CMS forges ahead with new DRG system in IPPS final rule

Briefings on Coding Compliance Strategies, August 3, 2007
CMS yesterday finalized its plans to move ahead with a new Medicare Severity (MS) DRG system and a corresponding "documentation and coding adjustment", or phased-in payment cut, as detailed in the Inpatient Prospective Payment System (IPPS) final rule.

The changes occurred despite some protests from influential organizations and groups, including the House of Representatives, who on July 19 voted in favor of an amendment to prevent CMS from implementing the payment cut, and also to delay implementation of MS-DRGs for one year.

"I'm not surprised at all [with CMS' decision]," says James S. Kennedy, MD, director with FTI Healthcare in Brentwood, TN. "CMS did not have private industry opposition to this methodology, as opposed to the Consolidated-Severity DRG (CS-DRG) methodology it proposed last year."

You can read the rule at the CMS Web site. All changes take effect October 1.

In a press release released yesterday, CMS Acting Deputy Administrator Herb Kuhn stated that Medicare payments for inpatient services, "will be more accurate and better reflect the severity of the patient's condition."

CMS said it adopted MS-DRGs to prevent abuses under the current system. "Under the old DRG system (with payments based on broad averages) incentives could lead hospitals to "cherry pick"--the practice of treating only the healthiest and most profitable patients," CMS said.

However, the replacement of the current DRG (CMS-DRG) system--relatively stable since its 1983 inception--means that hospitals, and in particular HIM, coding, and quality improvement departments, have a lot of work to do in a short time frame.

"There's not a lot of time to prepare," says Shannon McCall, director of HIM/coding for HCPro, Inc., in Marblehead, MA. "This shouldn't necessarily change the way coders assign codes, but they will have to be more cognizant of capturing every complication/comorbidity (CC) and more specific diagnoses."

Good news/bad news with MS-DRGs
The rule creates 745 new severity-adjusted diagnosis-related groups, or MS-DRGs, to replace the current 538 DRGs. It also expands the familiar CC classification to include CCs and major CCs (MCCs), which are conditions that require double the additional resources of a normal CC.

The good news with the new MS-DRG system, Kennedy says, is that coders will still report ICD-9-CM codes using the same principal/secondary diagnosis and procedure coding conventions as before. Other changes are relatively minor.

"The base DRGs, for all practical purposes, remain the same, although they'll have different numbers and there's some consolidation," says Kennedy. "It also only takes one CC or one MCC to change a DRG." CMS also restored five CCs and four MCCs that were previously deleted, including acute blood loss anemia (285.1) and trifascicular block (426.54), among others. Coma (780.01) is now an MCC, for example.

"I do think on a more positive note, [MS-DRGs] will positively affect those hospitals that do have a more severe case mix index," says McCall. "But this could cause problems for physicians because it will require them to give coders even more specific information than they do now."

The bad news is that CMS is implementing a corresponding 4.8 percent payment cut over a three-year period, including a 1.2 percent reduction for FY 2008 and proposed 1.8 percent reductions for FYs 2009 and 2010. This reduction is to offset the improved documentation and coding (and therefore payment) CMS believes providers will adopt, based on past data. "Substantial evidence supports the conclusion that the adoption of new payment systems leads to an increase in aggregate payments without any corresponding growth in actual patient severity," CMS states.

In other bad news, Kennedy says that revisions to the CC/MCC table will result in fewer MS-DRGs reported with a CC: 41.1 percent of MS-DRGs providers report will be without a CC, whereas providers today only report 22.34 percent of CMS-DRGs without CCs. Of the remaining 58.8 percent that will be CC/MCCs under MS-DRGs, 22.2 percent will be MCCs and 36.6 percent will be CCs.

Rural hospitals are expected to lose 1.1 percent to 2.7 percent of their revenue (before the documentation and coding adjustment), whereas urban teaching and Disproportionate Share Hospitals (DSH) will see a 0.5 percent revenue increase as a result. "Not only will coding staff have to dig deeper and query more often to find a CC, they will have to go the extra mile to capture an appropriate MCC," says Kennedy.

Kennedy says that CMS did not correct some of its logic errors in CC/MCC designation, errors that will ultimately reward nonspecific physician documentation. For example, CMS classified Malnutrition, not otherwise specified as a CC, whereas mild/moderate malnutrition is not a CC. "It pays for hospitals to not be specific with malnutrition, which I think is wrong" he says. Also, CMS did not differentiate between sepsis and severe sepsis, as it classifies both as MCCs. CMS also will not allow decompensated congestive heart failure (428.0) as a CC or MCC.

Medicare will also only accept the first nine diagnoses and six procedures on hospital bills, not the first 25 diagnoses allowed in electronic billing, Kennedy adds, which makes sequencing crucial. "Do not assume that the increased number of diagnoses reported on the UB-04 will be considered by CMS for billing purposes and included in MedPAR [data]," he warns.

The bottom line is that hospitals that do not have a clinical documentation improvement program--one that engages medical and coding staff to cooperatively document and report illness severity using ICD-9-CM terminology--should strongly consider implementing one now, Kennedy says. "Given the 1.2 percent documentation and coding adjustment, and the complete revision of the CC/MCC structure, hospitals that don't implement such a clinical documentation program will be left behind," he says.

Other important changes
In addition to the MS-DRG change, CMS is also moving forward with the following changes to the IPPS in FY 2008:

Present on admission: Beginning October 1, 2008, CMS will not assign a higher paying DRG to patients who have/suffer from the following eight conditions, unless they are documented as present on admission:
  • Serious preventable event--Object left in surgery
  • Serious preventable event--Air embolism
  • Serious preventable event--Blood incompatibility
  • Catheter-associated urinary tract infections
  • Pressure ulcers (decubitus ulcers)
  • Vascular catheter-associated infection
  • Surgical site infection--Mediastinitis after coronary artery bypass graft (CABG) surgery
  • Falls

Quality measures: The rule also expands the list of quality measures hospitals must report to 27. Hospitals that report quality information will receive the full market basket update, while those that do not report this information will suffer a 2 percent market basket update reduction.

Zero/reduced cost devices: The rule reduces payment when hospitals use a recalled or replacement device at no cost or with partial credit. Currently, payment for these devices is included in the payment for the DRG, and Medicare pays the same for the second procedure even if the hospital acquires the device for free or at reduced cost.

Increased overall payment: CMS said that payments to all hospitals will increase by an estimated average of 3.5 percent for FY 2008 when all provisions of the rule are taken into account, primarily as a result of the 3.3 percent market basket increase. Payments to specific hospitals may increase more or less than this amount depending on the patients they serve.

Lowered outlier threshold: CMS reduced the outlier threshold to $22,650, down from $24,485 in FY 2007.

Continuing payment shift to costs instead of charges: Under the rule, hospitals will be paid in 2008 based on a blend of one-third charge-based weights and two-thirds hospital cost-based weights. In 2009, hospitals will be paid 100 percent based on cost-based DRG weights.

Brian Murphy is the editor of Briefings on Coding Compliance Strategies. He may be reached at This story first appeared as a breaking news update from the editors of Briefings on Coding Compliance Strategies, a monthly newsletter by HCPro Inc. For information on all of HCPro's products, visit




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