CMS proposes MS-DRGs, a transparent severity methodology for FY2008 IPPS

On Friday, April 13, the Centers for Medicare and Medicaid Services (CMS) issued the long-awaited FY 2008 inpatient prospective payment system (IPPS) proposed rule. This proposed rule contains a number of significant changes including the introduction of a new set of Diagnosis-Related Groups called Medicare Severity DRGs or MS-DRGs. The proposed MS-DRGs are self-developed by CMS and are very different from the Consolidated Severity-Adjusted DRGs proposed last year. MS-DRGs are not proprietary and use the current CMS DRGs as a starting point.

The 745 proposed MS-DRGs should be thought of as a complete replacement of the current 538 CMS DRGs. While the MS-DRGs are based upon the current CMS DRGs and retain most of the refinements and improvements made to the base CMS DRGs over the years, the underlying structure and numbering of the DRGs has changed. CMS re-examined each of the base DRGs making numerous changes and consolidations. For example, all pediatric splits have been eliminated, as well as current complication or co-morbidity (CC) splits and other diagnosis-driven complexity splits. Finally, a number of clinical areas with low volume are consolidated. The MS-DRGs recognize a set of 335 base DRGs, which may then be further refined by CC and major CC. In order to create groups with sufficient volume, not all base DRGs are refined or refined by both CC and major CC. In summary (and excluding the 24 newborn, maternity and error DRGs), 53 base DRGs are not refined further; 152 base DRGs are split by both CC and major CC; 63 base DRGs are split into two subgroups of (1) major CC/CC combined and (2) non-CC; and 43 base DRGs are split into two groups of (1) major CC and (2) CC/non-CC combined.

In developing the MS-DRGs, the current CC list was completely re-evaluated and all codes were assigned to a non-CC, CC or major CC status. In addition, several diagnoses that were closely associated with patient mortality were treated differently, depending on whether the patient expired. Conditions which should not be treated as CCs for specific clinical conditions were eliminated through changes to the CC exclusion list.

According to CMS, the MS-DRGs represent a substantial improvement in the recognition of severity of illness and resource consumption. CMS is asking the RAND Corporation to validate this by further analyzing the MS-DRGs along the same dimensions that other commercially-available severity systems were recently evaluated.

As a result of industry concerns, the MS-DRGs are not proprietary, are transparent and will be available on the same terms as the current CMS DRGs through the National Technical Information Service.

Medicare's inpatient rates for operating expenses are proposed to increase by 3.3% in FY 2008 for those hospitals that report quality data to CMS. However, CMS is proposing to reduce rates by 2.4% in FY 2008 and 2.4% in FY 2009 to adjust for anticipating coding improvements by hospitals. The net effect is a proposed 0.96% increase in operating rates, effective October 1, 2007. Overall, the proposed rule is estimated to increase hospital payments by $3.3 billion. It is expected, however, that the MS-DRGs will result in a redistribution of hospital payments, increasing payments to hospitals that serve more severely ill patients and decreasing payment to hospitals whose patients are less severely ill.

The proposed rule would continue to phase in the DRG "weight" changes introduced in FY 2007. Under the proposed rule, in FY 2008 hospitals would be paid based on a blend of one-third charge-based weights and two-thirds cost-based weights for the DRGs. In 2009, hospitals would be paid based on 100 percent cost-based DRG weights.

The proposed rule will be published in the Federal Register on May 3, 2007. Comments on the proposed rule will be accepted until June 12, 2007 and a final rule, to be effective for discharges on or after October 1, 2007, will be published later in the summer.