Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates
Federal RegisterAug 22, 2007
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Parts 411, 412, 413, and 489
[CMS-1533-FC]
RIN 0938-AO70
Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2008 Rates
AGENCY:
Centers for Medicare and Medicaid Services (CMS), HHS.
ACTION:
Final rule with comment period.
SUMMARY:
We are revising 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 certain provisions made by the Deficit Reduction Act of 2005 (Pub. L. 109-171), the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (Pub. L. 109-432), and the Pandemic and All Hazards Preparedness Act (Pub. L. 109-417). In addition, in the Addendum to this final rule with comment period, we describe the 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 the rate of increase limits for certain hospitals and hospital units excluded from the IPPS that are paid on a reasonable cost basis subject to these limits, or that have a portion of a prospective payment system payment based on reasonable cost principles. These changes are applicable to discharges occurring on or after October 1, 2007.
In this final rule with comment period, as part of our efforts to further refine the diagnosis related group (DRG) system under the IPPS to better recognize severity of illness among patients, for FY 2008, we are adopting a Medicare Severity DRG (MS DRG) classification system for the IPPS. We are also adopting the structure of the MS-DRG system for the LTCH prospective payment system (referred to as MS-LTC-DRGs) for FY 2008.
Among the other policy decisions and changes that we are making, we are making changes related to: limited revisions of the reclassification of cases to MS-DRGs, the relative weights for the MS-LTC-DRGs; applications for new technologies and medical services add-on payments; the wage data, including the occupational mix data, used to compute the FY 2008 wage indices; payments to hospitals for the indirect costs of graduate medical education; submission of hospital quality data; provisions governing the application of sanctions relating to the Emergency Medical Treatment and Labor Act of 1986 (EMTALA); provisions governing the disclosure of physician ownership in hospitals and patient safety measures; and provisions relating to services furnished to beneficiaries in custody of penal authorities.
DATES:
Effective Date:
This final rule with comment period is effective October 1, 2007 and applies to discharges occurring on or after that date.
Comment Date:
We will consider public comments only on the provisions of section V., Changes to the IPPS for Capital Related Costs, of the preamble of this final rule with comment period, if we receive them at one of the addresses provided below, no later than 5 p.m. on November 20, 2007.
ADDRESSES:
In commenting on the provisions of section V. of the preamble of this final rule with comment period, please refer to file code CMS-1533-FC.
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-1533-FC, 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-1533-FC, 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 appropriately for hand or courier delivery may be delayed and received after the comment period.
Submitting Comments:
You can assist us by referencing the file code CMS-1533-FC and the specific “issue identifier” that precedes section V., Changes to the IPPS for Capital Related Costs.
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, 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 4:00 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.
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, and Hospital Geographic Reclassifications 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.
Jacqueline Proctor, (410) 786-8852, Disclosure of Physician Ownership in Hospitals.
Marilyn Dahl, (410) 786-8665, Patient Safety Measures Issues.
Fred Grabau, (410) 786-0206, Services to Beneficiaries in Custody of Penal Authorities Issues.
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Acronyms
ACGME—Accreditation Council for Graduate Medical Education
AMGA—American Medical Group Association
AHA—American Hospital Association
AHIMA—American Health Information Management Association
AHRQ—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, Pub. L. 105-33
BBRA—Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113
BIPA—Medicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 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
CCR—Cost-to-charge ratio
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, Pub. L. 99-272
CoP—[Hospital] Condition of participation
CPI—Consumer price index
CY—Calendar year
DRA—Deficit Reduction Act of 2005, Pub. L. 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, Pub. L. 99-272
FDA—Food and Drug Administration
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
GMEC—Graduate Medical Education Committee
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, Pub. L. 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
ICD-9-CM—International Classification of Diseases, Ninth Revision, Clinical Modification
ICD-10-PCS—International Classification of Diseases, Tenth Edition, Procedure Coding System
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
MAC—Medicare Administrative Contractor
MCC—Major complication or comorbidity
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
MIEA-TRHCA—Medicare Improvements and Extension Act, Division B of the Tax Relief and Health Care Act of 2006, Pub. L. 109-432
MMA—Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173
MPN—Medicare provider number
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
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)
PMSAs—Primary metropolitan statistical areas
PPI—Producer price index
PPS—Prospective payment system
PRA—Per resident amount
PRM—Provider Reimbursement Manual
ProPAC—Prospective Payment Assessment Commission
PRRB—Provider Reimbursement Review Board
PSF—Provider Specific File
PS&R—Provider Statistical and Reimbursement (System)
QIG—Quality Improvement Group, CMS
QIO—Quality Improvement Organization
RCE—Reasonable compensation equivalent
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
TEFRA—Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
UHDDS—Uniform hospital discharge data set
VBP—Value-based purchasing
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. Provisions of the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006
D. Provisions of the Pandemic and All-Hazards Preparedness Act
E. Issuance of a Notice of Proposed Rulemaking
1. 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 IPPS for Capital-Related Costs
5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages
6. Services Furnished to Beneficiaries in Custody of Penal Authorities
7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate of Increase Limits
8. Impact Analysis
9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services
10. Discussion of Medicare Payment Advisory Commission Recommendations
F. Public Comments Received on the Proposed Rule
II. Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
1. General
2. Yearly Review for Making DRG Changes
C. MedPAC Recommendations for Revisions to the IPPS DRG System
D. Refinement of DRGs Based on Severity of Illness
1. Evaluation of Alternative Severity-Adjusted DRG Systems
a. Overview of Alternative DRG Classification Systems
b. Comparative Performance in Explaining Variation in Resource Use
c. Payment Accuracy and Case-Mix Impact
d. Other Issues for Consideration
2. Development of the Medicare Severity DRGs (MS DRGs)
a. Comprehensive Review of the CC List
b. Chronic Diagnosis Codes
c. Acute Diagnosis Codes
d. Prior Research on Subdivisions of CCs into Multiple Categories
e. Medicare Severity DRGs (MS-DRGs)
3. Dividing MS DRGs on the Basis of the CCs and MCCs
4. Conclusion
5. Impact of the MS-DRGs
6. Changes to Case-Mix Index (CMI) from the MS-DRGs
7. Effect of the MS-DRGs on the Outlier Threshold
8. Effect of the MS-DRGs on the Postacute Care Transfer Policy
E. Refinement of the Relative Weight Calculation
1. Summary of RTI's Report on Charge Compression
2. RTI Recommendations
a. Short-Term Recommendations
b. Medium-Term Recommendations
c. Long-Term Recommendations
F. Hospital-Acquired Conditions, Including Infections
1. General
2. Legislative Requirement
3. Public Input
4. Collaborative Effort
5. Criteria for Selection of the Hospital-Acquired Conditions
6. Selection of Hospital-Acquired Conditions
7. Other Issues
G. Changes to Specific DRG Classifications
1. Pre-MDCs: Intestinal Transplantation
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantable Neurostimulators
b. Intracranial Stents
3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat)—Cochlear Implants
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)
a. Hip and Knee Replacements
b. Spinal Fusions
c. Spinal Disc Devices
d. Other Spinal DRGs
5. MDC 17 (Myeloproliferative Diseases and Disorders, Poorly Differentiated Neoplasm): Endoscopic Procedures
6. Medicare Code Editor (MCE) Changes
a. Non-Covered Procedure Edit: Code 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessel(s))
b. Non-Specific Principal Diagnosis Edit 7 and Non-Specific O.R. Procedures Edit 10
c. Limited Coverage Edit 17
d. Revision to Part 1, Pancreas Transplant Edit A
7. Surgical Hierarchies
8. CC Exclusions List
a. Background
b. CC Exclusions List for FY 2008
9. Review of Procedure Codes in CMS DRGs 468, 476, and 477
a. Moving Procedure Codes from CMS DRG 468 (MS-DRGs 981 through 983) or CMS DRG 477 (MS-DRGs 987 through 989) to MDCs
b. Reassignment of Procedures Among CMS DRGs 468, 476, and 477 (MS-DRGs 981 through 983, 984 through 986, and 987 through 989)
c. Adding Diagnosis or Procedure Codes to MDCs
10. Changes to the ICD-9-CM Coding System
11. Other DRG Issues Addressed in the FY 2008 IPPS Proposed Rule
a. Seizures and Headaches
b. Devices That are Replaced Without Cost or Where Credit for a Replaced Device is Furnished to the Hospital
12. Other MS-DRG Issues Raised in the Public Comments on the Proposed Rule
a. Heart Transplants or Implants of Heart Assist System and Liver Transplants (Pre-MDC)
b. Gliadel® Wafer (MDC 1)
c. Myasthenia Gravis and Acute and Chronic Inflammatory Demyelinating Neuropathies (AIDP-CIDP) (MDC 1)
d. Peripheral and Spinal Neurostimulators (MDC 1 and MDC 8)
e. Stroke and Administration of Tissue Plasminogen Activator (tPA) (MDC 1)
f. Gliasite® Radiation Therapy System (RTS) (MDC 1)
g. Noninvasive Ventilation (MDC 4)
h. Heart Assist Devices (MDC 5)
i. Automatic Implantable Cardioverter-Defibrillators (ACID) Lead and Generator Procedures (MDC 5)
j. Artificial Heart (MDC 5)
k. Vascular Procedures (MDC 5)
l. Coronary Artery Stents (MDC 5)
m. Endovascular Repair of Aortic and Thoracic Aneurysms (MDC 5)
n. O.R. Procedures for Obesity (MDC 10)
o. Penile Restorative Procedures (MDC 12)
p. Female Reproductive System Reconstruction Procedures (MDC 13)
q. Urological and Gynecological Disorders with Grafts or Prosthesis (MDCs 13 and 14)
r. High Dose Interleukin-2 (HD-IL-2) (MDC 17)
s. Computer Assisted Surgery
13. Changes to MS-DRG Logic As a Result of Public Comments
H. Recalibration of DRG Weights
I. MS-LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2008
1. Background
2. Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the FY 2008 MS-LTC-DRG Relative Weights
a. General Overview of Development of the MS-LTC-DRG Relative Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Treatment of Severity Levels in Developing Relative Weights
e. Low-Volume MS-LTC-DRGs
4. Steps for Determining the FY 2008 MS-LTC-DRG Relative Weights
J. Add-On Payments for New Services and Technologies
1. Background
2. Public Input Before Publication of a Notice of Proposed Rulemaking on Add-On Payments
3. FY 2008 Status of Technologies Approved for FY 2007 Add-On Payments
a. Endovascular Graft Repair of the Thoracic Aorta
b. Restore® Rechargeable Implantable Neurostimulators
c. X STOP Interspinous Process Decompression System
4. FY 2008 Application for New Technology Add-On Payments
5. Technical Correction
III. Changes to the Hospital Wage Index
A. Background
B. Core-Based Statistical Areas for the Hospital Wage Index
C. Occupational Mix Adjustment to the FY 2008 Wage Index
1. Development of Data for the FY 2008 Occupational Mix Adjustment
2. Timeline for the Collection, Review, and Correction of the Occupational Mix Data
3. Calculation of the Occupational Mix Adjustment for FY 2008
4. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
D. Worksheet S-3 Wage Data for the FY 2008 Wage Index
1. Included Categories of Costs
2. Contract Labor for Indirect Patient Care Services
3. Excluded Categories of Costs
4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals under the IPPS
E. Verification of Worksheet S-3 Wage Data
F. Wage Index for Multicampus Hospitals
G. Computation of the FY 2008 Unadjusted Wage Index
1. Method for Computing the FY 2008 Unadjusted Wage Index
2. Expiration of the Imputed Floor
3. CAHs Reverting Back to IPPS Hospitals and Raising the Rural Floor
4. Application of Rural Floor Budget Neutrality
H. Analysis and Implementation of the Occupational Mix Adjustment and the FY 2008 Occupational Mix Adjusted Wage Index
I. Revisions to the Wage Index Based on Hospital Redesignations
1. General
2. Effects of Reclassification/Redesignation
3. FY 2008 MGCRB Reclassifications
4. Hospitals That Applied for Reclassification Effective in FY 2008 and Reinstating Reclassifications in FY 2008
5. Clarification of Policy on Reinstating Reclassifications
6. “Fallback” Reclassifications
7. Geographic Reclassification Issues for Multicampus Hospitals
8. Redesignations of Hospitals under Section 1886(d)(8)(B) of the Act
9. Reclassifications under Section 1886(d)(8)(B) of the Act
10. New England Deemed Counties
11. Reclassifications under Section 508 of Pub. L. 108-173
12. Other Issues
J. FY 2008 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees
K. Process for Requests for Wage Index Data Corrections
L. Labor-Related Share for the Wage Index for FY 2008
M. Wage Index Study Required under Pub. L. 109-432
N. Proxy for the Hospital Market Basket
IV. Other Decisions and Changes to the IPPS for Operating Costs and GME Costs
A. Reporting of Hospital Quality Data for Annual Hospital Payment Update
1. Background
2. FY 2008 Quality Measures
3. New Quality Measures and Program Requirements for FY 2009 and Subsequent Years
a. New Quality Measures for FY 2009 and Subsequent Years
b. Data Submission
4. Retiring or Replacing RHQDAPU Program Quality Measures
5. Procedures for the RHQDAPU Program for FY 2008 and FY 2009
a. Procedures for Participating in the RHQDAPU Program
b. Procedures for Participating in the RHQDAPU Program for FY 2009
c. Chart Validation Requirements
d. Data Validation and Attestation
e. Public Display
f. Reconsideration and Appeal Procedures
g. RHQDAPU Program Withdrawal Requirements
6. Electronic Medical Records
