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CMS Seeks to Cut Nearly $1 Billion in MS-DRG Payments in 2010

June 22, 2009
Modern Healthcare -------------------------------------------------------------------------------- Article published May 11, 2009 Sins of the father Remembering the ’80s, the CMS seeks to cut nearly $1 billion in MS-DRG payments in 2010 citing ‘upcoding’ as impetus By Jennifer Lubell Posted: May 11, 2009 - 5:59 am EDT The scenario seems all too familiar. Medicare implements a new payment system designed to level the playing field among hospitals and reflect more accurate payments to inpatient claims. The hospital industry wrings its hands and claims it will lose money under that new system. Then, evidence of “upcoding” appears, payments increase and the federal government responds by taking measures to rein in those overpayments. One-two punch, one-two punch … In this latest rulemaking issued by the CMS, it appears that all of the players are once again poised to don their boxing gloves and cry foul, echoing earlier battles of yore from the early 1980s over new payment systems and reimbursement disputes. The agency recently released its proposed fiscal 2010 inpatient prospective payment rule for hospitals, which outlines a series of payment decreases that the industry believes could lead to losses totaling more than $20 billion over the next decade. The CMS claims these reductions were necessary to counter new coding trends identified in a review of claims paid to hospitals under the new Medicare severity-adjusted DRGs, or MS-DRGs, in 2008, the system’s first year of implementation. Basically, the agency determined that hospitals got paid too much in fiscal 2008—approximately $2.2 billion—and are expected to be overpaid again in fiscal 2009. The proposed rule therefore includes a 1.9% decrease to inpatient prospective payments for fiscal 2010, and then 6.6% in additional cuts by 2012, to recapture these excess payments. Hospitals, however, claim the agency’s proposed cuts are unjustified—that these payment increases are a result of the industry’s ability to code more accurately under the MS-DRGs—than any attempts to game the system. The effect of this 1.9% decrease to the marketbasket alone will result in a $22 billion loss to the hospital industry over the next decade, the American Hospital Association has projected. “And that doesn’t even take into account reductions the CMS has planned for future years,” said Don May, vice president for policy with the AHA. Overall, Medicare payments to hospitals this coming fiscal year are projected to be $117.4 billion. The industry, however, will be experiencing a net reduction of 0.5% or $586 million to hospital payments in fiscal 2010, factoring in a 2.1% inflationary update, numerous other coding adjustments proposed in the rule, and the 1.9% offset. Add to that an estimated decrease in capital payments that will result from the rulemaking, acute-care hospitals in total stand to lose $979 million next fiscal year. Individual hospitals expect to get hit hard by the 2010 rulemaking. Exempla St. Joseph Hospital in Denver may lose “perhaps $20 million over 10 years,” said Robert Minkin, the 436-bed hospital’s president and CEO. “To penalize hospitals for complying effectively is the wrong policy in my mind.” Many third-party sources believe that hospitals haven’t necessarily done anything wrong under this newest wave of payment and coding changes. If anything, the CMS’ latest decisions in its rulemaking acknowledge the fact that coding practices among hospitals have shifted under the new MS-DRGs, said William Shoemaker, vice president, business services with the American Hospital Directory, an industry data provider in Louisville, Ky. In looking at 2008 claims data, the CMS found in its analysis that the case mix index was higher for hospitals than the agency anticipated. “They don’t believe people were sicker; they believe that coding practices changed, that more patients were being coded into newly added complication categories” under the new MS-DRGs, Shoemaker said. The original plan MS-DRGs were designed to identify the severity of a patient’s condition, and pay hospitals accordingly. The goal was to pay hospitals more for treating sicker patients and less for patients with less severe conditions. Yet, the agency in its analysis of the 2008 data discovered that no meaningful rise in patient acuity had accompanied the rise in payments. “This is another way of saying that coding improvement rather than a real change in case mix caused the increase in payments,” said Barbara Wynn, senior health policy researcher with the RAND Corp., Santa Monica, Calif., which has evaluated various severity-adjusted DRG classification systems for the CMS. The agency, however, has made it clear that it’s not going to pay hospitals for coding creep, Larry Oday, a healthcare lawyer with Vinson & Elkins law firm in Washington, said. “Hospitals may be coding more precisely but that doesn’t mean the nature of the patient has changed,” Oday said. “The CMS is saying, ‘We’re not going to pay you more just because you’ve learned to code better. We’ll do that when you have a more acutely sick patient population.’ ” And that’s been the federal government’s consistent position since the prospective payment system came out 26 years ago, Oday said. Coding creep did in fact take place when the hospital payment system moved to a prospective payment system in 1983—and it’s happening again, Oday said. The intricate dance between the federal government and hospital industry to control costs has been a cyclical phenomenon for decades, starting in the 1970s, when President Jimmy Carter threatened tough cost-containment regulation, and again in the early 1980s, when hospital reimbursements switched from a cost-based system to a prospective payment system. The idea behind prospective payment was that Medicare could save money and improve efficiency of hospitals by paying set rates based on DRGs. Instead, hospitals learned how to “game” the system by upcoding and billing Medicare for multiple DRGs for a single incident of patient care, experts have said. When the federal government caught on, it cracked down on such practices. Some experts believe that upcoding may be more risky than it used to be. DRG creep did exist in the 1980s and afterward, “and perhaps some of it may reappear as providers are testing the limits of the new system,” said Uwe Reinhardt, professor of economics and public affairs