Clinical Business Strategies

Supply-intensive admissions face payment cuts from Medicare
 

by Eileen McGinnity

The Centers for Medicare and Medicaid Services (CMS) in April 2006 proposed major changes to the inpatient prospective payments system (IPPS) – the way in which hospitals are reimbursed by the federal government for Medicare admissions. Overall, the stated goal is to move towards a system in which Medicare reimbursement is based on hospital costs rather than charges.

The comment period on the proposed changes closed in mid-June. A final ruling is anticipated this month. If adopted, the first wave of changes would be implemented in October 2006. These include adjustments to case weights and corresponding changes to reimbursements. A second wave of change would take effect October 2007 and include expansion of the current 526 DRGs to more than 800 severity-adjusted DRGs.

"Winners" and "Losers"

By any measure, the proposed changes, if adopted, would constitute what might be viewed as the most significant reform of the Medicare payment system since the inception of IPPS. The plan is designed to be budget-neutral, that is, result in no undue increase in the Medicare IPPS budget.

To achieve budget neutrality, the reforms propose to redistribute finite Medicare payments among patient populations. The government’s overall expenditures would remain the same, but the method of allocation would change – in some cases, radically. Some describe it as a "rob Peter to pay Paul" scenario.

In this new allocation of finite funds, certain patient case types "win" additional reimbursement. Others "lose" ground compared with their existing reimbursement. As a general rule of thumb, the proposed rule changes tend to redistribute payments away from procedure-based, supply-intensive patient populations, and reallocate those funds to less supply-intensive, medically-managed patient populations. In the cardiovascular world, for example, congestive heart failure admissions garner greater reimbursement, and coronary stents lose ground.

This could be welcome news to hospitals that derive the bulk of their admissions from medically managed cases such as congestive heart failure and chronic respiratory disease patients like COPD. This typically includes rural hospitals that treat chronically ill patients, but send many or most of their complex surgical patients to referral centers for treatment. They stand to gain under the new system if it is adopted as proposed. (Assuming they master the severity coding and can create the data that will be key to success under the new payment plan.)

A 3 percent increase in payment for DRG 127 Congestive Heart Failure may not sound like a big gain. But this tends to be a relatively high-volume DRG for most hospitals. Although the per-patient reimbursement increase is modest, the overall impact to the hospital can be quite positive. This and other high-volume "winners" are shown on the table below:

Conversely, procedure-intensive hospitals – big heart or orthopedic centers within general acute care hospitals, as well as specialty hospitals – stand to lose the most ground. In fact, there is speculation that the proposed rule changes are in part a reaction to specialty hospitals that have greater latitude to choose to admit historically higher-reimbursed surgical, interventional or diagnostic cases. The impact on procedure-intensive clinical programs could be pronounced, as the following table indicates:

One view is that this approach allows Medicare to sidestep the issues of supply cost – especially physician preference item (PPI) cost. Rather than putting the purchasing clout of Medicare to work to address skyrocketing implant costs with the medical device industry – which derives untold revenue from patient care paid for by the federal government – CMS seems merely to intensify pressure on hospitals. It is up to each hospital to negotiate with its vendors to achieve affordable pricing for high-end implants under increasingly restrictive payments.

Evaluating the impact of proposed changes

Will the proposed changes be adopted? Perhaps not wholesale, perhaps not immediately; we’ll know shortly. But major revamping of IPPS is not a new idea. Redesign ideas have been on the drawing board for some time. A shift in reimbursement is probably inevitable. This is not a new topic or goal, only the most concrete proposal to date.

It is fairly easy to sketch out the relative impact of the proposed rule changes on your facility. Your finance department can provide you with a list of your hospital’s highest-volume Medicare DRGs. You don’t need to analyze all 526. Taking a look at the top 50-65 – just 10 percent or so – gets you into the ballpark.

You can then factor into this list the national average percentage payment reduction proposed for your top DRGs. This information is available in the Federal Register or from companies such as Aspen Healthcare Metrics or MedAssets Inc. The picture that emerges will probably be compelling enough for your CFO to request a full analysis from finance. The call to action will then be to develop the plan of what your hospital can do to optimize your "winners" and mitigate the impact of the "losers" on the bottom line. HPN

Eileen McGinnity is president of Aspen Healthcare Metrics, Englewood, CO. Aspen is a subsidiary of MedAssets Inc. Visit Aspen Healthcare Metrics’ Web site at www.aspenhealthcare.com.