7. New Hospitals
B. Development of the Medicare Hospital Value-Based Purchasing Plan
C. Rural Referral Centers (RRCs)
1. Annual Update of RRC Status Criteria
a. Case-Mix Index
b. Discharges
2. Acquired Rural Status of RRCs
D. Indirect Medical Education (IME) Adjustment
1. Background
2. IME Adjustment Factor for FY 2008
3. Time Spent by Residents on Vacation or Sick Leave and in Orientation
a. Background
b. Vacation and Sick Leave Time
c. Orientation Activities
d. Regulation Changes
E. Payments to Disproportionate Share Hospitals (DSHs): Technical Correction
1. Background
2. Technical Correction: Inclusion of Medicare Advantage Days in the Medicare Fraction of the Medicare DSH Calculation
F. Hospital Emergency Services under EMTALA
1. Background
2. Recent Legislation Affecting EMTALA Implementation
a. Secretary's Authority to Waive Requirements During National Emergencies
b. Provisions of the Pandemic and All-Hazards Preparedness Act
c. Revisions to the EMTALA Regulations
G. Disclosure of Physician Ownership in Hospitals and Patient Safety Measures
1. Disclosure of Physician Ownership in Hospitals
2. Patient Safety Measures
H. Rural Community Hospital Demonstration Program
V. Changes to the IPPS for Capital-Related Costs
A. Background
B. Policy Change
VI. Changes for Hospitals and Hospital Units Excluded from the IPPS
A. Payments to Existing and New Excluded Hospitals and Hospital Units
B. Separate PPS for IRFs
C. Separate PPS for LTCHs
D. Separate PPS for IPFs
E. Determining LTCH Cost-to-Charge Ratios (CCRs) under the LTCH PPS
F. Report of Adjustment (Exceptions) Payments
VII. Services Furnished to Beneficiaries in Custody of Penal Authorities
VIII. MedPAC Recommendations
IX. Other Required Information
A. Requests for Data from the Public
B. Collection of Information Requirements
C. Waiver of Notice of Proposed Rulemaking
Regulation Text
Addendum—Schedule of Standardized Amounts, Update Factors, and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2007
I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2008
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. Imputed Rural Floor—Budget Neutrality Adjustment
d. Case-Mix Budget Neutrality Adjustment
e. Outliers
f. Rural Community Hospital Demonstration Program Adjustment (Section 410A of Pub. L. 108-173)
5. FY 2008 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 Prospective Payment Rates
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 2008
3. General Formula for Calculation of Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2007 and Before October 1, 200
a. Puerto Rico Rate
b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2008
A. Determination of Federal Hospital Inpatient Capital Related Prospective Payment Rate Update
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
b. MedPAC Update Recommendation
2. Outlier Payment Adjustment Factor
3. Budget Neutrality Adjustment Factor for Changes in DRG Classifications and Weights and the GAF
4. Exceptions Payment Adjustment Factor
5. Capital Standard Federal Rate for FY 2008
6. Special Capital Rate for Puerto Rico Hospitals
B. Calculation of the Inpatient Capital-Related Prospective Payments for FY 2008
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2008
IV. Changes to Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages
V. 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 2006; Hospital Wage Indexes for Federal Fiscal Year 2008; Hospital Average Hourly Wages for Federal Fiscal Years 2006 (2002 Wage Data), 2007 (2003 Wage Data), and 2008 (2004 Wage Data); and 3-Year Average of Hospital Average Hourly Wages
Table 3A—FY 2008 and 3-Year Average Hourly Wage for Urban Areas by CBSA
Table 3B—FY 2008 and 3-Year Average Hourly Wage for Rural Areas by CBSA
Table 4A—Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas by CBSA—FY 2008
Table 4B—Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas by CBSA—FY 2008
Table 4C—Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified by CBSA—FY 2008
Table 4F—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF) by CBSA—FY 2008
Table 4J—Out-Migration Wage Adjustment—FY 2008
Table 5—List of Medicare Severity Diagnosis-Related Groups (MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay
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 6I—Complete List of Complication and Comorbidity (CC) Exclusions
(Available only through the Internet on the CMS Web site at:
http://www.cms.hhs.gov / AcuteInpatientPPS/
)
Table 7A—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update—March 2007 GROUPER V24.0 CMS DRGs
Table 7B—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2006 MedPAR Update—March 2007 GROUPER V25.0 CMS DRGs
Table 8A—Statewide Average Operating Cost-to-Charge Ratios—July 2007
Table 8B—Statewide Average Capital Cost-to-Charge Ratios—July 2007
Table 8C—Statewide Average Total Cost-to-Charge Ratios for LTCHs—July 2007
Table 9A—Hospital Reclassifications and Redesignations—FY 2008
Table 9C—Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act—FY 2008
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 Medicare Severity Diagnosis-Related Groups (MS-DRGs)—July 2007
Table 11—FY 2008 MS-LTC-DRGs, Relative Weights, Geometric Average Length of Stay, Short-Stay Outlier Threshold, and IPPS Comparable Threshold
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 Policy Changes Under the IPPS for Operating Costs
A. Basis and Methodology of Estimates
B. Analysis of Table I
C. Effects of the Changes to the DRG Reclassifications and Relative Cost-Based Weights (Column 2)
D. Effects of Wage Index Changes (Column 3)
E. Combined Effects of DRG and Wage Index Changes (Column 4)
F. Effects of the Expiration 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 5)
G. Effects of MGCRB Reclassifications (Column 6)
H. Effects of the Adjustment to the Application of the Rural Floor (Column 7)
I. Effects of Application of the Imputed Floor (Column 8)
J. Effects of the Expiration of Section 508 of Pub. L. 108-173 (Column 9)
K. Effects of the Wage Index Adjustment for Out-Migration (Column 10)
L. Effects of All Changes with CMI Adjustment Prior to Estimated Growth (Column 11)
M. Effects of All Changes with CMI Adjustment and Assumed Estimated (Column 12)
N. Effects of Policy on Payment Adjustments for Low-Volume Hospitals
O. Impact Analysis of Table II
VII. Effects of Other Policy Changes
A. Effects of Policy on Hospital-Acquired Conditions, Including Infections
B. Effects of MS-LTC-DRG Reclassifications and Relative Weights for LTCHs
C. Effects of New Technology Add-On Payments
D. Effects of Requirements for Hospital Reporting of Quality Data for Annual Hospital Payment Update
E. Effects of Policy on Cancellation of Classification of Acquired Rural Status and Rural Referral Centers
F. Effects of Policy Change on Payment for IME and Direct GME
G. Effects of Policy Changes Relating to Emergency Services under EMTALA During an Emergency Period
H. Effects of Policy on Disclosure of Physician Ownership in Hospitals and Patient Safety Measures
I. Effects of Implementation of the Rural Community Hospital Demonstration Program
J. Effects of Policy Changes on Services Furnished to Beneficiaries in Custody of Penal Authorities
VIII. Impact of Changes in the Capital IPPS
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 2008
III. Secretary's Final Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating Payments in Traditional Medicare
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 IPPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Capital IPPS 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, the LTCH PPS was effective for a LTCH's first cost reporting period beginning on or after October 1, 2002. LTCHs that do not meet the definition of “new” under § 412.23(e)(4) are paid, during a 5-year
transition period, a LTCH prospective payment that is comprised of an increasing proportion of the LTCH Federal rate and a decreasing proportion based on reasonable cost principles. Those LTCHs that did not meet the definition of “new” under § 412.23(e)(4) could 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, all LTCHs are 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. 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)
The Deficit Reduction Act of 2005 (DRA), Pub. L. 109-171, made a number of changes to the Act relating to prospective payments to hospitals and other providers for inpatient services. The final rule implements amendments made by (1) section 5001(a), which, effective for FY 2007 and subsequent years, expands the requirements for hospital quality data reporting; and (2) section 5001(c), which requires the Secretary to select, by October 1, 2007, at least two hospital-acquired conditions that meet certain specified criteria that will be subject to a quality adjustment in DRG payments during FY 2008.
In this final rule with comment period, we also discuss our development of a plan to implement, beginning with FY 2009, a value-based purchasing plan for section 1886(d) hospitals, in accordance with the requirements of section 5001(b) of Pub. L. 109-171.
C. Provisions of the Medicare Improvements and Extension Act under Division B, Title I of the Tax Relief and Health Care Act of 2006
In this final rule with comment period, we discuss the provisions of section 106(b)(1) of the Medicare Improvements and Extensions Act under Division B, Title I of the Tax Relief and Health Care Act of 2006 (MIEA-TRHCA), Pub. L. 109-432, which requires MedPAC to submit to Congress, not later than June 30, 2007, a report on the Medicare wage index classification system applied under the Medicare Prospective Payment System. Section 106(b) of the MIEA-TRHCA requires the report to include any alternatives that MedPAC recommends to the method to compute the wage index under section 1886(d)(3)(E) of the Act.
In addition, we discuss the provisions of section 106(b)(2) of the MIEA-TRHCA, which instructs the Secretary of Health and Human Services, taking into account MedPAC's recommendations on the Medicare wage index classification system, to include in the FY 2009 IPPS proposed rule one or more proposals to revise the wage index adjustment applied under section 1886(d)(3)(E) of the Act for purposes of the IPPS.
We note that we published a notice in the
Federal Register
on March 23, 2007 (72 FR 13799) that addressed the provisions of section 106(a) of the MIEA-TRHCA relating to the extension of geographic reclassifications of hospitals under section 508 of Pub. L. 108-173 (that expired on March 31, 2007) through September 30, 2007.
D. Provisions of the Pandemic and All-Hazards Preparedness Act
On December 19, 2006, Congress enacted the Pandemic and All-Hazards Preparedness Act, Pub. L. 109-417. Section 302(b) of Pub. L. 109-417 makes two specific changes that affect EMTALA implementation in emergency areas during an emergency period. Specifically section 302(b)(1)(A) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that sanctions may be waived for the direction or relocation of an individual for screening where, in the case of a public health emergency that involves a pandemic infectious disease, that direction or relocation occurs pursuant to a State pandemic preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of Pub. L. 109-417 amended section 1135(b)(3)(B) of the Act to state that, if a public health emergency involves a pandemic infectious disease (such as pandemic influenza) the duration of a waiver or modification under section 1135(b)(3) of the Act (relating to EMTALA) shall be determined in accordance with section 1135(e) of the Act as that subsection applies to public health emergencies.
In this final rule with comment period, we are making changes to the EMTALA regulations to conform them to the sanction waiver provisions of section 302(b) of Pub. L. 109-417.
E. Issuance of a Notice of Proposed Rulemaking
On May 3, 2007, we issued in the
Federal Register
(72 FR 24680) a notice of proposed rulemaking that set forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2008. We also set forth proposed changes relating to payments for GME and IME costs and payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis that would be effective for discharges occurring on or after October 1, 2007. Below is a summary of the major changes that we proposed to make:
1. DRG Reclassifications and Recalibrations of Relative Weights
We proposed to adopt a Medicare Severity DRG (MS-DRG) classification system for the IPPS to better recognize severity of illness. We presented the methodology we used to establish the MS-DRGs and discussed our efforts to
further analyze alternative severity-adjusted DRG systems and to refine the relative weight calculations for DRGs.
We presented a proposed listing and discussion of hospital-acquired conditions, including infections, which were evaluated and proposed to be subject to the statutorily required quality adjustment in DRG payments for FY 2008.
We proposed limited annual revisions to the DRG classification system in the following areas: Intestinal transplants, neurostimulators, intracranial stents, cochlear implants, knee and hip replacements, spinal fusions and spinal disc devices, and endoscopic procedures.
We presented our reevaluation of certain FY 2007 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of the FY 2008 applicant (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).
We proposed 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 2008. We proposed that the LTC-DRGs would be revised to mirror the proposed MS-DRGs for the IPPS.
2. Proposed Changes to the Hospital Wage Index
In section III. of the preamble to the proposed rule, we proposed revisions to the wage index and the annual update of the wage data. Specific issues addressed included the following:
• The FY 2008 wage index update, using wage data from cost reporting periods that began during FY 2004.
• Analysis and implementation of the proposed FY 2008 occupational mix adjustment to the wage index.
• Proposed changes relating to expiration of the imputed rural floor for the wage index and application of budget neutrality for the rural floor.
• Proposed changes in the determination of the wage index for multicampus hospitals.
• The proposed revisions to the wage index based on hospital redesignations and reclassifications, including reclassifications for multicampus hospitals.
• The proposed adjustment to the wage index for FY 2008 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 were in effect for the FY 2008 wage index.
• The labor-related share for the FY 2008 wage index, including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs and GME Costs
In section IV. of the preamble to the proposed rule, we discussed a number of the provisions of the regulations in 42 CFR Parts 412, 413, and 489, including the following:
• The reporting of hospital quality data as a condition for receiving the full annual payment update increase.
