methods in FY 2008 (if not earlier). In developing this proposal, we considered a range of alternatives outlined below, and we are soliciting comments on both the proposal and the alternatives. We ask commenters to consider both the consolidated severity-adjusted DRGs and alternative severity adjustment methods for accounting for severity more comprehensively in the DRG payment system. For example, under one alternative, we would implement the consolidated severity-adjusted DRGs in FY 2007 along with the HSRVcc weighting methodology. In this event, as discussed above, to maintain budget neutrality, we would also implement in FY 2007 an adjustment to the standardized amounts to eliminate the effect of changes in coding or classification of discharges that do not reflect real changes in case-mix. Under another alternative, as proposed, we would adopt and implement consolidated severity-adjusted DRGs in FY 2008. Under yet another alternative, we would consider partially implementing the consolidated severity-adjusted DRGs in FY 2007 and complete implementation in FY 2008. However, there are practical difficulties associated with partial implementation of consolidated severity-adjusted DRGs because cases in a single DRG under the current CMS DRG system may group to multiple DRGs and MDCs under a consolidated severity-adjusted DRG system. Conversely, cases that group to multiple MDCs and DRGs under the current system may group to a single MDC and DRG under the current system. We welcome public comments on this issue.
One potential alternative to partially adopting consolidated severity-adjusted DRGs would involve applying a clinical severity concept to an expanded set of DRGs in FY 2007. For example, we have received correspondence that raised the concern that hospitals may have incentives under the current DRG system to avoid severely ill, resource-intensive back and spine surgical cases (as discussed in section II.D.3.b. of this proposed rule; the correspondence specifically requested that we apply a clinical severity concept to DRG 546). Other surgical DRGs may not accurately recognize case severity. Because of the frequency of DRG use and the potential for risk selection, certain DRGs may be particularly important in creating a financial incentive for hospitals to select a less severely ill patient whose case would be assigned to the same DRG as a more severely ill patient.
Therefore, while we are proposing to adopt the consolidated severity-adjusted DRGs in FY 2008, we are considering whether to make more limited changes to the current DRG system to better recognize severity of illness in FY 2007. In the FY 2006 IPPS final rule (70 FR 47474 through 47478), we took steps to better recognize severity of illness among cardiovascular patients. For all DRGs except cardiac DRGs, we currently distinguish between more complex and less complex cases based on the presence or absence of a CC. However, the diagnoses that we designate as CCs are the same across all base DRGs. Because the CC list is not dependent on the patient's underlying condition, CCs may not accurately recognize severity in a given case. The changes we made in FY 2006 to the cardiac DRGs significantly improved recognition of severity between patients by distinguishing between more and less severe cases based on the presence or absence of a major cardiovascular condition (MCV). We are considering whether a similar approach applied to other DRGs would improve payment.
Much like the approach we took last year to identify MCV conditions that represented higher severity in cardiovascular patients, we plan to examine which conditions identify more severely ill cases in selected MDCs and DRGs. We are soliciting comments as to whether it would be appropriate to adopt these types of limited changes in FY 2007 as an intermediate step to adopting consolidated severity-adjusted DRGs in FY 2008. We also encourage commenters to send suggestions regarding this method for modifying the DRGs. Under the final alternative, we would implement the consolidated severity-adjusted DRGs in FY 2007 and the HSRVcc methodology in FY 2008. As the impacts presented in this proposed rule are based on the latest and best available data, we believe the estimated yearly impacts due to implementing the HSRVcc methodology in FY 2007 described in the regulatory impact section of Appendix A of this proposed rule would be similar to the annual impact of adopting the HSRVcc methodology in FY 2008.
With respect to the relative weight calculations, we believe that adopting HSRVcc weights has the potential to significantly improve payment equity between DRGs. As MedPAC notes, “a survey of hospitals' charging practices suggest that hospitals use diverse strategies for setting service charges and raising them over time.” MedPAC found that data from the Medicare cost reports indicate that hospital markups for ancillary services (for example, operating room, radiology, and laboratory) are generally higher than for routine services (for example, intensive care unit and room and board).
5
Thus, MedPAC has concluded that the relative weights for DRGs that use more ancillary services may be too high compared to other DRGs where the routine costs account for a higher proportion of hospital costs. We agree.
The CCRs that we are using to develop the HSRVccs support MedPAC's conclusion. As indicated above, we summarized hospital-level cost and charge information to 2 routine and 8 ancillary departmental cost centers and found that national average routine cost center CCRs ranged from 72 percent (intensive care unit days) to 85 percent (routine days), while ancillary cost center CCRs ranged from 20 percent (cardiology) to 37 percent (operating room).
5
Ibid., p. 26.
MedPAC also found that relative profitability ratios were higher among cardiovascular surgical DRGs than the medical DRGs.
6
We believe the relative profitability of the surgical cardiovascular DRGs has been an important factor in the development of specialty heart hospitals. Our payment impact analysis indicates that this issue will be addressed by adopting HSRVccs. Moving from the current system of charge-based weights to HSRVcc weights increases payment in the medical DRGs relative to the surgical DRGs. We expected this result, given that routine costs will generally account for a higher proportion of total costs in the medical DRGs than in the surgical DRGs. Adopting HSRVcc weights would result in the most significant improvement in hospital payment-to-cost ratios among the changes to the IPPS recommended by MedPAC.
