CMS to Use DRG Classifications?

From a Modern Healthcare alert sent last night:

"The Medicare Payment Advisory Commission told the CMS that it should adopt the Medicare Severity Diagnosis-Related Groups payment system, or MS-DRG, as proposed, but recommended that the agency make some refinements to the proposed methods for estimating cost-based weights."

Some goals (according to MedPAC):
1. improve payment accuracy
2. reduce charge compression effects

Click here to see the actual letter. I encourage you to read the whole 21 pages of gooey governmental goodness.

In burea-speak, here are the meat-n-potatoes recommendations to whet your appetite:

"For fiscal year 2008, we recommend that you:

  • Adopt MS-DRGs, as proposed;
  • Make two refinements to your proposed methods for estimating cost-based weights for MS-DRGs:

1. As a short-term step to ameliorate the effects of charge compression on the weights, adopt the RTI-recommended methods for calculating national revenue center cost to charge ratios (CCRs), for drugs, supplies, radiology, emergency room, and blood products. This would increase the number of revenue centers—groups of hospital departments in which hospitals charge patients for services—from 13 to 19; (because we all like more revenue centers right?)


2. Standardize the Medicare charges and costs used in calculating national revenue center CCRs to adjust for differences in local wage levels and the extent of hospitals’ teaching activity and service to low-income patients. (curiouser and curiouser)...This change would be consistent with your use of national standardized charges by revenue center for each MS-DRG in the other half of the cost-weight calculation;

  • Terminate the transition to cost-based weights—adopting 100 percent cost-based weights, or adopt a two-year transition period for MS-DRGs that coincides with the remainder of the current transition period for implementing cost-based weights. These actions would help to balance the payment impacts of implementing severity refinements and cost-based weights; and,
  • Adopt an adjustment that is between -1.6 and -1.8 percent per year (for at least the two years following adoption of MS-DRGs) to the standardized amounts to offset the expected impact of improvements in documentation and reporting of diagnoses.
Further comments:

  • Our analyses show that substantial differences in relative profitability would remain, on average, for cases grouped in many MS-DRGs, even if payments were based on the refined cost-based weights described above.
  • Our findings also suggest that adopting cost-based, hospital-specific relative value (HSRV) weights would result in substantial further improvements in payment accuracy.
  • In addition, CMS needs to make a sustained effort to improve the quality and specificity of the information that hospitals submit on their annual cost reports. To meet this goal, CMS
    will have to change the cost reporting form and instructions, and step up efforts to inform providers and monitor the information they furnish.
  • An effective patient classification system—in the context of a payment system—should group together clinically similar cases that have similar costs.
  • The average absolute difference for MS-DRGs was 4.8 percent lower than the average absolute difference for the current DRGs. In other words, the MS-DRGs did a better job of grouping cases with similar costs into the same category. This was expected because the MS-DRGs break out high severity (and high cost) cases with major comorbidities or complications (MCCs) into separate DRGs.
  • Under the DRG system, only 23 percent of total payments fall in MS-DRG categories that have payment to cost ratios that are within 5 percent of the national average payment to cost ratio. In the case of proposed MS-DRGs, 55 percent of payments fall in MS-DRGs with payment to cost ratios that are within 5 percent of the national target. If CMS adopted the refined version of the cost-based weights, 58 percent of payments would meet the target for payment accuracy.
  • These longer-term improvements are needed to reduce the extent to which Medicare encourages community hospitals to allocate capital to profitable services, such as cardiology, and stimulates the formation of specialty hospitals that often focus on providing profitable services and tend to care for low-severity patients.
So what does all this mean for revenues (gulp)?

  • Now that CMS is proposing to adopt MS-DRGs in 2008, continuation of the transition
    period for cost-based weights would produce payment swings between 2008 and 2009. Many of the hospitals that benefit from cost-based weights (including small urban and rural hospitals) will see their payments decline under the MS-DRGs. Therefore, some hospitals that saw an increase in their DRG weights and payments in 2007 due to the phase-in of cost-based weights will see a decrease in their weights and payments in 2008, and then a slight increase in 2009 when cost weights are fully phased in. Conversely, many of the hospitals that saw a decrease in weights and payments due to the phase-in of cost-based weights will see their payments increase under MS-DRGs in 2008 and then decline again as the cost-weight transition ends in 2009.

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