• Development of the Medicare value-based purchasing plan and reports on the “listening sessions” held.
• The proposed updated national and regional case-mix values and discharges for purposes of determining RRC status and a proposed policy change relating to the acquired rural status of RRCs.
• The statutorily-required IME adjustment factor for FY 2008 and a proposed policy change relating to determining counts of residents on vacation or sick leave and in orientation for IME and direct GME purposes.
• Proposed changes relating to the waiver of sanctions for requirements for emergency services for hospitals under EMTALA during national emergencies.
• Proposed policy changes relating to the disclosure to patients of physician ownership of hospitals and patient safety measures.
• Discussion of the fourth year of implementation of the Rural Community Hospital Demonstration Program.
4. Proposed Changes to the IPPS for Capital-Related Costs
In section V. of the preamble to the proposed rule, we discussed the payment policy requirements for capital-related costs and capital payments to hospitals and proposed changes relating to adjustments to the Federal capital rate to address continuous large positive margins.
5. Proposed Changes to the Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-Increase Percentages
In section VI. of the preamble to the proposed rule, we discussed payments to excluded hospitals and hospital units, and proposed changes for determining LTCH CCRs under the LTCH PPS.
6. Services Furnished to Beneficiaries in Custody of Penal Authorities
In section VII. of the preamble to the proposed rule, we clarified when individuals are considered to be in “custody” for purposes of Medicare payment for services furnished to beneficiaries who are under penal authorities.
7. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits
In the Addendum to the proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2008 prospective payment rates for operating costs and capital-related costs. We also established the proposed threshold amounts for outlier cases. In addition, we addressed the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2008 for hospitals and hospital units excluded from the PPS.
8. Impact Analysis
In Appendix A of the proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals.
9. Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services
In Appendix B of the 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 2008 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.
10. 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 2007 recommendations 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. We addressed these recommendations in Appendix B of the proposed rule. For further information relating specifically to the MedPAC March 2007 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.
F. Public Comments Received on the Proposed Rule
We received approximately 900 timely pieces of correspondence in response to the FY 2008 IPPS proposed rule issued in the
Federal Register
on May 3, 2007. These public comments addressed issues on multiple topics in the proposed rule. We present a summary of the public comments and our responses to them in the applicable subject matter sections of this final rule with comment period.
II. Changes to DRG Classifications and Relative Weights
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
As discussed in the preamble to the FY 2007 IPPS final rule (71 FR 47881 through 47971), we are focusing our efforts in FY 2008 on making significant reforms to the IPPS consistent with the recommendations made by MedPAC in its “Report to the Congress, Physician-Owned Specialty Hospitals” in March 2005. MedPAC recommended that the Secretary refine the entire DRG system by taking into account severity of illness and applying hospital-specific relative value (HSRV) weights to DRGs.
1
We began this reform process by adopting cost-based weights over a 3-year transition period beginning in FY 2007 and making interim changes to the DRG system for FY 2007 by creating 20 new CMS DRGs and modifying 32 others across 13 different clinical areas involving nearly 1.7 million cases. As described below in more detail, these refinements were intermediate steps towards comprehensive reform of both the relative weights and the DRG system that is occurring as we undertook further study.
1
Medicare Payment Advisory Commission:
Report to the Congress, Physician-Owned Specialty Hospitals
, March 2005, page viii.
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 to ensure 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 2007, cases are assigned to one of 538 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, under the most recent version of the CMS GROUPER (Version 24.0), there are 9 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, 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 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. An example is 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 diagnosis class 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 entered 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 payment 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 FY 2000 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
date 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.
As we proposed in the FY 2008 IPPS proposed rule, for FY 2008, we are adopting significant changes to the current DRGs. As described in detail below, we proposed significant improvement in the DRG system to recognize severity of illness and resource usage by proposing to adopt Medicare Severity DRGs (MS-DRGs). The changes we proposed (and are adopting in this final rule with comment period) will be reflected in the FY 2008 GROUPER, Version 25.0, and will be effective for discharges occurring on or after October 1, 2007. As noted in the proposed rule, our DRG analysis was based on data from the December 2006 update of the FY 2006 MedPAR file, which contained hospital bills received through December 31, 2006, for discharges occurring in FY 2006. For this final rule with comment period, our analysis is based on more recent data from the March 2007 update of the FY 2006 MedPAR file, which contains hospital bills received through March 31, 2007, for discharges occurring in FY 2006.
2. Yearly Review for Making DRG Changes
Many of the changes to the DRG classifications we make annually are the result of specific issues brought to our attention by interested parties. As we indicated in the proposed rule, 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 will likely continue to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. We describe in detail below the process we used to develop the MS-DRGs that we proposed and are adopting in this final rule with comment period. In addition, in deciding whether to make further modification to the MS-DRGs for particular circumstances brought to our attention, we considered 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 MS-DRG. We evaluated patient care costs using average charges and lengths of stay as proxies for costs and relied on the judgment of our medical advisors to decide whether patients are clinically distinct or similar to other patients in the MS-DRG. In evaluating resource costs, we considered both the absolute and percentage differences in average charges between the cases we selected for review and the remainder of cases in the MS-DRG. We also considered variation in charges within these groups; that is, whether observed average differences were consistent across patients or attributable to cases that were extreme in terms of charges or length of stay, or both. Further, we considered the number of patients who will have a given set of characteristics and generally preferred not to create a new DRG unless it would include a substantial number of cases.
C. MedPAC Recommendations for Revisions to the IPPS DRG System
In the FY 2006 and FY 2007 IPPS final rules, we discussed a number of recommendations made by MedPAC regarding revisions to the DRG system used under the IPPS (70 FR 47473 through 47482 and 71 FR 47881 through 47939).
In Recommendations 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.
• 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.
For FY 2007, we began this process. In the FY 2007 IPPS proposed rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 2008 (if not earlier). However, based on public comments received on the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs. Rather, we decided to make interim changes to the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 different clinical areas that would significantly improve the CMS DRG system's recognition of severity of illness. We also modified 32 DRGs to better capture differences in severity. The new and revised DRGs were selected from 40 existing CMS DRGs that contained 1,666,476 cases and represent a number of body systems. In creating these 20 new DRGs, we deleted 8 and modified 32 existing DRGs. We indicated that these interim steps for FY 2007 were being taken as a prelude to more comprehensive changes to better account for severity in the DRG system by FY 2008. In the FY 2007 IPPS final rule, we indicated our intent to pursue further DRG reform through two initiatives. First, we announced that we were in the process of engaging a contractor to assist us with evaluating alternative DRG systems that were raised as potential alternatives to the CS DRGs in the public comments. Second, we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes as part of making further refinements to the current CMS DRGs to better recognize severity of illness based on the work that CMS (then HCFA) did in the mid-1990's to adopt severity DRGs. We describe in detail below the progress we have made on these two initiatives, our actions for FY 2008, and our plans for continued analysis of reform of the DRG system for FY 2009. We note that revising the DRGs to better recognize severity of illness has implications for the outlier threshold, the application of the postacute care transfer policy, the measurement of real case-mix versus apparent case-mix, and the IME and DSH payment adjustments. We discuss these implications in more detail in the following sections.
In the FY 2007 IPPS proposed rule, we discussed MedPAC's recommendations to move to a cost-based HSRV weighting methodology beginning with the FY 2007 IPPS
proposed rule. Although we proposed to adopt HSRV weights for FY 2007, we decided not to adopt the proposed methodology in the final rule after considering the public comments we received on the proposal. Instead, in the FY 2007 IPPS final rule, we adopted a cost-based weighting methodology without the hospital-specific portion of the methodology. The cost-based weights are being adopted over a 3-year transition period in
1/3
increments between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we indicated our intent to further study the hospital-specific methodology as well as other issues brought to our attention with respect to the cost-based weights. There was significant concern in the public comments that we account for charge compression—the practice of applying a higher charge markup over costs to lower cost than higher cost items and services—if we are to develop relative weights based on cost. Further, public commenters expressed concern about potential inconsistencies between how costs and charges are reported on the Medicare cost reports and charges on the Medicare claims. In the FY 2007 IPPS final rule, we used costs and charges from the cost report to determine departmental level cost-to-charge ratios (CCRs) to apply to charges on the Medicare claims to determine the cost-based weights. The commenters were concerned about potential distortions to the cost-based weights that would result from inconsistent reporting between the cost reports and the Medicare claims. After publication of the FY 2007 IPPS final rule, we entered into a contract with RTI International to study both charge compression and to what extent our methodology for calculating DRG relative weights is affected by inconsistencies between how hospitals report costs and charges on the cost report and how hospitals report charges on individual claims. Further, as part of its study of alternative DRG systems, the RAND Corporation is analyzing the HSRV cost-weighting methodology.
As we present below, we believe that revisions to the DRG system to better recognize severity of illness and changes to the relative weights based on costs rather than charges are improving the accuracy of the payment rates in the IPPS. We agree with MedPAC that these refinements should be pursued. Although we continue to caution 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 the changes we have adopted and the continuing reforms we proposed, and are adopting in this final rule with comment period, for FY 2008 will improve payment accuracy and reduce financial incentives to create specialty hospitals.
D. Refinement of DRGs Based on Severity of Illness
For purposes of the following discussions, the term “CMS DRGs” means the DRG system we currently use under the IPPS; the term “Medicare-Severity DRGs (MS-DRGs)” means the revisions that we proposed to make (and are adopting in this final rule with comment period) to the current CMS DRGs to better recognize severity of illness and resource use based on case complexity. Although we have found the terms “CMS DRGs” and “MS-DRGs” useful to distinguish the current DRG system from the DRGs that we proposed to adopt for FY 2008, we invited public comments on how to best refer to both the current DRGs and the proposed DRGs to avoid confusion and improve clarity.
Comment:
One commenter responded to our request for name suggestions for the new DRG system. The commenter agreed that the name should differentiate which DRG scheme is being referenced. The commenter did not provide an alternative suggestion.
Response:
We agree with the importance of being able to differentiate between the current and the revised DRG system. We believe the name “Medicare Severity DRGs (MS-DRGs)” is an appropriate name for this revised system. Therefore, we are adopting as final our reference to the revised DRG system as the “Medicare Severity DRGs (MS DRGs).”
1. Evaluation of Alternative Severity-Adjusted DRG Systems
In the FY 2007 IPPS final rule, we stated our intent to engage a contractor to assist us with an evaluation of alternative DRG systems that may better recognize severity than the current CMS DRGs. We noted it was possible that some of the alternative systems would better recognize severity of illness and are based on the current CMS DRGs. We further stated that if we were to develop a clinical severity concept using the current CMS DRGs as the starting point, it was possible that several of the issues raised by commenters (in response to the CS DRGs, which, in the FY 2007 IPPS proposed rule, we proposed to adopt for FY 2008 or earlier) would no longer be a concern. We noted that if we were to propose adoption of severity DRGs for FY 2008, we would consider the issues raised by commenters on last year's proposed rule as we continued to make further refinements to account for complexity as well as severity to better reflect relative resource use. We stated that we believed it was likely that at least one of several alternative severity-adjusted DRG systems suggested for review (or potentially a system we would develop ourselves) would be suitable to achieve our goal of improving payment accuracy beginning in FY 2008.
On September 1, 2006, we awarded a contract to the RAND Corporation to perform an evaluation of alternative severity-adjusted DRG classification systems. RAND is evaluating several alternative DRG systems based on how well they are suited to classifying and making payments for hospital inpatient services provided to Medicare patients. Each system is being assessed on its ability to differentiate among severity of illness. A final report is due on or before September 1, 2007.
RAND's draft interim report focused on the following criteria:
• Severity-adjusted DRG classification systems.
• How well does each classification system explain variation in resource use?
• How would the classification system affect a hospital's patient mix?
• Are the groupings manageable, administratively feasible and understandable?
• Payment accuracy—What are the payment implications of selected models?
In response to our request, several vendors of DRG systems submitted their products for evaluation. The following products were evaluated by RAND:
3M/Health Information Systems (HIS)
• CMS DRGs modified for AP-DRG Logic (CMS+AP-DRGs)
• Consolidated Severity-Adjusted DRGs (CS DRGs)
Health Systems Consultants (HSC)
• Refined DRGs (HSC-DRGs)
HSS/Ingenix
• All-Payer Severity DRGs with Medicare modifications (MM-APS-DRGs)
Solucient
• Solucient Refined DRGs (Sol-DRGs)
Vendors submitted their commercial (off-the-shelf) software to RAND in late September 2006. The five systems were compared to the CMS DRGs that were in effect as of October 1, 2006 (FY 2007). RAND assigned FY 2004 and FY 2005 Medicare discharges from acute care hospitals to the FY 2007 CMS DRGs and
to each of the alternative severity-adjusted DRG systems. RAND's initial analysis provided an overview of each alternative DRG classification system, their comparative performance in explaining variation in resource use, differences in DRG grouping logic, and case mix change.
