Severity-Adjusted Reimbursement: Is the Roller Coaster Ride Nearing its End or Are More Twists and Turns Around the Corner?

The Medicare regulatory landscape may feel a bit like a roller coaster ride to those following the introduction of severity-adjusted reimbursement. The past 18 months or more have been a series of hills, valleys and unexpected turns.

These include shifting implementation dates, a switch in the case-mix software to drive the system, various independent evaluations of the regulations, and even a House vote to postpone implementation. With the new regulations nearing their final stage of development, many within the industry are not sure if the ride is nearing its end, or if they should tighten their seat belts for another series of twists and turns.

This month, the Centers for Medicare & Medicaid Services (CMS) published its Final Rule detailing its changes to the Inpatient Prospective Payment System (IPPS) for FY 2008. With these changes comes the deployment of Medicare Severity DRGs (MS-DRGs), which base inpatient reimbursement on the severity of a patient’s condition. Although the Final Rule is still subject to change based on feedback that CMS receives during the public comment period, payers and hospitals alike need to prepare for the coming of MS-DRGs.

“Ingenix has an unusual perspective on the roll-out of MS-DRGs, since a fair number of people at Ingenix have been involved with the prospective payment system since the advent of DRGs,” said Dean Farley, Ingenix senior vice president. “Based on our decades of work with the DRGs and alternative systems, Ingenix believes that there has long been a need for a severity adjustment mechanism in the DRGs to facilitate more accurate payment under IPPS.”

With the move to MS-DRGs, Medicare is expecting hospital payments to increase by approximately $4 billion, as hospitals pay more attention to coding according to a patients’ severity of illness. Medicare wants MS-DRGs to be revenue neutral, so to offset the expected hospital coding improvements, Medicare is cutting their base rate by 4.8 percent over three years. That puts the pressure on hospitals to make sure they are ready for severity adjustment.

“The Final Rule’s effective date of October 1 gives the industry only a brief time to prepare for the changes, yet many people still have questions about the details within the regulations,” Farley said. “To help provide answers, Ingenix has hosted a series of Webinars with presentations developed by Ingenix experts, such as Claire Kapilow and Douglas Kundel. These Webinars are interactive forums where people from within the industry can get answers to their questions.”

Claire Kapilow, MSM, is the director of regulatory affairs for Ingenix, and Doug Kundel is the director of consulting services for Ingenix. What follows are the answers that Kapilow and Kundel provided to selected questions asked during the Webinars:

Q: What is the biggest concern you see right now?
A: This answer will be different for every hospital and payer. Certainly there are major financial and operational concerns. Money will be substantially redistributed under the new system, and every hospital and payer will see financial impact. In particular, smaller rural hospitals may be on the losing end. Operationally, hospital HIM departments will be under great pressure to adjust their coding practices based on the new DRGs, and must also add present on admission coding. Payers have to analyze all their DRG-based contracts and consider not only MS DRGs but also commercial variations. 

Q: Recently the House passed a bill that contained language which would postpone MS-DRG implementation. What are your thoughts on it passing the Senate and being signed by the President?
A: The Congressional action happened before publication of the Final Rule, which softened some of the most problematic proposals from the industry’s perspective. At this point, anything can happen, but it’s best to be prepared for MS-DRGs because their implementation according to the Final Rule is the most-likely scenario.

Q: What payers, besides Medicare, are ready now to implement this new system?
A: Any payer that is obligated by law or contract to use the current Medicare grouper will need to adopt MS-DRGs on October 1. However, many payers just began to analyze the final details of the new system within the last few weeks. At Ingenix, we have contacted many of the state Medicaid programs, as well as the Department of Defense, to find out their plans. Most say they will be evaluating MS-DRGs, but none is planning an Oct. 1, 2007 implementation. Many of our commercial payer customers are beginning their analyses, and several vendors, including Ingenix, are already working to adapt MS-DRGs for the commercial population. So, although few non-Medicare payers will be adopting MS-DRGs this October unless they have to, most will be analyzing their contracts and their severity-DRG options in the coming months.

Q: We implemented documentation improvement for physicians five years ago. Do they need to relearn everything under MS-DRGs?
A: Not really. The concept of thoroughly documenting patient conditions and services is not changing, nor is the process of making sure that certain secondary conditions are thoroughly documented and coded. Medicare is changing the DRG classifications. These classifications are based on what is in the patient chart, and what is transcribed from the chart onto the claim. Physicians will need education on which conditions need improved documentation, since this list is changing substantially. Ideally, this list would be targeted for each physician’s specific caseload.

Q: When do hospitals need to begin present on admission (POA) reporting?
A: Hospitals may begin reporting the new POA indicators this October, but CMS will not begin editing these fields until January, and will not withhold payment based on these edits until April of 2008. Beginning in April of next year, CMS will return for correction any claim that does not have valid and accurate POA reporting.

Q: How will claims be affected if a secondary commercial payer does not follow the MS-DRGs and Medicare is the primary payer?
A: Many secondary payers do not follow Medicare’s current DRG payment rules, and many will not implement the new MS-DRGs. Deductible, coinsurance and Medicare coverage rules are not changing due to MS DRGs, nor is the basic structure of case-based reimbursement. The dollars will change, but the underlying mechanism of secondary payer crossovers should not fundamentally change.

Q: If the secondary payer wants the old DRG system and Medicare wants the new system, do we need multiple groupers?
A: Yes, you most definitely will need to use multiple groupers. Although many state Medicaid programs and commercial payers will be evaluating the MS DRGs for implementation, most will not be switching as of Oct. 1. Therefore, you will need the MS DRGs for Medicare as well as non-severity DRGs, probably several versions, for all your other DRG-based payers and contracts.

Q: Does the Final Rule have a public comment period?
A: Yes, Yes, although only for a few provisions of the Final Rule. The public comment period is open until Nov. 20, 2007. However, only comments about “Changes to the IPPS for Capital Related Costs” will be considered. Comments can be submitted electronically by going to www.cms.hhs.gov/eRulemaking and instructions for submitting written comments can be obtained on the CMS Web site www.cms.gov.

To learn more about Medicare’s move to severity-adjusted DRGs, visit the S-DRG Report blog, or click here to get information about upcoming Ingenix MS-DRG Readiness Webinars.

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