IPPS final rule: DRG payment reform and quality incentives

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The Centers for Medicare & Medicaid Services (CMS) issued a final inpatient prospective payment system (IPPS) rule yesterday that is designed to improve the accuracy of Medicare’s reimbursement to acute care hospitals, while providing additional incentives for hospitals to engage in quality improvement efforts.

“The IPPS payment reforms we are making today finalize the changes we proposed in April and build upon three years of consistent, incremental improvements to Medicare inpatient hospital payments,” said CMS Acting Deputy Administrator Herb Kuhn. “With these changes – first proposed by the Medicare Payment Advisory Commission in 2005 – Medicare payments for inpatient services will be more accurate and better reflect the severity of the patient’s condition.”

Kuhn said that this rule, combined with new payment system rules for inpatient rehabilitation facilities and skilled nursing facilities, demonstrates CMS’ commitment to ensure the future of the Medicare program.

The IPPS payment reforms would restructure the inpatient diagnosis-related groups (DRGs) to account more fully for the severity of each patient’s condition. In addition, the rule includes important provisions to ensure that Medicare no longer pays for the additional costs of certain preventable conditions (including certain infections) acquired in the hospital. The rule also expands the list of publicly reported quality measures and reduces Medicare’s payment when a hospital replaces a device that is supplied to the hospital at no or reduced cost.

Payments to all hospitals will increase by an estimated average of 3.5 percent for FY 2008 when all provisions of the rule are taken into account, primarily as a result of the 3.3 percent market basket increase. Payments to specific hospitals may increase more or less than this amount depending on the patients they serve. For instance, urban hospitals generally treat more severely ill patients and are estimated to receive a 3.8 percent increase in payments. Overall, hospital payments will increase by almost $4 billion.

In the previous two years, Medicare made important, incremental changes while it studied comprehensive reform of the inpatient hospital payment system. This year, the rule creates 745 new severity-adjusted diagnosis-related groups (Medicare Severity DRGs or MS-DRGs) to replace the current 538 DRGs. Projected aggregate spending will not change as a result of the reforms. However, payments will increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely ill.

The final rule adds new quality measures that hospitals would need to report in calendar year (CY) 2008 in order to qualify for the full market basket update in FY 2009. CMS will measure 30-day mortality for Medicare patients with pneumonia and plans to adopt two measures relating to surgical care improvement in the CY 2008 outpatient prospective payment system final rule. In addition, CMS will finalize two additional surgical care improvement measures by program notice after they receive NQF endorsement. The provision of the law specifies that Medicare payments for inpatient hospital services be adjusted if hospitals fail to report this quality information. Hospitals that report quality information will receive the full market basket update. For those that do not report, the market basket update will be reduced by 2.0 percentage points.