A Technical Expert Panel comprised of individuals representing academic institutions, hospital associations, and MedPAC was formed in October 2006. The members received the preliminary draft report of RAND's alternative severity-adjusted DRG systems evaluation in early January 2007. The panel met with RAND and CMS on January 18, 2007, to discuss the preliminary draft report and to provide additional comments. RAND incorporated items raised by the panel into its preliminary draft report and submitted a revised interim report to CMS in mid-March 2007. CMS posted RAND's interim report on the CMS Web site in late March 2007. Interested individuals can view RAND's interim report on the CMS Web site at:
http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292.
The report may also be viewed on RAND's Web site at
http://www.rand.org/pubs/online/health.
At this time, RAND has completed its evaluation of the alternative severity adjusted DRG systems. RAND's interim report reflects its evaluation of five alternative DRG systems using the criteria described above. Since the proposed rule, RAND evaluated the Medicare Severity DRG (MS-DRG) system using the same criteria applied to the other DRG systems. We are continuing to work with RAND to evaluate alternate methodologies for establishing relative weights using the MS-DRGs. Once RAND completes its work on the alternate methodologies for establishing relative weights, we will be in a better position to evaluate the issue of charge compression and potential improvements to our methodology to determine cost-based relative weights. We plan to review RAND's analysis of these issues and determine if it will be appropriate to propose additional adjustments to the MS-DRGs or the relative weight methodology in the FY 2009 IPPS proposed rule.
We instructed RAND to evaluate the MS-DRGs using the same criteria that it applied to the other DRG systems. Consistent with conclusions we made in the IPPS proposed rule, RAND's findings demonstrate that MS-DRGs explain 43 percent of the cost variation; a 9.1 percent improvement over the CMS DRGs. RAND reports that the explanatory power of the MS-DRGs is higher than the CMS+AP-DRGs, but lower than the other systems analyzed. The MS-DRGs have the lowest adjusted R
2
values among the severity-adjusted systems in seven MDCs. In three of these MDCs, the R
2
values are actually lower than under the CMS DRGs: MDC 19 (Mental Diseases and Disorders), MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders) and MDC 22 (Burns). RAND attributes the reduction in R
2
values to how the CMS DRGs were collapsed to form the base DRGs and recommends future examination. We agree that RAND's findings provide us with potential issues to examine to further improve the MS-DRGs for FY 2009.
Although RAND's findings related to R
2
in certain MDCs are of concern, we believe the MS-DRGs remain an improvement over the current CMS DRGs and have significant advantages over the other DRG systems being evaluated. Specifically, they are more up-to-date because of our review of secondary diagnoses and classification into MCCs and CCs. Further, they are understandable, available in the public domain, and will have fewer transition issues than the other systems. As MS-DRGs are a modification of the current CMS DRGs, they allow for updates and maintenance to continue using the same process as under the current CMS DRGs.
Depending on the criteria being evaluated, the relative merits of each system being evaluated by RAND are different. For instance, the CS DRGs performed well in explaining resource variation but have the highest potential for case-mix growth. Other than the MS-DRGs, the CMS+AP-DRGs did the poorest among the systems evaluated in explaining variation in resource usage but did the best on producing reliable and stable results. The remaining systems generally performed somewhere in between on most of the measures that RAND used in its comparative analysis. The MS-DRGs are the result of modifications to the CMS DRGs to better account for severity. Unlike the other systems, the MS-DRGs are available in the public domain, and as a result, systems implementation and other costs are likely to be at a minimum. As suggested above, RAND found that the MS-DRGs are an improvement over the CMS DRGs and compare favorably to the alternative DRG systems being evaluated on some criteria and not as well on others.
As RAND has completed its evaluation of the alternative DRG systems, including the MS-DRGs, consistent with RAND's findings, we believe it is appropriate at this time to adopt the MS-DRG system for the Medicare IPPS in FY 2008. While there will be an opportunity for the public to comment on RAND's findings, we expect to permanently adopt the MS-DRGs for the IPPS. We do not think it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems being evaluated by RAND is clearly superior. In our view, none of the systems appears to be clearly superior or inferior to the other systems based on the criteria RAND used for the evaluation. Given the strong support in the public comments for the MS-DRGs and the fact they compare well overall to the alternative DRG systems being evaluated by RAND, we believe it is likely that the MS-DRGs will be the system that Medicare uses permanently for the IPPS. However, because we are interested in public input on this issue, we are making RAND's final report available on the CMS Web Site at:
http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292.
The report may also be viewed on RAND's Web site at
http://www.rand.org/pubs/online/health.
Interested members of the public can write to the following address to make their views known to us about the RAND Report:
Division of Acute Care, Center for Medicaid Management, 7500 Security Boulevard, C4-08-06, Baltimore, MD 21244, Attn: Mady Hue.
In the FY 2008 IPPS proposed rule, we proposed to adopt the MS-DRGs for FY 2008. We are providing the following update on RAND's progress in evaluating the MS-DRGs against the alternative DRG systems. In the proposed rule, we also invited public comment regarding RAND's preliminary analysis of each vendor-supplied alternative severity-adjusted DRG system described below. A summary of any public comments that we received and our responses to those comments are presented under each subject area.
a. Overview of Alternative DRG Classification Systems
Analysis of how each of the six severity adjusted DRG systems performs began by using the current CMS DRGs as a baseline. Two of the six systems (CS DRGs and MM-APS-DRGs) are derivatives of all-patient severity-adjusted DRG systems that have been modified by their developers for the Medicare population and two of the systems (HSC-DRGs and Sol-DRGs) are all-patient systems that incorporate severity levels into the CMS DRGs. The CMS+AP-DRGs are a combination of CMS DRGs and a modification for the Medicare population of the major CC
(MCC) severity groupings used in the AP-DRG system. (The AP-DRG system was developed by 3M/HIS specifically for the State of New York to capture the non-Medicare population.) The MS-DRG system modifies the current CMS DRGs by collapsing any paired DRGs (DRGs distinguished by the presence or absence of CCs and/or age) into base DRGs and then splits the base DRGs into MCC/CC-severity levels.
Table A below shows how each of the six alternative severity-adjusted systems classifies patients into base DRGs and their corresponding severity levels.
Table A.—Logic of CMS and Alternative DRG Systems
CMS-DRG
CMS+AP-DRG
HSC-DRG
Sol-DRG
MM-APS-DRG
CS DRG
MS-DRG
Number of MDCs
25
25
25
25
25
25
25
Number of base DRGs
379
379
391
393
328
270
335
Total number of DRGs
538
602
1,293
1,261
915
863
745
Number of DRGs <500 discharges
97 (18%)
97 (16%)
374 (29%)
474 (38%)
115 (13%)
113 (13%)
38 (5.2%)
Number of CC (severity) subclasses
2
3
3 (med) or 4 (surg)
3 (med) or 4 (surg)
3
4
3
CC subclasses
With CC, without CC for selected base DRGs
Without CC, With CC for selected base DRGs and Major CC across DRGs within MDC
No CC, Class C CC, Class B CC, Class A CC (Surgical only)
Minor/no substantial CCs, Moderate CCs, Major CCs, Catastrophic CCs (Surgical only)
Without CC, With CC, With Major CC with some collapsing at base DRG level
Minor, Moderate, Major, Severe with some collapsing at DRG level
Without CC, With CC, With Major CC with collapsing between severity levels for same base DRG.
Multiple CCs recognized
No
No
No
No
Yes (in computation of weight)
Yes
No.
CC assignment logic
Presence/absence
Presence/absence
Presence/absence
Presence/absence
Presence/absence
18-step process
Presence/absence.
MDC assignment
Principal diagnosis
Principal diagnosis
Principal diagnosis
Principal diagnosis
Principal diagnosis
Principal diagnosis with rerouting
Principal diagnosis.
Death used in DRG assignment
Yes (in selected DRGs)
Yes (in selected DRGs)
Yes (“early death” DRGs)
Yes (“early death” DRGs)
Yes (in selected DRGs)
No
Yes (in selected DRGs and CC assignments).
RAND's evaluation of the logic for each system demonstrated the following:
• Four systems add severity levels to the base CMS DRGs; the CS DRGs add severity levels to the base APR DRGs, which are comparable but not identical to the base CMS DRGs. Both the CS DRGs and MM-APS-DRGs collapse some base DRGs with low Medicare volume. The MS-DRGs collapse the current CMS DRG splits and either leave the base DRG undivided or divide it into two or three severity levels.
• The HSC-DRGs and the Sol-DRGs use uniform severity levels for each base DRG (three for medical and four for surgical). The general structure of the MS-DRG logic establishes three severity levels for each base DRG: With MCC, with CC, and without CC. However, CMS consolidated severity levels for the same base DRG if they do not meet specific statistical criteria. The general structure of the MM-APS-DRG logic includes three severity levels for each base DRG, but some severity levels for the same base DRG are consolidated to address Medicare low-volume DRGs and nonmonotonicity issues. Monotonicity is when the average costs for a severity group consistently rise as the severity level of the group increases. For example, in a monotonic system, if within a base DRG there are three severity groups and level 1 severity is less than level 2 severity and level 2 severity is less than level 3 severity, the average costs for a level 3 case would be greater than the average costs for a level 2 case, which would be greater than the average costs for a level 1 case. When a DRG is nonmonotonic, the mean cost in the higher severity level is less than the mean cost in the lower severity level. The general structure of the CS DRGs includes four severity levels for each base DRG. However, severity level consolidations occur to address Medicare low-volume DRGs and nonmonotonicity. The CS DRGs consolidate both adjacent severity levels for the same base DRG and the same severity level across multiple base DRGs (especially for severity level 4).
• Under the CMS+AP-DRGs and MM-APS-DRGs, each diagnosis is assigned a uniform CC-severity level across all base DRGs (other than CCs on the exclusion list for specific principal diagnoses). The remaining systems assign diagnoses to CC-severity level classifications by groups of DRGs.
• Under the grouping logic used by all systems other than the CS DRGs, each discharge is assigned to the highest severity level of any secondary diagnosis. The MS-DRGs assign discharges with no CC but certain high cost devices to a higher severity level. The CS DRGs adjust the initial severity level assignment based on other factors, including the presence of additional CCs. None of the other systems adjusts the severity level classification for additional factors or CCs. However, the MM-APS-DRG system handles additional CCs through an enhanced relative weight.
• The HSC-DRGs and the Sol-DRGs have a medical “early death” DRG within each MDC. The CS DRGs do not use death in the grouping logic. In addition, most complications of care do not affect the DRG assignment. The MS-DRGs use death in making an assignment in selected DRGs and do not count certain conditions as MCCs and CCs (such as cardiac arrest) in patients who die during the inpatient stay.
b. Comparative Performance in Explaining Variation in Resource Use
In evaluating the comparative performance of each alternative DRG system, RAND used MedPAR data from FY 2004 and FY 2005. RAND excluded data from CAHs, Indian Health Service hospitals, and hospitals that have all-inclusive rate charging practices. Consistent with CMS practice, RAND did not exclude data from Maryland hospitals, which operate under an IPPS waiver. Records that failed edits for data consistency or that had missing variables that were needed to determine standardized costs were also excluded.
RAND reported that evaluation of each alternative severity-adjusted DRG system is a complex process due to differences in how each of the severity levels are applied, the number of severity-adjusted DRGs in each system, and the average number of discharges assigned to each DRG. In addition, the manner in which the DRGs for patients 0 to 17 years of age are assigned in the severity-adjusted systems affects the number of low volume DRGs using Medicare discharges. Low-volume, severity-adjusted DRGs can affect the relative performance of a classification system. However, the percentage of Medicare discharges assigned to these DRGs is small—approximately 0.7 percent in the HSC-DRG and Sol-DRG systems compared to 0.1 percent in the CMS DRGs.
To facilitate compatrisons across the severity-adjusted DRG system, RAND assigned a severity level to each MS-DRG consistent with the method used for the other DRG systems. The severity level is based on the lowest severity level. If a base MS-DRG divided into two DRGs, one for both discharges with no CC and discharges with CCs and the other for discharges with MCCs, RAND assigned Level 0 to the DRG for discharges with no MCC and Level 2 to the DRG for discharges with MCCs. RAND also assigned Severity Level 0 to base DRGs that do not split by CC level. Table B summarizes the distribution of DRGs and discharges across severity levels by classification system, exclusive of MDC 15, ungroupable discharges, and statistical outliers. In comparison to the other severity-adjusted systems, the MS-DRGs have a much higher percentage of discharges assigned to the lowest severity level. This includes base DRGs that are not divided into severity subgroups, the no CC severity level, and the no MCC severity level in those base DRGs that are split based on the presence of a MCC only. Sixty percent of discharges are assigned to Severity Level 0 DRGs compared to only 20 percent in the CS DRG system. There are several reasons for the higher percentage, including the reassessment of CC assignments, the collapsing of the no CC and CC severity levels in 43 base MS-DRGs, and no severity subgroups in 53 base MS-DRGs.
