A display copy of the final rule updating the inpatient hospital payment system (“IPPS”) for FY 2008 was recently posted by the Centers for Medicare and Medicaid Services (“CMS”) to its website. The IPPS rule finalizes the agency's proposal to replace the current system of 538 diagnosis related groups (“DRGs”) with 745 new Medicare-Severity adjusted DRGs (“MS-DRGs”). In response to public comments, CMS extended the transition period for implementing the MS-DRGs from one year, as proposed, to two years, with a 50/50 payment blend (DRG/MS-DRG) beginning in FY 2008, followed by full implementation of MS-DTG in FY 2009. According to CMS, setting the DRG relative weights based on costs rather than charges is expected “to reduce incentives for hospitals to cherry pick the healthiest and most profitable patients.” As a result, the MS-DRGs will lower reimbursement to specialty hospitals, particularly for certain elective cardiac admissions. For example, CMS projects that payments to cardiac specialty hospitals will decline under the new MS-DRG system by more than 5%.

Over the protests of the American Hospital Association and similar organizations and related groups, the final rule retains the prospective “documentation and coding adjustment” designed to eliminate what CMS claims will be “increases in aggregate payments without any corresponding growth in actual patient severity.” The controversial payment cut, known as the “behavioral offset,” is slated to occur over a three-year period as follows: 1.2% for FY 2008; 1.8% for FY 2009; and 1.8% for FY 2010. Last month the House of Representatives voted overwhelmingly to approve (412-12) an amendment to the Labor-HHS-Education appropriations bill (H.R. 3043) that would prohibit CMS from altering payments to hospitals based on the MS-DRG system and from implementing the behavioral offset. The Senate is not expected to take up the appropriations bill until sometime in September.

According to CMS, in FY 2008, payments to all hospitals are expected to increase by an average of 3.5%, taking into account all changes in the final rule, though there is likely to be a significant redistribution under the new system that will affect providers in different ways. Other payment changes addressed in the rule include the elimination of the capital payment add-on for large urban hospitals; the phaseout of the indirect medical education adjustment to capital payments over the next three years; and a decrease in the outlier fixed-loss threshold from $24,485 to $22,650. Continuing its drive toward its value-based purchasing model, CMS also expanded the number of quality measures to 27 hospitals that will have to submit data in order to receive the full market basket increase in FY 2008. Additionally, beginning in FY 2009, cases for certain hospital-acquired conditions will not be assigned to a higher paying DRG unless there is documentation supporting that such conditions were present on admission. Finally, the rule requires hospitals to disclose physician ownership to patients, and upon request, provide patients with the names of the physician investors. It also requires hospitals to notify patients in writing regarding how a patient's emergency services needs will be met if there is not a physician present in the hospital around the clock. CMS may terminate a provider's participation in the Medicare program for failing to comply with these disclosure requirements.

The full text of the final rule may be accessed through the CMS website at http://www.cms.hhs.gov/AcuteInpatientPPS/IPPS/ . It is slated for publication in the Federal Register on August 22, 2007. There are a number of major policy changes in the final rule for which hospitals must be prepared. Providers will no doubt be keeping a close eye on Capitol Hill as a showdown between Congress and the agency looms on some of these major changes.