CMS Proposes Major Reforms of Medicare Inpatient Hospital Payment System and Changes for Long-Term Care Hospital Payments
Publication Date: April 24, 2006
The Centers for Medicare & Medicaid Services (“CMS”) has proposed major reforms designed to improve the accuracy of Medicare payment rates for inpatient hospital services and respond to concerns that the existing system may create incentives for certain hospitals to “cherry-pick” more profitable cases. The proposal, included in the CMS proposed inpatient prospective payment system (“IPPS”) update for fiscal year (“FY”) 2007 (“Proposed Rule”), would redistribute payment among hospital services, generally increasing payment for medical services and decreasing payment for surgical services. While CMS stresses that the Proposed Rule would “significantly affect payments to specialty hospitals,” the rule could have a negative impact on Medicare reimbursement to acute care hospitals as well that focus on certain cardiac cases and, to a lesser degree, certain orthopedic cases.
Specifically, CMS is considering two reforms related to diagnosis related groups (“DRGs”): (1) basing the weights assigned to DRGs on hospital costs rather than charges, and (2) adjusting the DRGs for patient severity. CMS is considering phasing in these reforms separately, with implementation of the cost-based DRG weights in FY 2007 and the patient severity adjustments implemented in FY 2008, although CMS reserves the right to implement both components as soon as FY 2007. The sweeping proposal also would impact other aspects of inpatient payment policy, including establishing the market basket update, revising rates for hospitals exempt from the IPPS, updating the outlier payment policy, and discussing options for improving the transparency of hospital pricing and moving towards value-based purchasing, among many other policies. The Proposed Rule also includes payment changes for long-term care hospitals (“LTCHs”), including the annual update to long-term care diagnosis related group (“LTC-DRG”) relative weights.
CMS will accept comments on the Proposed Rule until June 12, 2006. The final Medicare IPPS rule is likely to be released by late July or early August 2006.
The following is an overview of the Proposed Rule, focusing on CMS’s DRG reform proposals. While this memo highlights other key provisions of the Proposed Rule, the advance copy of the rule is almost 1200 pages; a comprehensive summary is beyond the scope of this memo. We would be pleased to provide you with additional information on any aspect of the proposal or assist you in filing comments on the Proposed Rule.
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