ER22AU07.001
Severity-adjusted DRGs are designed to reduce the amount of cost variation within DRGs. To compare how much within-DRG variation occurs in each DRG system, RAND computed the mean standardized cost, standard deviation, and coefficient of variation (CV) for each DRG across the various systems. Each severity-adjusted system has a smaller proportion of DRGs with a CV >100 percent than the CMS DRGs. Seventeen percent of the 511 CMS DRGs to which Medicare patients were assigned in 2005 had a CV >100 percent. In contrast, 8 percent of the 736 MS-DRGs have a CV >100 percent. This is a slightly lower percentage than in the CMS+AP DRGs but slightly higher percentage than the other four severity-adjusted DRG systems. Only 1.7 percent of discharges are assigned to MS-DRGs with a CV >100 percent, which is comparable to the percentage of discharges assigned to DRGs with a CV >100 percent in the CS DRGs and the CMS+AP DRGs. The MM-APS DRGs and CMS+AP DRGs have slightly lower and higher percentages, respectively, of discharges assigned to DRGs with a CV >100 percent.
RAND utilized a general linear regression model to evaluate how well each severity-adjusted DRG system explains variation in costs per case. The initial results demonstrate that all six severity-adjusted DRG systems predict cost better than the CMS DRGs. The CS DRGs have higher adjusted R
2
values (explanatory power) than the other severity-adjusted systems in nearly every MDC. In general, the adjusted R
2
value for the CS DRGs is 0.4458, a 13-percent improvement over the adjusted R
2
value for the CMS DRGs. The HSC-DRGs demonstrate an 11-percent improvement, while the adjusted R
2
values for the MM-APS-DRGs and Sol-DRGs are 10.0 percent and 9.7 percent higher, respectively, than the CMS DRG R
2
value. The adjusted R
2
value for the MS-DRGs is 0.4300, a 9.1 percent improvement over the CMS DRGs. The CMS+AP-DRGs show the smallest improvement, nearly 8 percent.
Another aspect of RAND's evaluation was to identify the validity of each alternative DRG system as a measurement for resource costs. For a base DRG, the severity levels should be monotonic; that is, the mean cost per discharge should increase simultaneously with an increase in the severity level. A distinction between patient groups and varying treatment costs should be accomplished by the severity levels. When a DRG is nonmonotonic, the mean cost in the higher severity level is less than the mean cost in the lower severity level. RAND studied the percentage differences and absolute differences in cost between the severity levels within the base DRGs for each system under evaluation. For the analysis, RAND assigned the severity levels for discharges assigned to the CMS+AP-
DRGs and CS DRGs that include several base DRGs to the base DRG to which they would have been assigned at a lower severity level.
Table C shows the percentage difference between the mean standardized cost for discharges with severity levels 1 through 3 as applicable to the adjacent lower severity level within the base DRG (for example, Base DRG 1 Severity Level 1 compared with Base DRG 1 Severity Level 0). The first column of the table shows the number of DRGs with severity level 0 and the proportion of discharges assigned to those DRGs. The “Other DRGs” column, which is not applicable to the MS-DRGs, includes DRGs for age 0 to 17 years and any DRGs for which there was no base DRG with severity level 0 that could be used in the comparison, for example, no Medicare discharges were assigned to the base DRG severity level 0. For severity level 1 and higher, RAND computed the ratio of the mean cost for that level to the mean cost for the adjacent lower level (for example, mean cost
DRG Level 2
/mean cost
DRG Level 1
) and reported the results by the magnitude of the ratio. RAND used the number of discharges assigned to the higher severity level to calculate the percentage of discharges assigned to each ratio category.
For the two systems (CMS+AP-DRGs and CS DRGs) that include several base DRGs, RAND assigned those discharges to the lower severity level base DRG. Following that methodology, RAND was able to calculate how much more costly the discharges assigned to the consolidated or lower severity levels were than the discharges in the base DRG assigned to the next higher severity level. Results demonstrate that, overall, nonmonotonicity is not a factor across the alternative DRG systems. There are only a small percentage of discharges that are assigned to nonmonotonic DRGs. Unlike the other systems, all severity level 1 or level 2 MS-DRGs were monotonic.
Using the data from severity of illness levels 1 through 3 (except for the MM-APS-DRGs, which do not have a severity of illness level 3), RAND calculated the discharge-weighted mean cost difference between severity levels and the mean ratio of the cost per discharge for the higher severity level to the adjacent lower severity level. The greatest cost discrimination was present in the higher severity levels versus the lower severity levels across all the systems. Unlike the other systems, each MS-DRG was at least 20 percent more costly than the adjacent lower severity DRG. The remaining systems demonstrated equivalent percentage cost differences between the severity levels as shown in Table C below.
ER22AU07.002
In examining whether each of the alternative DRG systems provided stability in the relative weights from year to year, RAND compared the relative weights derived from the MedPAR data in FY 2004 to the relative weights data from FY 2005. RAND's results demonstrate that generally, across all the systems, only a small percentage of DRGs had greater than a 5-percent change in relative weights. RAND did not repeat this analysis for the MS-DRGs. However, RAND had no reason to expect that the results would be substantially different for this system. For further details and discussion, we encourage readers to view RAND's full interim report on the CMS Web site at:
http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292.
The report may also be viewed on RAND's Web site at
http://www.rand.org/pubs/online/health.
c. Payment Accuracy and Case-Mix Impact
Similar to how CMS established the relative weights in the FY 2007 IPPS final rule, RAND used standardized costs as determined by the national CCR and the FY 2005 MedPAR data to construct relative weights for each of the DRG systems being evaluated. RAND analyzed the effect of variations in the explanatory power on the distribution of Medicare payments for each system under evaluation. The preliminary findings indicate payment accuracy is improved by each severity-adjusted system by redistributing payment from lower-cost discharges to higher-cost discharges. However, the total payment redistribution across systems differs and reflects the payment impact of improved explanatory power. Although these findings are estimates, the percent of total payment redistributed was the least under the CMS+AP-DRGs (7.1 percent) and the most under the CS DRGs (11.9 percent). The total payment redistribution under the MS-DRGs is 8.4 percent of the total payment. The redistribution is less than the CS DRG system, the same as the HSC-DRG system, and more than in the other systems, even though some of these systems have higher explanatory power.
Table D shows changes in case-mix index (CMI) by hospital category across alternative severity-adjusted DRG
systems. Results demonstrate that, under the severity-adjusted systems, urban hospitals have a higher average CMI than under the CMS DRGs, and rural hospitals have a lower CMI. The analysis suggests that any system adopted to better recognize severity of illness with a budget neutrality constraint will result in payment redistribution that can be expected to benefit urban hospitals at the expense of rural hospitals. This impact occurs because patients treated in urban hospitals are generally more severely ill than patients in rural hospitals and the CMS DRGs are not currently recognizing the full extent of these differences. For purposes of the study, RAND assumed no behavioral changes in coding practice or the types of patients treated.
On average, the CMI for urban hospitals increases under the severity-adjusted systems, and that for rural hospitals decreases. The change is greatest in the CS DRGs, where the CMI for rural hospitals is 2.4 percent lower than that under the CMS DRGs. The CMI for large urban hospitals (those located in metropolitan areas with more than 1 million population) and other urban hospitals is 0.6 and 0.1 percent higher, respectively, under the CS DRGs. Under the MS-DRGs, there is a slightly larger increase in the average CMI for large urban hospitals, a reduction in the CMI for other urban hospitals, and a smaller reduction for rural hospitals.
The CMI for larger hospitals increases, while that for smaller hospitals decreases across the systems. This result is consistent with a severity-adjusted DRG system shifting payment from less expensive cases to more expensive cases. Larger hospitals tend to have relatively more complex cases and severely ill patients than smaller hospitals do. Teaching hospitals also tend to treat more complex cases, but the impact on these facilities differs by severity-adjusted DRG system. Across all the severity-adjusted systems, nonteaching hospitals have a lower CMI, ranging from a 0.2 percent reduction under the HSC-DRGs and Sol-DRGs to a 0.5 percent reduction under the CS DRGs. In three of the systems (CMS+AP-DRG, HSC-DRG, and MM-APS-DRG), hospitals with large teaching programs (100 or more residents) would experience a larger increase than hospitals with smaller teaching programs. Under the Sol-DRG system, hospitals with large teaching programs would have a 0.1 percent increase, compared with a 0.2 percent increase for hospitals with smaller teaching programs. Under the CS DRG system, the CMI for hospitals with large teaching programs would be about the same, but that for hospitals with smaller teaching programs would increase 0.7 percent relative to the CMS DRGs.
Table D.—CMI Change in Alternative DRG Systems Relative to the CMS DRG CMI
Number of hospitals
Number of discharges
CMS-DRG CMI
Percentage change from CMS-DRG CMI
CMS+AP-DRG
(Percent)
HSC-DRG
(Percent)
Sol-DRG
(Percent)
MM-APS-DRG
(Percent)
CSDRG
(Percent)
MS-DRG
(Percent)
ALL
3,890
12,165,763
1.00
0.0
0.0
0.0
0.0
0.0
0.0
By Geographic Location:
Large urban areas (pop>1 million)
1,485
5,715,356
1.02
0.5
0.4
0.3
0.6
0.6
0.7
Other urban areas (pop<1 million )
1,186
4,578,447
1.04
−0.2
−0.2
−0.1
−0.2
0.1
−0.3
Rural hospitals
1,219
1,871,960
0.84
−1.3
−0.9
−1.0
−1.4
−2.4
−1.7
Bed Size (Urban):
0--99 beds
685
611,139
0.91
−1.0
−1.1
−1.1
−1.3
−1.6
−1.2
100-199 beds
875
2,346,922
0.93
0.0
0.1
0.0
0.1
0.0
0.0
200-299 beds
511
2,446,737
1.00
0.1
0.2
0.3
0.3
0.6
0.3
300-499 beds
433
2,965,216
1.08
0.3
0.3
0.3
0.4
0.8
0.4
500 or more beds
167
1,923,789
1.17
0.6
0.3
0.2
0.4
0.4
0.5
Bed Size (Rural):
0-49 beds
543
330,242
0.73
−2.5
−2.1
−2.2
−2.7
−5.0
−3.0
50-99 beds
398
595,599
0.80
−1.4
−1.0
−1.1
−1.6
−2.7
−2.0
100-149 beds
160
415,367
0.85
−1.1
−0.7
−0.8
−1.2
−2.0
−1.5
150-199 beds
69
260,910
0.91
−0.8
−0.6
−0.7
−0.8
−1.5
−1.0
200 or more beds
49
269,842
0.99
−0.6
−0.1
−0.1
−0.6
−0.5
−0.9
Urban by Region:
New England
129
541,471
0.99
0.1
−0.2
−0.5
−0.5
−0.6
−0.5
Middle Atlantic
370
1,621,488
1.00
0.0
−0.4
−0.5
−0.3
−1.5
−0.1
South Atlantic
432
2,208,336
1.04
0.5
0.7
0.7
0.7
1.4
0.7
East North Central
410
1,856,164
1.03
0.6
0.7
0.6
0.8
1.5
0.6
East South Central
168
696,943
1.06
−0.2
−0.2
−0.2
−0.2
−0.3
−0.4
West North Central
164
657,322
1.08
−0.3
−0.3
0.0
−0.3
0.3
−0.3
West South Central
369
1,115,411
1.05
0.1
0.0
0.1
0.3
0.5
0.3
Mountain
153
465,093
1.08
0.4
0.2
0.5
0.4
1.0
0.7
Pacific
423
1,016,135
1.03
0.0
−0.2
−0.1
−0.1
0.2
0.3
Puerto Rico
53
115,440
0.87
−1.1
−1.4
−0.1
−1.2
−5.1
−1.3
Rural by Region:
New England
34
49,842
0.90
−0.6
−0.6
−0.5
−1.1
−0.6
−1.1
Middle Atlantic
68
139,639
0.85
−1.1
−0.7
−0.7
−1.3
−1.5
−1.4
South Atlantic
191
409,116
0.82
−0.8
−0.4
−0.5
−0.9
−1.8
−1.2
East North Central
163
290,069
0.87
−1.1
−0.7
−0.9
−1.3
−1.8
−1.6
East South Central
201
328,326
0.82
−1.5
−0.9
−1.1
−1.4
−3.2
−1.9
West North Central
184
240,449
0.87
−1.6
−1.2
−1.1
−1.8
−2.5
−2.0
West South Central
227
266,419
0.80
−2.1
−1.8
−1.9
−2.0
−4.3
−2.5
Mountain
91
80,219
0.85
−1.2
−1.0
−0.4
−1.3
−1.2
−1.1
Pacific
60
67,881
0.86
−0.9
−1.0
−1.1
−1.4
−1.6
−1.6
By Payment Classification:
Teaching Status:
Non-teaching
2,791
6,115,193
0.92
−0.4
−0.2
−0.2
−0.4
−0.5
−0.4
Fewer than 100 Residents
853
4,061,451
1.04
0.1
0.2
0.2
0.2
0.7
0.2
100 or more Residents
246
1,989,119
1.16
0.8
0.3
0.1
0.5
0.0
0.6
Urban DSH:
Non-DSH
778
2,574,640
1.02
−0.1
0.0
0.1
−0.2
0.5
0.0
100 or more beds
1,541
7,378,095
1.05
0.3
0.2
0.2
0.4
0.4
0.4
Less than 100 beds
352
341,068
0.82
−0.9
−0.8
−1.0
−1.1
−2.0
−1.1
Rural DSH:
Non-DSH
238
300,747
0.87
−1.4
−1.0
−0.9
−1.7
−1.9
−1.7
SCH
402
599,823
0.83
−1.3
−1.0
−1.0
−1.4
−2.4
−1.8
RRC
132
466,395
0.92
−0.8
−0.3
−0.5
−0.7
−1.4
−1.1
Other Rural
100 or more beds
60
135,146
0.80
−0.9
−0.8
−1.2
−1.3
−2.0
−1.5
Less than 100 beds
387
369,849
0.74
−2.1
−1.6
−1.7
−2.2
−4.3
−2.6
Urban teaching and DSH:
Both teaching and DSH
829
4,705,476
1.09
0.5
0.3
0.3
0.5
0.5
0.5
Teaching and no DSH
204
1,108,092
1.06
0.0
0.1
0.0
−0.1
0.4
0.1
No teaching and DSH
1,064
3,013,687
0.95
−0.1
0.1
0.0
0.1
0.1
0.1
No teaching and no DSH
574
1,466,548
1.00
−0.2
−0.1
0.1
−0.3
0.5
0.0
Rural Hospital Types:
RRC
145
519,808
0.92
−0.8
−0.4
−0.5
−0.7
−1.4
−1.1
SCH
423
457,119
0.79
−1.6
−1.2
−1.2
−1.7
−3.0
−2.1
MDH
180
164,453
0.75
−2.1
−1.7
−1.7
−2.3
−4.1
−2.7
SCH and RRC
76
266,027
0.92
−0.9
−0.7
−0.7
−1.1
−1.3
−1.3
MDH and RRC
8
19,746
0.85
−1.4
−0.6
−0.8
−1.6
−1.9
−1.7
Other Rural
387
444,807
0.77
−1.6
−1.2
−1.4
−1.8
−3.3
−2.1
RAND also noted that changes in documentation and coding that increase case mix will occur with each severity adjusted DRG system they evaluated. Increases in CMI after adopting the system could be the result of improved coding rather than increases in actual patient severity. RAND observed that the experience of Maryland hospitals using the APR DRG system provides some indication of the likely impact on case-mix of introducing a severity-adjusted system. RAND also noted that coding behaviors are expected to vary under alternative systems according to RAND. Therefore, the risk of case-mix growth due to improved documentation and coding exists with any system. However, RAND advises that the amount of risk can be assessed based on the logic of the DRG system and result in anticipated changes in coding behavior. For the analysis we presented in the proposed rule, RAND found that the CMS+AP-DRG system may have the lowest risk of case-mix increase, while the CS DRGs present the greatest risk. The remaining systems under evaluation demonstrated equivalent risk, based on the DRG logic and other features specific to each system.
