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CMS Proposes 3.4 Percent Payment Increase for Acute Care Hospitals

APRIL 13, 2006 -- Late Wednesday the Centers for Medicare and Medicaid Services proposed a 3.4 percent payment increase in fiscal 2007 for inpatient services at acute care hospitals, with more than 1,000 hospitals in rural areas seeing an average increase of 6.7 percent.

The proposed rule—which would be fully implemented by fiscal 2008—would also base the weights assigned to diagnosis related groups (DRGs) on hospital costs rather than charges. The DRGs also would be adjusted for patient severity, CMS officials said in a news release.

The estimated market basket increase of 3.4 percent in fiscal 2007 would increase payments to acute care hospitals by $3.3 billion.

"We are taking important steps to make payments fairer to hospitals and to assure beneficiary access to services in the most appropriate setting," CMS Administrator Mark B. McClellan said in a statement. "We look forward to comprehensive feedback from hospitals, suppliers, and other stakeholders that will help to refine and improve the final version of this rule."

CMS said the proposed rule would be the start of the first significant revision of the Inpatient Prospective Payment System (IPPS) since its implementation in 1983.

CMS said the proposed changes reflect recommendations from the Medicare Payment Advisory Commission (MedPAC) and respond to some lawmakers' concerns that the current system creates incentives for certain hospital to "cherry-pick" more profitable cases. The changes also would significantly affect payment to specialty hospitals, whose growth has been slowed by statute or regulations since passage of the Medicare drug law in 2003.

CMS is considering a two-step process for changing the current DRG system. The first step, set out in the proposed rule, would assign weights to DRGs based on hospital costs rather than hospital charges. That would "eliminate biases in the current DRG system arising from the differential markup hospitals assign for ancillary services among the DRGs," according to CMS. The new DRG weights would go into effect Oct. 1.

The second step, currently scheduled for fiscal 2008, would replace the current system of 526 DRGs with either the proposed 861 consolidate severity-adjusted DRGs or an alternative security adjusted DRG system developed in response to public comments CMS is soliciting on the issue. CMS is also considering ways of improving how the current DRG system recognizes the severity of cases by fiscal 2007.

When both steps are fully implemented, CMS said, hospitals can expect to be more accurately paid for their services.

CMS is also proposing to increase the "outlier threshold" for fiscal 2007 to $25,530, up from $23,600 in 2006. The proposed increase, CMS said, is based on data that suggest "a consistent pattern of inflation in hospital charges which affect hospital cost-to-charge ratios used in determining eligibility for outlier payment." The proposed fiscal 2007 threshold is expected to keep aggregate hospital outlier payments within the target of 5.1 percent of total payments under the IPPS.

Hospitals receive an additional payment—called an outlier payment—if the estimated costs of an individual case exceed the Medicare payment rate by a threshold amount that is set by Medicare regulations.

The proposed rule will be published in the April 25 Federal Register. Comments on the proposed rule will be accepted until June 12 and a final rule will be published later this year, CMS said.

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