1. Medicare Inpatient Hospital Payment: What Changes Can Your Hospital Expect?

2. Claudia Sanders Sr. Vice President Policy Development WSHA Presenters Caroline Steinberg Vice President Trends Analysis AHA Will Callicoat Director Financial Policy WSHA

3. Topics Why are Hospitals Concerned? Background Severity Adjustment Systems Overall Impact Policy Options Impact on Washington Hospitals Questions

4. Why Are Hospitals Concerned?

5. Medicare as major payer Specialty hospitals and proper payment –Prevent cream skimming –Appropriate payment by service Predictability for future decisions Transitions

6. Many Changes In Proposed Rule Operating payment update Wage index New DRG system Cuts for Behavioral Offset Continuation of transition to cost based weights Capital cuts Quality requirements

7. Background

8. MedPAC Report to Congress Opportunity for patient selection –Some services pay better than others –Current system doesn’t adequately adjust for severity of illness  Strong evidence physician-owned limited-service hospitals benefit  “Improving payment accuracy” will make competition more equitable

9. MedPAC Recommendations Use hospital specific relative values to set DRG weights Use All Patient Refined DRGs (APR- DRGs) Base DRG weights on costs Use DRG specific outlier offsets to fund outlier pool

10. Last Year’s Proposed Rule New DRG Weights (FY 2007) –Cost-based weights vs. charge-based weights New DRG Classifications (FY 2008 or earlier) –Consolidate severity-adjusted DRGs –Refine DRG weights based on severity of illness

11. Last Year’s Final Rule New DRG weights (FY 2007) –Used cost-based weights –Altered methodology –Fixed mathematical errors –Three year transition Modest changes in DRG classifications (FY 2007) –Added 20 new DRGs, deleted 8, and modified 32

12. This Year’s (FY 2008) Proposed Rule Continues transition to cost-based weights –Moves from 1/3 to 2/3 cost-based blend –No methodological changes Adopts Medicare Severity-adjusted DRGs (MS-DRGs) –Moves from 538 DRGs to 745 MS-DRGs Cuts base payment rate by 2.4% in FY 2008 and FY 2009 – “behavioral offset” –Eliminates effect of coding changes on case mix

13. Severity Adjustment Systems

14. Severity Adjustment in the Current Payment System Paired DRGs with and without complications and comorbidities (335 base/538 total) New DRGs added over time to capture greater complexity (e.g. bilateral hip replacement)

15. What Alternatives Are Being Considered? MedPAC: All-Patient Refined DRGs CMS (FY 2007 Proposed Rule): Consolidated Severity-adjusted DRGs CMS (FY 2008 Proposed Rule): Medicare Severity-adjusted DRGs

16. APR-DRGs (MedPAC Recommendation) 1258 All Patient Refined DRGs (APR-DRGs) –270 base and 863 severity-adjusted DRGs Up to four tiers of payment Complicated multi-step process for assigning APR-DRG assignment

17. CS-DRGs: Last Year’s FY 2007 Proposed Rule Starts with APR-DRGs Adapts to suit Medicare population Consolidates APR-DRGs by having 3 severity of illness subclasses off a base DRG and a single subclass off each major diagnostic category More aggressive consolidation where volumes are low Results in 861 CS-DRGs

18. CS-DRGs: Issues Identified in Comments Uses proprietary grouper –Logic is not transparent –Logic is proprietary Does not build on current DRGs –Does not recognize recent refinements of DRGs to capture complexity

19. MS-DRGs: This Year’s FY 2008 Proposed Rule Rooted in current DRG system Up to three tiers of payments –A major complication or comorbidity –A complication or comorbidity –No complication or comorbidity 745 MS-DRGs

20. Example: Current DRG Assignment Principal Diagnosis Simple Pneumonia and Pleurisy Age Comorbidities and/or Complications DRG 91 Simple Pneumonia & Pleurisy Age 0 - 17 17 and Under 18 and Over YesNo DRG 90 Simple Pneumonia & Pleurisy Age>17 Without CC DRG 89 Simple Pneumonia & Pleurisy Age>17 With CC