with Princeton University. That said, “I think what has changed since the 1980s and 1990s is most hospitals now have vice presidents of compliance, board subcommittees of compliance and the threat of whistle-blowers,” Reinhardt said, making the risk to upcode considerably higher. Yet it does seem that history is repeating itself, as the CMS in its latest rulemaking makes new adjustments to account for payment fluctuations that have resulted from implementing the MS-DRGs that were first unveiled in the proposed hospital inpatient prospective payment rule in April 2007 and went into effect on Oct. 1 of that year. The new system, which pays hospitals for inpatient procedures based on the severity of a patient’s condition, is far more complex than its predecessor, replacing 538 DRGs with 745 new ones. Hospitals have always been wary of such system changes, but the CMS sparked the ire of providers even more when it announced several years ago that it would be establishing a so-called “behavioral offset,” based on a presumption that hospitals would upcode as a result of MS-DRG implementation. When Congress stepped in The agency had initially established a 1.8% reduction in fiscal 2010, along with a 1.2% reduction to IPPS reimbursement in 2008, and 1.8% in 2009, although Congress later stepped in, halving those offset numbers for 2008 and 2009 (Oct. 1, 2007, p. 12). “Congress had told CMS, ‘You can only take half of that adjustment, but you can look back in a few years and see if you were right,’ ” once the agency had actual claims data to back up its theory. “And it turns out they were,” Oday said. Not only was the CMS correct that upcoding would take place, but also it underestimated the amount of coding creep, he added. In analyzing 2008 claims data from the new MS-DRG system, the CMS estimates that the coding creep adjustments in fiscal 2008 and fiscal 2009 should have been much higher, at 2.5% and 2.3%, respectively, according to an analysis of the proposed rule by Deutsche Bank. Medicare’s actuary estimated that an overall offset of 8.5% would be needed to adjust for these changes in coding practices. This led to the 1.9% offset for fiscal 2010, and then an additional 6.6% reduction through 2012. “We understand hospitals will be concerned about lower-than-historical update amounts” said Charlene Frizzera, CMS’ acting administrator, in a written statement. “However, we are proposing an adjustment that minimizes the effects on fiscal year 2010 payments” while striving to maintain budget neutrality, which may mean larger reductions in the next two years, Frizzera said. It would certainly have been better if Congress had allowed the CMS to go forward with its original proposed changes, but “the hospital industry lobbied for the more conservative offsets in the belief that the amount of coding improvement would be less than what the CMS actuary had estimated,” Wynn said. Hospitals sources claim they’re getting penalized unfairly and that the higher payments aren’t the result of upcoding, but the attempt to code more accurately under a more complex system. The American Hospital Association is disappointed in the CMS’ decision to issue these future payment decreases, because “this is not a time when hospitals can absorb these types of reductions,” the AHA’s May said. “It’s not that hospitals are upcoding, they are coding precisely. According to the CMS, in theory this could change payments inappropriately,” May said. Patients are in fact getting sicker every year, and hospitals are taking on more severe cases. This is due in part to the aging of the population, and that technology is making it possible to do surgical treatments on older patients, “and that all affects the severity of patients you’re treating,” May said, countering assessments that the patient mix hasn’t changed. Another factor that led to the increase in hospital payments in 2008 is the fact that less complex patients are being treated in the outpatient setting, May said. “Easy surgeries have gone to the ambulatory surgery centers. Those left in the hospital are the sicker, more complex patients.” In Minkin’s view, the CMS’ agenda to reduce “one-day stays,” where patients stay in the hospital less than 24 hours, has in part led to a smaller but more acute inpatient population for the hospitals to take care of. “This has led to the acuity creep that the CMS is now trying to adjust for,” Minkin said. Given that so many factors could drive up the severity of patients and case mix in hospitals, the AHA plans to do its own analysis of the 2008 claims data, “and look at what we believe are the changes to the new payment system. We always duplicate CMS’ work and we work with CMS when we find discrepancies,” said May, who added that the AHA would submit its analysis as part of the proposed rule’s comment period, which ends June 30. Michael Klett, director of reimbursement for not-for-profit Beaumont Hospitals, a system of three hospitals in southeast Michigan, remains hopeful that these cuts ultimately won’t go through. “The amounts do not seem realistic with what little information we have to act on today, nor does this seem fair to an industry that has been frequently targeted by the government as an area to cut its spending. This is extremely unsettling when you consider the safety net role hospitals provide to the communities they serve coupled with the alarming trends in hospital uncompensated care.” The hope is additional funding dollars from the American Recovery and Reinvestment Act of 2009 might counter these future reductions “and make this issue go away,” Klett said. What do you think? Write us with your comments. Via e-mail, it’s mhletters@crain.com; by fax, 312-280-3183. Related Articles Under the gun June 22, 2009 Promises and threats June 08, 2009 Manning the battle stations May 18, 2009 You’re not in Kansas anymore May 04, 2009 Fee-for-service punching bag April 13, 2009 More Related Articles >> -------------------------------------------------------------------------------- Modern Healthcare is the industry's most trusted, credible and relied-upon news source. In print and online, Modern Healthcare examines the most pressing healthcare issues and provides executives with the information they need to make the most informed business decisions and lead their organizations to success. It's for this reason Modern Healthcare is deemed a "must-read publication" by the who's who in healthcare. For more healthcare business news, visit http://www.ModernHealthcare.com.