Payment Reform Reality

Rick Johnson, for HealthLeaders News , August 2, 2007

The Centers for Medicare and Medicaid Services today made good on its promise to significantly change the way Medicare pays for acute inpatient care at hospitals. The final rule for the inpatient prospective payment system creates 745 new Medicare severity-adjusted diagnosis-related groups.

I wrote about the proposed for the August issue HealthLeaders magazine. But, on the whole the content of the story remains current.

CMS says the reforms will result in increased payments overall and fairer reimbursement for more than 3,500 acute care hospitals. Providers I spoke with after the proposed rule came out were leery of the changes that CMS claims will increase hospital payments by an average of 3.5 percent for FY 2008.

"When you go from 500-plus DRGs to 700-plus DRGs and start getting into these different levels of severity, it's going to be a challenge for us to understand the program," said Steve Brown, vice president of Financial Planning and Analysis for MediCorp Health System in Fredericksburg, VA. The system's 400 staffed-bed Mary Washington Hospital is preparing for the MS-DRG system that Brown expects will be in place come October.

CMS predicts urban hospitals will do slightly better under the new system because they tend to treat more severely ill patients, while rural and specialty hospitals may expect lower reimbursement. Brown has worked with his state's hospital association to conduct some modeling under the new system. He anticipates Mary Washington will get lower reimbursement under the proposal. "But you just don't know until you get into it," he says. "It's an entire redistribution of the pot of money across all hospitals, so you got to get into the system for a while to see how you fare."

Providers I spoke with were also concerned about the impact of the ongoing RAND study. CMS asked the RAND Corporation to evaluate alternative systems that it might use to classify discharges into severity-adjusted DRGs. So providers are not sure how much, if any, of the CMS rule will remain intact based upon RAND's recommendations due later this year.

"With the RAND study going on, what you'll find is a new MS-DRG system in October, and quite possibly another system for October 2008 or sometime in the future," Brown said.

The rule also changes the way Medicare pays for hospital capital-related costs. According to CMS, the final rule does not finalize the proposal to provide a zero payment update for urban hospitals and instead provides a full update for all hospitals. But the final rule eliminates the large urban add-on payment, which pays for construction costs.

Expect your hospital's coding/HIM department to scramble to prepare staff and educate physicians about the system overhaul. With any luck, they won't have to do again next year.

Rick Johnson is a senior editor with HealthLeaders Media. He can be reached at

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