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CMS moves toward full severity-adjusted DRG system

Hospitalist Leadership Connection, April 18, 2007

In its proposed rule updating the hospital inpatient prospective payment system (IPPS) for fiscal year 2008, the Centers for Medicare & Medicaid Services (CMS) proposed to adopt a severity-adjusted diagnosis related group (DRG) system called Medicare-Severity DRGs (MS-DRGs).

The April 13 proposed rule amends inpatient hospital reimbursement by

• revising the definition and payment hierarchy for secondary diagnoses and specifying whether these secondary conditions are major
• requiring hospitals to document all conditions that are present on admission and proposing financial penalties when certain conditions develop after admission
• expanding the reporting of hospital quality data from 21 to 27 metrics

CMS is proposing to create 745 new DRGs to replace the current 538. According to CMS, the reforms are measured steps to improve the accuracy of Medicare's payment for inpatient stays to better account for the severity of patients' conditions.

The proposal will increase payment for some cases while decreasing payment for others. Hospitals treating more severely ill and costlier patients will receive higher payments, while hospitals treating less severely ill patients will see a decline in reimbursement. 

The new system would not reduce the overall payment amount to hospitals but may adversely affect some hospitals if they treat patients who are less severely ill, says Kimberly Hoy, JD, CPC, director of Medicare and compliance for HCPro, Inc., in Glen Allen, VA. In particular, the rule reduces payment incentives for specialty hospitals that, according to CMS, may select to treat only the "healthiest and most profitable patients."  

However, some hospitals that see less acutely ill patients due to the more limited nature of their services (i.e., more severely ill patients are transferred) may also be caught in these reductions.  

To read the proposed rule, go to: www.cms.hhs.gov/AcuteInpatientPPS/downloads/CMS-1533-P.pdf 

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