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Payment Accuracy Provisions Take Effect in Fall

By John Reichard, CQ HealthBeat Editor

AUGUST 1, 2006 -- The Centers for Medicare and Medicaid Services (CMS) announced Tuesday that two types of changes to improve the accuracy of Medicare inpatient payments will be launched this fall—contrary to a request by the hospital and medical device industries.

CMS said it will phase in the changes, making payments more closely reflect the costs of care and severity of illness, to prevent sharp swings in payment. Hospital and medical device lobbies called for delaying the start of the accuracy provisions until fiscal 2008 and phasing them in after that time, a request joined by Senate Finance Committee Chairman Charles E. Grassley, R-Iowa.

Instead, CMS is heeding the wishes of House Ways and Means Committee Chairman Bill Thomas, R-Calif., and the Medicare Payment Advisory Commission by starting both changes in fiscal 2007.

But thanks to its phase-in plan, CMS appears to have blunted much of the industry criticism of the provisions. Rick Pollack, executive vice president of the American Hospital Association, praised the three-year phase-in of "cost weights" to adjust payments on the costs of care rather than what hospitals charge for care.

"While we continue to have concerns about the rule's impact, CMS has listened to the hospital fields' views and made important changes from its proposal," Pollack said. "While we continue to believe a one-year delay is needed given the rule's complexity, we are committed to working with CMS to ensure any needed changes are addressed in future years."

"At first blush . . . it appears that the rule addresses many of the concerns that were raised by patient, physician and hospital groups," said Stephen J. Ubl, chief executive officer of the Advanced Medical Technology Association, which lobbies for medical device firms. "We look forward to working with the administration and CMS over the three-year phase-in period to further improve the accuracy of inpatient hospital payments."

Under a proposed rule governing the changes, CMS would have fully implemented the cost weights in fiscal 2007, which starts October 1. "Severity adjustments" classifying patients on the severity of their illnesses, paying more for sicker ones and less for healthy ones, were to be implemented in fiscal 2008.

The new timetable speeds up "severity adjustment" by starting it this fall, but only for a limited number of "DRGs," the diagnosis-based payment categories to which patients are assigned for purposes of calculating Medicare inpatient payment rates. The proposed rule would have applied severity adjustment to all DRGs in fiscal 2008. CMS Administrator Mark B. McClellan said it's still possible all DRGs will be severity adjusted in fiscal 2008, but told reporters Tuesday afternoon CMS will consider delaying severity adjustment of some DRGs until after fiscal 2008 under an as-yet-undetermined timetable.

Prior to fiscal 2008, CMS will evaluate severity adjustment systems as a prelude to increasing the number of DRGs affected. "CMS will require that hospital stakeholders have easy access to the new system," the agency said in a press release. An interim report comparing severity-adjusted DRG systems will be completed by the end of 2006 and will be released for public comment.

The accuracy provisions seek to end the ability of hospitals to limit their care to certain patients and to certain procedures as a way to boost their profits. "Hospital payments should promote the best care for all patients, not the treatments that happen to be most profitable, and we are now on a path to making sure that happens," said Department of Health and Human Services Secretary Michael O. Leavitt. Because of the rate adjustments, payments to cardiac specialty hospitals will drop 5 percent between fiscal 2006 and fiscal 2009, CMS said. Complaints about "cherry picking" patients and procedures have centered on these facilities.

The accuracy provisions are part of the final fiscal 2007 rule for Medicare inpatient payments, under which payments to all hospitals will increase an average of 3.5 percent in fiscal 2007 when all provisions of the rule are taken into account. No individual DRG will have a payment reduction of more than 5.4 percent under the rule.

CMS also announced a final rule governing payments to inpatient rehabilitation facilities in the fiscal year starting Oct. 1. Payments to the 1,240 facilities will rise by about $50 million in fiscal 2007, the agency estimated. Although the rule increases payment rates 3.3 percent, it also applies a 2.6 percent reduction to offset billing practices that do not accurately reflect how sick patients are, CMS said. The proposed version of the rule would have applied a 2.9 percent offset.

The final rule for the facilities also includes accreditation requirements that must be met by suppliers of prosthetics and of durable medical equipment, such as walkers, wheelchairs, and hospitals beds. Along with a competitive bidding program to be announced "shortly," the accreditation procedures "will promote quality and avoid unnecessary costs in providing needed durable medical equipment," McClellan said.

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