RAND did not repeat the analysis of the potential for documentation and coding improvements to increase case-mix using the MS-DRGs because it only worked with FY 2005 data to evaluate them. Further, CMS did a detailed analysis of the likely impact of documentation and coding improvements on case-mix using the MS-DRGs. Section II.D.6. of the preamble of this rule describes in detail the CMI impact under the MS-DRGs using the State of Maryland's experience and data.
d. Other Issues for Consideration
RAND was asked to examine whether each of the alternative severity-adjusted DRG systems under evaluation appears to contain logic that is manageable, administratively feasible, and understandable. RAND's results describe the extent to which those features are present in the grouping logic of each system. A brief summary of these findings and other discussion points follow. For more complete details of the grouping logic for each system evaluated, we encourage readers to review RAND's interim report at the following CMS Web site:
http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292.
The report may also be viewed on RAND's Web site at
http://www.rand.org/pubs/online/health.
To increase and promote understanding of a DRG classification system, the grouping logic should include a uniform structure. With the exception of the CS DRGs, RAND found that there is uniformity in the hierarchical structure for assigning discharges to MDCs, DRGs, and severity levels for each system evaluated. The CS DRGs utilize a complex rerouting logic and severity of illness level assignment. However, the result is a higher explanatory power that accounts for limitations in the current system. Therefore, due to the complexities associated with that system, it may not easily be understood. However, if the results yield clinically coherent groups of patients with comparable costs, RAND concluded that the system may be worth exploring further. The HSC-DRG and Sol-DRG grouping logic uses a standard number of severity levels for each base DRG, although the result is an increase in the number of low-volume DRGs. The standard severity level structure provides increased understanding, although as mentioned
previously, low-volume, severity-adjusted DRGs can affect the relative performance of a classification system. The MM-APS-DRGs and CS DRGs use standard DRG severity levels. However, the method of collapsing DRGs varies due to the modifications made for Medicare use. The underlying logic of the MS-DRG system uses standard severity levels, but the criteria for establishing severity subgroups result in severity levels that vary by base DRG. Because the severity levels are often collapsed and the resulting subgroups depend on the particular DRG, it is a more complicated system to understand than those systems that uniformly define subgroups according to RAND. By only collapsing DRGs to determine relative weights, RAND notes it is possible to preserve the underlying DRG structure, which perhaps would lead to a more understandable system.
As stated earlier, there are also several transition issues that require attention when evaluating alternative severity-adjusted DRG systems. In determining how manageable, administratively feasible, and understandable the systems being evaluated are, consideration should be given to how they crosswalk or map to the current CMS DRGs. Because four of the systems under evaluation are based on the underlying CMS DRG grouping logic to establish their base DRGs (CMS+AP-DRGs, HSC-DRGs, Sol-DRGs, and MM-APS-DRGs), the CMS DRGs are able to crosswalk smoothly to these severity-adjusted DRGs. Conversely, crosswalking in reverse or backward mapping from the CMS+AP DRGs to the CMS DRGs is problematic due to the discharges in one severity level of the CMS+AP-DRG system compared to several base CMS DRGs. As expected, the CS DRGs do not crosswalk easily to the CMS DRGs due to the complex grouping logic. The MM-APS-DRGs pose unique complications as well due to the large number (over 1,000) of DRGs. Although the MS-DRGs are based on the CMS DRGs, there are challenges in crosswalking discharges between the two systems because of the revisions in the CC list and the sequential renumbering of the DRGs.
System updates are another important factor that may have serious implications. All of the DRG systems RAND evaluated were reported to make annual updates to reflect ICD-9-CM coding changes. However, the CC severity level assignments for each system have not routinely been reviewed and revised. The CC exclusion list and severity level assignments should be reviewed where appropriate to reflect current patterns of care, according to RAND. RAND found that the MS-DRGs are the most updated of the severity-adjusted DRG systems. CMS reviewed the CC list and severity-level assignments in developing the MS-DRGs. Further, the MS-DRGs incorporate recent refinements in the CMS DRGs to account for complexity as well as severity. According to RAND, the other CMS-based systems use CC lists and severity level assignments that are based on outdated analyses of the effect of a condition on treatment costs from either the 1988 Yale study or the 1994 CMS refinement study. The APR DRGs have not been reviewed for several years and are not as current as the severity-based systems according to RAND.
Accessibility to each of the severity-adjusted DRG system's logic and software is also a concern. Each system RAND analyzed is currently maintained as a proprietary product. In general, all of the vendors indicated a willingness to place their product in the public domain, under certain terms. As such, CMS believes it is likely there would need to be discussion as to whether there would be any limitations (such as the source code as well as the DRG logic) on the availability of the DRG systems to hospitals or competing vendors. None of these concerns would be an issue with the MS-DRGs. RAND further noted that because the MS-DRGs are in the public domain, there should be less disruption to existing arrangements for acquiring and installing the GROUPER software and integrating that software with other hospital systems. The intent of each vendor to provide public access to its GROUPER logic and software is described in further detail in RAND's interim report.
Comment:
One commenter supported the efforts of CMS to evaluate several alternatives to the existing DRG system. The commenter expressed appreciation that CMS had incorporated comments submitted by the provider community in setting the criteria for evaluating the various DRG products. This commenter also stated it looked forward to reviewing the final recommendations when the RAND report is released.
Response:
We appreciate the commenter's support of our efforts. As we indicated in the proposed rule, we have focused our efforts in response to public comments regarding the refinement of the current DRG system. With the assistance of RAND in the evaluation of alternative severity-adjusted DRG systems, our objective has been to select a classification system that will better recognize severity of illness, utilization of resources, and complexity of services. The ultimate goal of these combined objectives is to greatly improve the payment accuracy of the IPPS.
Comment:
Several commenters supported the implementation of a severity-based system. However, they urged CMS to wait until RAND completes the final report before moving forward with a specific system. One commenter articulated its appreciation of the thorough analysis conducted on the other alternative severity-adjusted systems. However, the commenter remains concerned that CMS would consider moving forward with the MS-DRGs in the absence of completing an analysis of them using the same criteria applied to the other systems under review. Other commenters expressed concern that CMS may implement the proposed MS-DRGs for FY 2008 and then switch to a completely different severity-based system in FY 2009, or phase in a different system in subsequent years. One commenter stated that, given the potential for heightened administrative burdens as well as financial consequences, it would seem prudent that CMS invest the needed time and energy to confirm whether its belief in the proposed MS-DRG system can be validated. This same commenter added that by stating it is not precluded from adopting another system for FY 2009, CMS is tacitly acknowledging that the MS-DRG system may not be the best system. Another commenter stated that CMS' request for RAND to evaluate the proposed MS-DRGs indicates it is not satisfied that the MS DRGs are ready for long-term use in the IPPS.
Response:
In the proposed rule, we indicated that we asked RAND to evaluate the proposed MS-DRG system using the same criteria it is applying to the other alternative severity-adjusted DRG systems. Our intent in not committing permanently to the MS-DRGs was not to suggest that we were not satisfied with the long-term application of the MS-DRG system or that we had concerns about it being the best system. Rather, we were interested in an objective evaluation of the MS-DRGs by RAND using the same criteria applied to the other alternative severity-adjusted systems. That is, before making a permanent commitment to the MS-DRGs, we were interested in knowing how well it demonstrates the ability to meet the objectives described previously—better recognition of severity of illness, utilization of resources, complexity of services and improved payment accuracy over the current CMS DRG system. While we proposed the MS-DRGs for
implementation in FY 2008, we were further interested in the public's response to the MS-DRGs and RAND's evaluation of them before making a final decision on a permanent DRG system to use for Medicare payment. Specifically, public comments on the FY 2007 IPPS proposed rule asked that CMS show evidence that the alternative system proposed results in an improved payment system compared to the current system, test the degree to which the variation in costs within cases at the DRG level is reduced, maintain the improvements made over the years to account for complexity of service and new technologies, and avoid a proprietary system that lacks transparency. We considered all these factors in the development of the MS-DRGs and had we not provided the proposed MS-DRG system to RAND for evaluation, we would not be able to make a fair comparison and final determination for the best course of action for Medicare long term. At the time of the proposed rule, we were unsure whether RAND would be able to complete its evaluation of the MS-DRGs by the time of this final rule with comment period. However, as summarized above, RAND has completed its analysis of the MS-DRG system and found that it compares favorably to the other DRG systems being evaluated on a number of criteria.
As RAND has completed its evaluation of alternative DRG systems, including the MS-DRGs, consistent with RAND's findings, we believe it is appropriate at this time to adopt the MS-DRG system for Medicare in FY 2008. We believe the MS-DRGs represent an improvement over the current CMS DRGs. While there will be an opportunity for the public to comment on RAND's findings, we expect to permanently adopt the MS-DRGs for the IPPS. We do not believe it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems being evaluated by RAND is clearly superior. We plan on using RAND's report to continue to examine ways to improve and refine the Medicare inpatient payment system and expect that any future refinements will be based on the MS-DRGs. Therefore, as final policy for FY 2008, we are adopting the MS-DRGs as the new classification system for the IPPS.
Comment:
One commenter agreed that CMS should adopt a transparent and publicly available DRG system and applauded the proposed MS-DRGs. The commenter stated that the transparency of the current system has been a critical aspect of its success over the years, and this will be even more important to ensure the successful adoption of the new severity-adjusted system chosen.
Response:
We appreciate the commenter's support for the proposal to use MS DRGs. We agree that transparency is an important factor in the selection of a new severity-adjusted DRG system. We refer readers to sections II.D.2. and 3. of the preamble of this final rule with comment period for a complete discussion of the MS-DRGs.
Comment:
One commenter stated CMS should consider adopting a more robust severity-based DRG system than the proposed MS-DRGs. The commenter admitted that it regards the APR DRG system highly and indicated it should not be abandoned because it is more complicated to implement and because of the controversy surrounding its suggested implementation. The commenter also noted that, as RAND stated in its preliminary report, it is a more robust, accurate, and precise system, and it was reluctant to see CMS abandon this superior system entirely before receiving RAND's final report and recommendations. Further, the commenter stated that, while the MS-DRGs would unquestionably represent a major improvement over the current CMS DRGs, it believed CMS has the ability and should proceed with introducing a better and more robust system and continue exploring further options while waiting for RAND's final report.
Response:
In the FY 2007 proposed rule (71 FR 24015), we proposed to adopt the CS DRGs which were based on a consolidated version of the APR DRGs. We received a significant number of public comments strongly urging us not to move forward with the CS DRGs. These comments are described in detail in the FY 2007 final rule (71 FR 47906 through 47912). Among other concerns, the public comments suggested that the system was overly complex and difficult to understand. Further, there was concern that the logic and source code would not be available in the public domain like the current CMS DRGs and that many of the improvements and refinements made to the CMS DRGs over the years would be abandoned. For these and other reasons, we decided not to adopt the CS DRGs for FY 2007. Our proposed adoption of MS-DRGs did not raise these same concerns in the public comments. Given that the MS-DRGs are a substantial improvement over the current CMS DRGs in their ability to recognize severity of illness and meet other objectives that we set for IPPS payment reform, we believe it is a better system to select for use by Medicare than the CS DRGs or APR DRGs.
