Policy: CMS Announces Payment Reforms for Inpatient Hospital Services

As promised, below are some notable changes to the inpatient hospital payment schedules announced by CMS today. For complete details, visit the official announcement on the CMS website.

The highlights (according to CMS):

• The revised payments will become effective for discharges on or after October 1, 2006.

JD: You've got 90 days to get ready...

• Medicare’s inpatient rates for operating expenses will increase by 3.4 percent in FY 2007 for those hospitals that report quality data to CMS. Overall, the final rule is estimated to increase payments to acute care hospitals by $3.4 billion.

JD: Note to all..."those hospitals that report quality data to CMS." We'll see what the final ruling is on the 18th, but I suspect there will be significant incentive to increase public reporting of quality data...a good thing.

• The changes will reduce incentives for hospitals to invest in certain service areas because payment rates significantly exceed costs.

JD: Hmmm...I think they mean profitable services will simply become less profitable. For the more idealistic non-profit purists out there...there will be less money available for free clinics and community education courtesy of highly profitable cardiac and neuro services.

• Specialty hospitals—hospitals that provide a limited range of services and typically are owned in whole or in significant part by physicians who serve as referral sources — may selectively provide such profitable services...but..as a result of the payment reforms implemented in 2006 and now for 2007, payments to cardiac specialty hospitals are expected to decline by over 5 percent between 2005 and 2007.

JD: This is big...CMS is going to start approving applications once again for specialty hospitals. Granted...they may get a bit less reimbursement...but will remain profitable ventures and attractive places to practice medicine. For all of you in non-CON (certificate of need) states...it's going to be a wild market over the next few years.

• While the payment reforms will significantly improve accuracy, their effects generally balance out at the hospital level for hospitals other than specialty hospitals.
• No hospital will experience an estimated decrease in payment for FY 2007 from the improvements to Medicare’s inpatient hospital system after including the update for inflation.
• While some diagnosis related groups (DRGs) have significant payment increases, no DRG has a FY 2007 payment reduction more than 5.4 percent.

JD: So...you shouldn't expect to see a decline in reimbursement unless you do a significant number of procedures in one of the DRGs being reduced 5.4%? Hope CMS lets us know (soon) which DRGs are being reduced...

• The payment reforms consist of two major parts which do not save money, but better align payment with the costs of care by increasing payments for some admissions and decreasing payments for others. The first part begins a transition to using estimated hospital costs, rather than list charges, to set payment. The reform will eliminate biases in the current system arising from the hospital practice of having list charges that disproportionately exceed costs for some services.

JD: The catch is always in the fine print...by making the above change, CMS effectively gets to continue lowering reimbursement as hospitals find new ways of generating a margin. A good solution in the short run...a disincentive for hospitals to keep reducing costs in the long run.

• The change will go into effect October 1, 2006 and will be phased in over a 3-year period.
• In addition, CMS is announcing steps to further evaluate hospital charging practices—particularly for expensive items like medical devices—as part of considering further improvements for 2008.
• More accurate accounting for the severity of a patient’s illness, which has a significant impact on costs of care. In 2007, CMS is beginning the process of moving to more complete severity adjustment by adding 20 new groups to the current DRG system.

JD: A good thing...the payment system will reimburse us for how sick the patient is...

• CMS is also implementing a significantly lower threshold for cost “outlier” status than had been proposed earlier this year. Consistent with the law, Medicare expects the additional payments for high cost cases will equal 5.1 percent of total inpatient payments.

JD: 5.1% of total inpatient payments above the threshold? Hope this doesn't incentivize some hospitals to discharge patients early...

• CMS is committed to ensuring that Medicare beneficiaries have rapid access to new technologies by providing for temporary add-on payments for appropriate technologies. In order to be eligible for additional reimbursement, a product must be:
  
  New – that is, less than two to three years old;
  Expensive – meeting a defined cost threshold in relation to the underlying DRG; and
  A substantial clinical improvement for the Medicare patient population.

JD: Can we define "additional reimbursement?" Some new devices are tens of thousands more than their generic, yet still effective, counterparts.

• CMS approved new technology add-on payments for an innovative new treatment for back pain in this final rule. The technology — the X STOP Interspinous Process Decompression System — relieves pain, numbness and weakness caused when nerves coming from the spinal cord become compressed. The device prevents the patient’s nerves from being compressed while preserving motion. It is the first technology to treat this condition that offers a minimally invasive alternative to conservative treatments (exercise, physical therapy and medication) and major back surgery.

JD: Is this a commercial? Props to St. Francis Medical Technologies for getting a shout out in the new CMS ruling...it's unfortunate not all device companies could have such affective marketing efforts.

• Additionally, CMS will continue to make add-on payments in FY 2007 for two technologies that were approved for new technology payments in FY 2006: Restore® Rechargeable Implantable Neurostimulator and GORE TAG.

JD: Wait...there's more? Looks like the neuro device industry hit one out of the park. It would be nice to see additional payments made to the health systems who make extra efforts to deliver vaccine and primary care to the underserved and underinsured.

• With respect to payments for Graduate Medical Education (GME), the rule finalizes the clarification to the CMS policy that only time spent in patient care activities may be counted for IME purposes in the hospital complex.

JD: This is too bad...a lot of good education occurs outside the "hospital complex."

• The final rule will appear in the August 18, 2006 Federal Register and will be effective for discharges on or after October 1, 2006.

JD: It's good to see CMS looking at new ways to innovate the payment system...we'll see what the next few months bear out.