7
For these reasons described above, we are proposing to adopt HSRVccs for FY 2007.
6
Ibid., p. 29.
7
Ibid., p. 37.
Based on our analysis, we concur with MedPAC that the modified version of the APR DRGs would account more completely for differences in severity of illness and associated costs among hospitals. MedPAC observed some modest improvements in hospitals' payment-to-cost ratios from adopting APR DRGs.
8
We modeled the consolidated severity-adjusted DRGs discussed above and observed a 12-percent increase in the explanatory power (or R-square statistic) of the DRG system to explain total hospital charges. That is, we found more uniformity among hospital total charges within the consolidated severity-adjusted DRG system than we did with Medicare's current DRG system. While we believe the consolidated severity-adjusted DRG system that we described above has the potential to improve the IPPS, we have the following concerns about adopting these changes for FY 2007, which is why we have proposed not adopting the changes in FY 2007. However, we recognize that there may be countervailing views, and we specifically seek comment on the wisdom of adopting consolidated severity-adjusted DRGs in FY 2007. Below are our concerns with immediate implementation of consolidated severity-adjusted DRGs:
8
Ibid., p. 37.
• These changes would represent a major change to how hospitals are paid for Medicare inpatient services. Given the number of new DRGs and logic for assigning cases in a consolidated severity-adjusted DRG system, we believe it may be appropriate to provide hospitals with additional time to plan for these changes. We also are considering whether hospitals should have more than the 60-day public comment period and the additional 60-day delay between the publication of the final rule and implementation on October 1, 2006, to fully understand and plan for the changes that we are proposing. Further, we welcome public comment on the changes we are proposing;
• If, based on analysis of data and public comments received, we were to make significant revisions in the final rule to the consolidated severity-adjusted DRGs we describe above, hospitals would have only 60 total days between the publication of the final rule and the October 1, 2006 effective date of the IPPS rule to understand and plan for the new DRG system.
• While we modeled the changes to the DRG system and relative weights to reflect budget neutrality, we believe the large increase in the number of DRGs would provide opportunities for hospitals to more accurately and completely code the information contained in the medical record. Coding that has no effect on payment under the current DRG system may result in a case being assigned to a higher paid DRG under the consolidated severity-adjusted DRG system. Thus, more accurate and complete coding may occur under the new system because the more sophisticated DRG system would mean that more comprehensive coding could result in higher payments. Section 1886(d)(3)(A)(vi) of the Act provides the Secretary with the authority to adjust the standardized amounts to account for the effect of coding or classification changes that do not reflect real changes in case-mix. We are interested in public comments on this issue.
• As described above, adoption of a consolidated severity-adjusted DRG system could have implications for the outlier threshold.
• As we indicated in the introduction to this section, adoption of a consolidated severity-adjusted DRG system also raises issues regarding the IME and DSH adjustments. It is possible that a consolidated severity-adjusted DRG system would have important implications for these payment adjustments. We believe further study of this issue is warranted.
• To this point, we have only considered one alternative DRG system to better recognize severity of illness. It is possible that the public comment process will present compelling evidence that there are potential alternatives to the consolidated severity-adjusted DRG system that could also better recognize severity of illness.
Therefore, for the reasons indicated above, we are seeking comment on the most effective approach to address severity of illness in the IPPS. However, we reserve the option to adopt consolidated severity-adjusted DRGs in FY 2007, based upon the comments that we receive. Between now and the eventual implementation, we will carefully study the additional impact of these DRGs on payment accuracy after our proposed refinements in relative weights are implemented, as well as their impact on hospitals before reaching a final decision.
Given the changes we are proposing, we believe that hospitals would be interested in understanding how a given case would be assigned to a consolidated severity-adjusted DRG under the new system. In order to facilitate understanding of the underlying severity DRG concepts and logic, we are providing a link below to 3M's Web site for the duration of the comment period where users can access information related to the proposed consolidated severity-adjusted DRGs. Users will have access to a tool that allows them to build case examples using this proposed DRG classification system. The report produced by the tool will provide a detailed explanation of how the severity of illness was assigned and the diagnostic and demographic factors affecting that assignment. In addition, users will be able to view the APR DRG Definitions Manual, a report showing the mapping from the standard APR DRGs to the consolidated severity-adjusted DRGs, a report showing basic APR DRG statistics, and other APR DRG background and educational materials. This site can be accessed at
http://www.aprdrgassign.com
.
In addition to the above information, CMS makes available for purchase the Expanded Modified MedPAR data that were used in simulating the policies proposed in the IPPS rule. If readers have already ordered the proposed rule data, we are in the process of filling the orders and will be providing the FY
2005 MedPAR data that were used to model the proposed changes to the DRGs and relative weights for FY 2007 as well as the FY 2004 MedPAR data that we used to model the consolidated severity-adjusted DRGs that we are proposing to implement in FY 2008 (if not earlier). If readers have not ordered the proposed rule MedPAR data
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