Comment:
One commenter, a vendor, submitted its DRG product to RAND for evaluation. The commenter expressed its concern that CMS developed a completely new and untested severity system while there are several alternate systems currently under evaluation by RAND. The commenter noted that its product has been in continuous use for 18 years and is based on the original Yale University methodology and developed under contract with the Health Care Financing Administration, now CMS, between 1986 and 1989.
The commenter urged CMS to continue with the current CMS DRGs for one more year. According to the commenter, introducing a new temporary severity system, the MS-DRGs, with the expectation that hospitals move to another system for FY 2009, will create unnecessary havoc for the hospital industry. The commenter noted that it is pleased with the work CMS has done in reviewing 13,549 secondary diagnosis codes to refine the CC list and believed the use of this new list will result in a greatly improved DRG GROUPER. However, the commenter stated it is not fair to compare the FY 2008 MS-DRGs (with the new CC list and new codes) with FY 2006 and FY 2007 alternative severity systems using the unrevised CC list. The commenter recommended that CMS create Version 25.0 CMS DRGs with the new CC list and new codes to allow the vendors of the alternative systems until November or December to incorporate the information into updated versions of their systems. The commenter also suggested that the RAND report deadline could be extended beyond September 1, 2007, to allow the comparison of alternative DRG systems to occur with the revised CC list.
In addition, the commenter believed the MS-DRGs have the following shortcomings:
• Although CMS' chief concern is Medicare patients, it is shortsighted to ignore non-Medicare patients in the proposed MS-DRG system, as the health care industry often focuses its attention on the Medicare relative value system for all of its hospital patients.
• The DRG system has always been comprehensive, including all possible ICD-9-CM diagnoses and procedures. Consolidating low-volume procedures and procedures now performed primarily in an outpatient setting creates confusion in the MS-DRG classification system. Procedures such as tonsillectomies, carpal tunnel release, and cataract extractions are different MDCs and are treated by different medical specialists. They are similar
only with respect to historical cost data and only for the time being.
• Eliminating newborns, maternity, and congenital anomalies from the usual MS-DRG severity level approach does not provide a comprehensive severity system.
Lastly, the commenter indicated that whatever software system is chosen for the public, it should be provided in a modern and accessible software language and format. The commenter recommended a “C” version, on CDs or DVDs, and suggested that continuing to place CMS software into the public domain written in IBM assembler and distributed through the National Technical Information Service (NTIS) on 9-track tapes or 3480 cartridges seems difficult to imagine, as this technology is over 40 years old.
Response:
We disagree that we are implementing a “completely new and untested severity system.” While the MS-DRGs constitute a major reform to better recognize severity of illness, they are a refinement of the current CMS DRGs that have been in use for Medicare payment for over 20 years. Further, our proposed rule analysis—subsequently validated by RAND—suggested that they are major improvement over the current CMS DRGs. Most of the other systems represent less updated refinements of the CMS DRGs. While these systems have been in use for other purposes, we note that (other than the APR DRGs that are used for payment in Maryland and the AP DRGs that were used in New York's all payer ratesetting system in the 1990s), the other systems being evaluated have never been used for Medicare payment.
We stated in the FY 2008 IPPS proposed rule that we developed the MS-DRG system in response to public comments received as a result of the FY 2007 proposed rule (in response to the proposed CS DRGs). We also stated we submitted the MS-DRG system to RAND for evaluation and the final report was expected on or before September 1, 2007. At this time RAND has completed the evaluation of alternative severity-adjusted DRG systems, including the MS-DRGs. In the near future, we will post RAND's analysis of the MS-DRG system to the following CMS Web site:
http://www.cms.hhs.gov/Reports/Reports/itemdetail.asp?itemID=CMS1197292.
The report may also be viewed on RAND's Web site at
http://www.rand.org/pubs/online/health.
This report is referred to as an Addendum to RAND's interim report that was released in March 2007. A completed final report incorporating the evaluation of all six severity adjusted DRG systems into one document will be posted to the CMS Web site after September 1, 2007.
As noted above, we share the commenter's concern about adopting one DRG system this year and potentially another one next year. We believe the MS-DRGs should be the system that is adopted for long-term use by Medicare for IPPS payment. However, we are interested in obtaining further public input on RAND's findings. We do not believe it is likely that there will be persuasive public comments suggesting that one of the alternative DRG systems evaluated by RAND is clearly superior to the MS-DRGs.
We appreciate the commenter's support of our efforts in the review of 13,549 secondary diagnosis codes. We agree that a new, updated CC list greatly improves the ability of a DRG GROUPER to reflect severity of illness and distribute payments more accurately. The intent of RAND's evaluation was to compare each of the alternative DRG systems in its current form. The fact that delays would be necessary to allow the other systems to adopt the improvements that CMS made to the CC list for the MS-DRGs suggests that the other systems would not be ready for implementation as soon. As noted elsewhere, we are interested in adopting comprehensive improvements to the DRG system for severity of illness at the earliest possible date. We do not believe it is in the public interest to delay adopting these improvements to wait for the alternative DRG systems to incorporate refinements to the CC list. Further, we note that CMS first discussed performing a comprehensive review of the CC list over 2 years ago. Each vendor could have undertaken a similar review of the CC list to improve its DRG product at any time.
We disagree with the commenter's assertion that our decision should turn on how the MS-DRGs can be used for non-Medicare payers. As we have stated many times in the past, we encourage private insurers and other non-Medicare payers to make refinements to Medicare's DRG system to better suit the needs of the patients they serve. With respect to the maternity and newborn DRGs, we cannot adopt the same approach to refine these DRGs that we did with the rest of the MS-DRGs because of the extremely low volume of Medicare patients there are in these DRGs. Medicare simply does not have enough cases in these DRGs to apply the same approach we did in the other MDCs. Whether we made revisions to these DRGs or not, private insurers and other private payers would have to develop their own DRGs or relative weights to address the needs of these patients that are not well-represented in the Medicare population. With respect to other pediatric patients, in our view, a significant advantage of the MS-DRGs over the prior CMS DRGs is the fewer number of low volume DRGs. By eliminating pediatric (ages 0 to 17 years) splits, the MS-DRGs will have fewer low-volume DRGs and less instability in the DRG relative weights for the cases paid using these DRGs.
With regards to the software, undere CMS' agreement with its contractor, the software provided by NTIS is the same public domain software that is provided to CMS for use by our system maintainers, regional offices, and fiscal intermediaries.MAC. We will consider this comment as we make updates to our information systems and related contracts.
As stated elsewhere in this final rule with comment period, we are adopting the MS-DRGs for implementation on October 1, 2007 (FY 2008). A detailed discussion summarizing the public comments received in response to the MS-DRG proposal is described in section II.D.2. of the preamble of this final rule with comment period.
2. Development of the Medicare Severity DRGs (MS-DRGs)
As discussed previously, we are committed to continuing our efforts of making refinements to the current CMS DRGs to better recognize severity of illness. In the FY 2007 IPPS final rule, we stated that we had begun a comprehensive review of over 13,000 diagnosis codes to determine which codes should be classified as CCs when present as a secondary diagnosis. We stated that we would also build on the severity DRG work we performed in the mid-1990's. We received a number of public comments on last year's proposed rule that supported the refinement of the current CMS DRGs so that they better recognize severity of illness for FY 2007.
We also committed to performing a more thorough reform of the entire DRG system to better recognize severity of illness for FY 2008. As a result of this broad based analysis, we developed the MS-DRGs that we proposed and are adopting in this final rule with comment period. The MS-DRGs represent a comprehensive approach to applying a severity of illness stratification for Medicare patients throughout the DRGs. As discussed in proposed rule and in section II.D.5. of the preamble of this final rule with comment period, the MS-DRGs maintain the significant advancements in identifying medical technology made
to the DRGs in past years. At the same time, they greatly improve our ability to identify groups of patients with varying levels of severity using secondary diagnoses. Further, they improve our ability to assign patients to different DRG severity levels based on resource use that is independent of the patient's secondary diagnosis—referred to in this discussion as “complexity.” We proposed to adopt the MS-DRGs for FY 2008 and also submitted the system to RAND to be considered as part of its evaluation of alternative DRG systems. In the proposed rule, we encouraged comments on our proposed methodology to establish a severity DRG system and the resulting DRGs.
a. Comprehensive Review of the CC List
Our efforts to better recognize severity of illness began with a comprehensive review of the CC list. Currently, 115 DRGs are split based on the presence or absence of a CC. For these DRGs, the presence of a CC assigns the discharge to a higher weighted DRG. The list of diagnoses designated as a CC was initially created at Yale University in 1980-1981 as part of the project to develop an ICD-9-CM version of the DRGs. The researchers at Yale University developed the ICD-9-CM DRGs using national hospital data with diagnoses and procedures coded in ICD-9-CM from the second half of 1979. Because hospitals only began reporting ICD-9-CM codes in 1979, discharge abstracts at that time were much less likely to fully report all secondary diagnoses. As a result, the Yale University researchers developed a liberal definition of a CC as any secondary diagnosis that “would cause an increase in length of stay by at least 1 day in at least 75 percent of the patients.” Because of the likely underreporting of secondary diagnoses in the 1979 data, the Yale University researchers also used age as a surrogate for identifying patients with a CC. The original version of the ICD-9-CM DRGs assigned patients to a CC DRG if they had a secondary diagnosis on the CC list or if the patient was 70 years or older.
With the implementation of the IPPS in FY 1984, the coding of secondary diagnoses by hospitals dramatically improved. During the first 4 years of the IPPS, the CC definition included the age 70 criterion. With the improved coding and reporting of diagnoses associated with the implementation of the IPPS, the use of age as a surrogate for CCs was no longer necessary. Thus, beginning in FY 1988, the age 70 criterion was removed from the CC definition and a CC DRG was defined exclusively by the presence of a secondary diagnosis on the CC list.
Except for new diagnosis codes that were added to ICD-9-CM after FY 1984 (for example, HIV), the CC list of diagnoses currently used in the CMS DRGs is virtually identical to the CC list created at Yale University. However, there have been dramatic changes not only in the accuracy and completeness of the coding of secondary diagnoses but also in the characteristics of patients admitted to hospitals and the practice patterns within hospitals as well.
Since the implementation of the IPPS, Medicare average length of stay has dropped dramatically from 9.8 days in 1983 to 5.7 days in 2005. The economic incentives inherent in DRGs motivated a change in practice patterns to discharge patients earlier from the hospital. These changes were facilitated by the increased availability of postacute care services, such as nursing homes and home health services, which allowed problems previously requiring continued hospitalization to be effectively treated outside the acute care hospital. Furthermore, there has also been a dramatic shift to outpatient surgery that avoids costly inpatient stays. Many surgical procedures formerly performed in the hospital are now routinely performed on an outpatient basis. As a result, patients admitted to the hospital today are on average more likely to have a CC than when the IPPS was implemented. The net effect of better coding of secondary diagnoses, reductions in hospital length of stay, increased availability of postacute care services, and the shift to outpatient care is that most patients (nearly 80 percent) admitted to a hospital now have a CC. As a result of the changes that have occurred during the 22 years since the implementation of the IPPS, the CC list as currently defined has lost much of its capacity to discriminate hospital resource use.
Currently, 115 CMS DRGs have a CC subdivision. Up until FY 2002, the number of DRGs with a CC subdivision remained essentially unchanged from the original FY 1984 version of the DRGs. As a means of improving the payment accuracy of the DRGs, beginning with the FY 2002 DRG update, each base CMS DRG without a CC subdivision was evaluated to determine if a CC subdivision was warranted. Over the past five DRG updates, only seven base CMS DRGs have had a CC subdivision added. The primary constraint preventing a significant increase in the number of base CMS DRGs with a CC subdivision is the low number of patients who would be assigned to the non-CC group. Thus, the expansion of the number of CMS DRGs subdivided based on a CC is constrained because the vast majority of patients would be assigned to the CC group and few patients would be assigned to the non CC group. To remedy these problems, we reviewed each of the 13,549 secondary diagnosis codes to evaluate their assignment as a CC or non-CC using statistical information from the Medicare claims data and applying medical judgment based on current clinical practice. We refer to this list in this section as the “revised CC list.”
The need for a revised CC list prompted a reexamination of the secondary diagnoses that qualify as a CC. Our intent was to better distinguish cases that are likely to result in increased hospital resource use based on secondary diagnoses. Using a combination of mathematical data and the judgment of our medical advisors, we included the condition on the CC list if it could demonstrate that its presence would lead to substantially increased hospital resource use.
Diagnoses may require increased hospital resource use because of a need for such services as:
• Intensive monitoring (for example, an intensive care unit (ICU) stay).
• Expensive and technically complex services (for example, heart transplant).
• Extensive care requiring a greater number of caregivers (for example, nursing care for a quadriplegic).
