CMS releases final Medicare hospital fee schedule for 2007

On August 1, CMS released the acute care hospital inpatient prospective payment system rule and fee schedule for FY 2007.  It will be published in the August 18 Federal Register.  CMS summarized the mammoth rule in one of its fact sheets as follows:

In this rule, CMS identified the goals of

• making meaningful first steps in diagnosis-related group (DRG) reform in FY 2007, while having further plans to continue reforms in FY 2008;
• taking needed steps toward more accurate payments, without disrupting hospital payments;
• ensuring that Medicare does not overpay for some services while underpaying for more severely ill patients and those with complex illnesses; and
• correcting inappropriate hospital incentives for treating certain types of patients and providing certain types of services, by re-directing a portion of the payments from cases that are currently overpaid to those that are underpaid.

Key Policies for FY 2007 Final Rule:

• Implement the first year of a three year transition for cost weights, including significant technical improvements to the payment methods based on public comments, and assess potential for further improvements for FY 2008 based on a contractor analysis of issues raised in public comments.
• Make meaningful refinements to the current CMS classification system to increase recognition of severity of illness, including 20 specific DRG changes;   and
• Conduct an evaluation with public comments of alternative severity adjustment systems for implementation in FY 2008.

Main Impacts:

• There will be limited hospital payment impact because of the simultaneous implementation of incremental reforms for cost-based and severity-adjusted payments. 
  • More specifically, payment to all hospitals will increase by an average 3.5 percent in FY 2007 or by more than $3.4 billion.
  • Only 2 percent of hospitals have a projected reduction in payment as a result of the overall rule, and factors other than the DRG changes (particularly certain wage index changes) account for these reductions. 
• There will be a limited impact on payments in specific DRGs.
  • No DRG weight will decrease more than 5.4 percent in FY 2007.   DRG weight reductions are less than in the proposed rule because of methodological changes suggested by commenters.
  • Nineteen DRGs weights increase by more than 5 percent as compared to the current weight methodology in the first year. 
• Changes to improve the IPPS are widely-supported because they will help assure that all beneficiaries have access to appropriate, high-quality care. 
  • The Medicare Payment Advisory Commission (MedPAC), an independent body that advises the Congress on Medicare payment policy, supports these reforms.
  • The types of payment changes being implemented were described as “promising” in a recently released Government Accountability Office (GAO) report. 
• The final rule represents a meaningful step towards DRG reforms that are needed to assure that all beneficiaries have access to quality care, while minimizing disruptions through a multiyear transition and the simultaneous implementation of severity and cost-based payment changes, as suggested by many who commented on the rule.

CMS also issued a press release and another fact sheet (this one focused on "improving accuracy" of DRG payments — gee, do you think that means increasing payments, or decreasing them?).

Not surprisingly, there were some significant differences between the proposed rule and the final rule.  The rule as initially rolled out earlier this year would have resulted in more drastic cuts in Medicare reimbursement; then the comment period opened.  As reported by the N.Y. Times’ Robert Pear,

The industry’s lobbying campaign offers a case study in how to influence the government on complex technical issues that have implications worth billions of dollars to a politically potent sector of the economy.

Rather than just filing comments on the proposed rule, the health care industry mobilized a political campaign that combined advertising and lobbying to beat back the proposed cuts. Lobbyists wrote dozens of letters to the Medicare agency, stoked concern on Capitol Hill, ran advertisements and met with White House officials . . . .

The result?  A moderated series of cuts, of the "improved accuracy" variety and otherwise, and even some rate increases here and there.  The N.Y. Times reports:

The reaction from Wall Street analysts on Wednesday was positive.

“The final rule significantly moderates proposed cuts for cardiac procedures,’’ Citigroup said in a note to investors. Lehman Brothers described the final rule as “a win for cardiac and orthopedic device companies, specialty hospitals and general acute care hospitals.’’ The Prudential Equity Group said the final rule, which takes effect on Oct. 1, was “favorable for device manufacturers’’ . . . .

We’ll have to wait and see whether CMS follows through with promised changes over the next two years, or whether the industry can beat them back even further.