21. Example: MS-DRG Assignment* Principal Diagnosis Simple Pneumonia and Pleurisy Comorbidities and/or Complications MS-DRG 195 Simple Pneumonia & Pleurisy Without CC YesNo MS-DRG 194 Simple Pneumonia & Pleurisy With CC MS-DRG 193 Simple Pneumonia & Pleurisy With MCC * Proposed for FY 2008

22. Distribution of Cases by Severity Level Current vs. MS-DRGs Not in a DRG w/CC In a DRG w/CC Not in a DRG w/CC or MCC MS-DRG w/CC MS- DRG w/MCC Source: Moran Company

23. Fixes Several Problems Identified with Last Year’s Proposal Builds on current DRG system rather than APR-DRGs –Easier to understand; transparent –Benefits from past refinements to DRGs lost in CS-DRG system –Captures complexity as well as severity Logic of MS-DRG grouper will be open to all

24. Overall Impact

25. Impact of Severity Adjustment Total dollars stay the same — money just shifts How an individual hospital does depends on its patients’ characteristics A hospital with the national average mix of severity levels would see no change in payment

26. Impact of Severity Adjustment Reductions for less severe cases Increases for more severe cases On average, payments: –Decrease for small and rural hospitals –Increase for large, urban and teaching hospitals Specific severity adjustment systems differ in the level of dollars redistributed

27. Percent Change in Payment by Hospital Type Large Urban Other Urban Rural Major Teaching 50-99 100-199200-299 Under 25 25-50 300-399400-499 500+ By Bed Size Change to MS-DRGs Only Source: Moran Company analysis of MedPAR and cost report data. Uses 2/3 cost-based weights. Minor Teaching Non- teaching

28. Percent of U.S. Hospitals by Range in Gain or Loss Lose 10% or More Gain 5-9.9% Roughly the Same 27% Hospitals with Gains 22% Hospitals With Losses 51% Change to MS-DRGs Only Lose 5-9.9% Lose 1-4.9% Gain or Lose Less than 1% Gain 1-4.9%

29. Percent of Washington State Hospitals by Range in Gain or Loss Roughly the Same 35% Hospitals With Gains 8% Hospitals With Losses 57% Change to MS-DRGs Only Lose 5-9.9% Lose 1-4.9% Gain or Lose Less than 1% Gain 5-9.9% Gain 1-4.9%

30. Policy Options

31. As Good as It’s Going to Get? CMS likely to implement a severity- adjusted system MS-DRGs fix several issues identified with last year’s CS-DRGs Additional refinement poses risks –Greater levels of redistribution –More complexity Arguments against “behavioral offset” stronger with this system

32. Policy Options Oppose severity adjustment Delay and develop alternative Support MS-DRGs with: –Delay –Transition –Protection from losses Support immediate implementation

33. AHA Position AHA strongly against “behavioral offset” –A cut of $24 billion over 5 years Advocacy steps to date: –Impact data sent to all members –HALO letter to CMS opposing cut –“Dear Colleague” letter circulating Workgroup of state association executives to look at MS-DRGs

34. Impact on Washington Hospitals

35. Hospital Specific Impact Analysis An impact analysis was e-mailed to CFOs on April 26, 2007 New impact forthcoming Includes all changes, including MS- DRGs Contact Will at willc@wsha.org or 206-216-2533 if you would like a copywillc@wsha.org

40. Change in Case Mix Increase/decrease was affected by: –Increase in cost based weights (now 67% based on costs and 33% on charges) –Change to MS-DRGs WSHA is sending a breakdown showing changes related to each variable

43. Next Steps and Future Need advocacy on cuts for capital and behavioral offset WSHA will send additional information on impacts Final rule in August and new system in October Impact on service lines or specialty hospitals?

44. Questions?

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