There are 3,326 diagnosis codes on the current CC list. Our 2006 review of the CC list reduced the number of diagnosis codes on the CC list to 2,583. Based on the current CC list, 77.66 percent of patients have at least one CC present. Based on the revised CC list from our 2006 review, the percent of patients having at least one CC present would be reduced to 40.34 percent.
b. Chronic Diagnosis Codes
The 1979 data used in the original formation of the CC list often did not have the manifestations of a chronic disease fully coded. As a result, the CC list included many chronic diseases with a broad range of manifestations. Such chronic illness diagnoses usually do not cause a significant increase in hospital resource use unless there is an acute exacerbation present or there is a significant deterioration in the underlying chronic condition. Therefore, in the revised CC list, we removed chronic diseases without a significant acute manifestation. Recognition of the impact of the chronic disease is accomplished by separately coding the acute manifestation. For example, the mitral valve disease codes
(codes 396.0 through 396.9) are assigned to the current CC list. However, unless the mitral valve abnormalities are associated with other diagnoses indicating acute deterioration, such as acute congestive heart failure, acute pulmonary edema, or respiratory failure, they would not be expected to significantly increase hospital resource use. Therefore, the revised CC list did not include the mitral valve codes. Recognition of the contribution of mitral valve disease to the complexity of hospital care would be accomplished by separately coding those diseases on the CC list that are associated with an acute exacerbation or deterioration of the mitral valve disease.
The revised CC list applied the criterion that chronic diagnoses having a broad range of manifestations are not assigned to the CC list as long as there are codes available that allow the acute manifestations of the disease to be coded separately. For some diseases, there are ICD-9-CM codes that explicitly include a specification of the acute exacerbation of the underlying disease. For example, for congestive heart failure, the following codes specify an acute exacerbation of the congestive heart failure:
• 428.21, Acute systolic heart failure
• 428.41, Acute systolic and diastolic heart failure
• 428.43, Acute on chronic systolic heart failure
• 428.31, Acute diastolic heart failure
• 428.33, Acute on chronic diastolic heart failure
These congestive heart failure codes are included on the revised CC list. However, the following congestive heart failure codes do not indicate an acute exacerbation and are not included in the revised CC list:
• 428.0, Congestive heart failure not otherwise specified
• 428.1, Left heart failure
• 428.20, Systolic heart failure not otherwise specified
• 428.22, Chronic systolic heart failure
• 428.32, Chronic diastolic heart failure
• 428.40, Systolic and diastolic heart failure
• 428.9, Heart failure not otherwise specified
As a result of this approach, most chronic diseases were not assigned to the revised CC list. In general, a significant acute manifestation of the chronic disease must be present and coded for the patient to be assigned a CC. We made exceptions for diagnosis codes that indicate a chronic disease in which the underlying illness has reached an advanced stage or is associated with systemic physiologic decompensation and debility. The presence of such advanced chronic diseases, even in the absence of a separately coded acute manifestation, significantly adds to the treatment complexity of the patient. Thus, the presence of the advanced chronic disease inherently makes the reason for admission more difficult to treat. For example, under the revised CC list, stage IV, V, or end-stage chronic renal failure (codes 585.4 through 585.6) are designated as a CC, but stage I through III chronic renal failure (codes 585.1 through 585.3) are not. For obesity, a body mass index over 35 (codes V85.35 through V85.4) is a CC, but a body mass index between 19 and 35 is not. End-stage renal failure and extreme obesity are examples of chronic diseases for which the advanced stage of the disease is clearly specified.
However, for most major chronic diseases, the stage of the disease is not clearly specified in the code. These codes were evaluated based on the consistency and intensity of the physiologic decompensation and debility associated with the chronic disease. For example, quadriplegia (codes 344.00 through 344.09) requires extensive care with a substantial increase in nursing services and more intensive monitoring. Therefore, quadriplegia is considered a CC in the revised CC list.
c. Acute Diagnosis Codes
Examples of acute diseases included on the revised CC list included acute myocardial infarction (AMI), cerebrovascular accident (CVA) or stroke, acute respiratory failure, acute renal failure, pneumonia, and septicemia. These six diseases are representative of the types of illnesses we included on the revised CC list. Other acute diseases were designated as a CC if their impact on hospital resource use would be expected to be comparable to these representative acute diseases. For example, acute endocarditis was included on the CC list but urinary tract infection was not.
The revised CC list is essentially comprised of significant acute disease, acute exacerbations of significant chronic diseases, advanced or end stage chronic diseases and chronic diseases associated with extensive debility. Compared to the existing CC list, the revised CC list requires a secondary diagnosis to have a consistently greater impact on hospital resource use.
The following Table E compares the current CC list and the revised CC list. There are 3,326 diagnosis codes on the current CC list. The CC revisions reduce the number of diagnosis codes on the CC list to 2,583. Based on the current CC list, 77.66 percent of patients have at least one CC present, using FY 2006 MedPAR data. Based on the revised CC list, the percent of patients having at least one CC present is reduced to 40.34 percent. The revised CC list increases the difference in average charges between patients with and without a CC by 56 percent ($15,236 versus $9,743).
Table E.—Comparison of Current CC List and Revised CC List
Current CC list
Revised CC list
Codes designated as a CC
3,326
2,583
Percent of patients with one or more CCs
77.66
40.34
Percent of patients with no CC
22.34
59.66
Average charge of patients with one or more CCs
$24,538
$31,451
Average charge of patients with no CCs
$14,795
$16,215
The analysis above suggests that merely reviewing and updating the CC list can lead to significant improvements in the ability of the CMS DRGs to recognize severity of illness. Although we could potentially adopt this one change to better recognize severity of illness in the CMS DRGs, we have undertaken additional analyses that further refine secondary diagnoses into MCCs, CCs and non-CCs as described below.
d. Prior Research on Subdivision of CCs into Multiple Categories
(1) Refined DRGs
During the mid-1980s, CMS (then HCFA) funded a project at Yale University to revise the use of CCs in the CMS DRGs. The Yale University project mapped all secondary diagnoses that were considered a CC in the CMS DRGs into 136 secondary diagnosis groups, each of which was assigned a CC complexity level. For surgical patients, each of the 136 secondary diagnosis groups was assigned to 1 of 4 CC complexity levels (non-CC, moderate CC, MCC, and catastrophic CC). For medical patients, each of the 136 secondary diagnosis groups was assigned to 1 of 3 CC complexity levels (non-CC, moderate/MCC, and catastrophic CC). All age subdivisions and CC subdivisions in the DRGs were
eliminated and replaced by the four CC subgroups for surgical patients, or the three CC subgroups for medical patients. The Yale University project did not reevaluate the categorization of secondary diagnosis as a CC versus a non-CC. Only the diagnoses on the standard CC list were used to create the moderate, major, and catastrophic subgroups. All secondary diagnoses in a secondary diagnosis group were assigned the same level, and a patient was assigned to the subgroup corresponding to the highest level secondary diagnosis. The number of secondary diagnoses had no effect on the subgroup assigned to the patient (that is, multiple secondary diagnoses at one level did not cause a patient to be assigned to a higher subgroup). The DRG system developed by the Yale University project demonstrated that a subdivision of the CCs into multiple subclasses would improve the predictability of hospital costs.
(2) 1994 Severity DRGs
We also examined the work we performed in the mid-1990's to revise the CMS DRGs to better recognize severity. In 1993, we reevaluated the use of CCs within the CMS DRGs. The reevaluation excluded the CMS DRGs associated with pregnancy, newborn, and pediatric patients (MDCs 14 and 15 and DRGs defined based on age 0-17). The major CC list from the AP-DRGs that are used for Medicaid payment by New York and other States was used to identify an initial list of MCCs. Using Medicare data, we reevaluated the categorization of each secondary diagnosis as a non-CC, CC, or an MCC. The end result was that 111 diagnoses that were non-CCs in the standard CMS DRGs were made a CC, 220 diagnoses that were a CC were made a non-CC, and 395 CCs were considered an MCC.
All CC splits in the CMS DRGs were eliminated, and an additional 24 DRGs were merged together. The resulting base CMS DRGs were then subdivided into three, two, or no subgroups based on an analysis of Medicare data. The result was 84 DRGs with no subgroups, 124 DRGs with two subgroups, and 85 DRGs with three subgroups. An additional 63 pregnancy, newborn, and pediatric DRGs not evaluated resulted in a total of 652 DRGs.
A patient was assigned to the CC subgroup corresponding to the highest level secondary diagnosis. Multiple secondary diagnoses at one level did not cause a patient to be assigned to a higher subgroup. The categorization of a diagnosis as non-CC, CC, or MCC was uniform across the CMS DRGs, and there were no modifications for specific DRGs. As part of the FY 1995 IPPS proposed rule, we made a complete file of the revised DRG descriptions available to the public. However, we never adopted the revised DRGs (55 FR 27756).
e. Medicare Severity DRGs (MS-DRGs)
We had several options in developing a refinement to the current CMS DRGs to better recognize increased resource use due to severity of illness. One option would involve simply taking the work performed in 1994 and then updating it with all the code changes that have taken place since then. We were reluctant to do this because of changes in medical practices as well as the substantial changes in ICD-9-CM codes since that time. Another option would have been to build on current CMS DRGs which include a number of advancements that better identify medical practices and technologies. Many commenters on the FY 2007 IPPS proposed rule urged us to take the latter approach because they believed the current base CMS DRGs clearly differentiate between the complexities of varying surgical procedures and medical devices. Therefore, we chose the option of developing a new severity DRG system based on the current CMS DRGs.
The development of the 1994 Severity DRGs involved three steps:
• Consolidation of existing DRGs into base DRGs.
• Categorization of each diagnosis as an MCC, CC, or non-CC.
• Subdivision of each base DRG into subclasses based on CCs.
We reviewed and revised each of the three steps and applied them to our current CMS DRGs to develop DRGs that better identify severity of illness among Medicare patients. We refer to this system that we proposed (and are adopting in this final rule with comment period) as the Medicare Severity DRGs (MS-DRGs). The purpose of the MS-DRGs is to more accurately stratify groups of Medicare patients with varying levels of severity.
(1) Consolidation of Existing CMS DRGs into Base MS-DRGs
The first step in our process was the consolidation of existing CMS DRGs into new proposed base MS-DRGs. We combined together the 115 pairs of CMS DRGs that are subdivided based on the presence of a CC. We further consolidated the CMS DRGs that are split on the basis of a major cardiovascular condition, AMI with and without major complication (CMS DRGs 121 and 122), and cardiac catheterization with and without complex diagnoses (CMS DRGs 124 and 125). We also consolidated the three pairs of burn CMS DRGs that were defined based on the presence of a CC or a significant trauma (CMS DRGs 506 and 507; 508 and 509; and 510 and 511). Next, we consolidated the 43 pediatric CMS DRGs that are defined based on age less than or equal to 17. These pediatric CMS DRGs contain a very low volume of Medicare patients. As shown in Table 10 of the FY 2007 IPPS final rule (71 FR 48318), only two of these pediatric CMS DRGs contained more than 100 patients (CMS DRGs 298 and 333). Seventeen of these pediatric DRGs had no patients (CMS DRGs 30, 33, 41, 48, 54, 58, 137, 252, 255, 282, 330, 340, 343, 393, 405, 446, and 448). As we have stated frequently, our primary focus in maintaining the CMS DRGs is to serve the Medicare population. We do not have the data or the expertise to maintain the DRGs in clinical areas that are not relevant to the Medicare population. We continue to encourage users of the CMS DRGs (or MS-DRGs that are being adopted) to make relevant adaptations if they are being used for a non-Medicare patient population.
In addition to the pediatric CMS DRGs defined by the age of the patient, there are a number of CMS DRGs that relate primarily to the pediatric or adult population that have very low volume in the Medicare population, such as male sterilization, tubal interruptions, circumcisions, tonsillectomies, and myringotomies. These CMS DRGs were consolidated into the most clinically similar MS-DRG.
Over the past two decades, the site of service for some elective procedures such as carpal tunnel release, cataract extraction, and laparoscopy has shifted from the inpatient to the outpatient setting, resulting in the CMS DRGs associated with these procedures having very low volume. These CMS DRGs were also consolidated into the most clinically similar MS-DRG. In addition, there were some clinically related CMS DRGs that had significant Medicare patient volume but had no significant difference in resource use. For example, thyroid (CMS DRG 290) and parathyroid (CMS DRG 289) procedures were virtually identical in terms of hospital resource use and were, therefore, consolidated. In total, 34 of these CMS DRGs were consolidated. The DRG consolidations are summarized in Table F below.
Four pairs of MS-DRGs (223 and 224; 228 and 229; 323 and 324; and 551 and 552) were defined based on the presence of a CC or some other condition. For example, MS-DRG 323 is defined based on the presence of a CC or the performance of extracorporeal shock
wave lithotripsy. For these MS-DRGs, the CC condition was removed and the pair of DRGs remains separate but defined based only on the other condition (that is, MS-DRG 323 became urinary stones with extracorporeal shock wave lithotripsy). As was done in the 1994 severity DRG work, we did not consolidate any of the CMS DRGs for maternity or newborn cases.
Before proceeding further, we made one additional change to a base DRG assi
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