Reimbursement M'Care-M'Caid Inpatient Prospective Payment System
Reform-Federal reimbursement resulted from three trends:
 rising payments reduced the Medicare trust faster than contribution dollars grew it.
 Waste by fraud and abuse in the system
 payment rules that were not formally applied across the nation
Prospective Payment System (PPS) was found to slow the rate of growth of Medicare part A payments before the IPPS system was instituted for acute care.
Because of its success DHHS extended PPS for all types of patients.
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 prospective payment self was effective in reducing the rate of increase in hospital costs
 Allstate systems require consideration of hospital case, the
 failure to adequately address the case mix issue results in an active appeals process
 small rural hospitals required special exception, unless case mix was explicitly recognized in the payment system
 prospective payment rates established through use of actual hospital costs for a base year

 successful system had a firm legal basis, strict enforcement individual hospitals' budget review systems were often managed by exceptions and more complex to administer
 All PPSs had some inherent undesirable incentives required insertion of countermeasures
Federal Register: Official journal of the US government.
Rules/regulations and legal notices of the projects proved PPS could control costs and still allow
 federal administrative agencies,
 departments of the executive branch, and
 the President adequate reimbursement for services rendered to
Medicare beneficiaries.
Organized alphabetically by agency. Federal payment systems indexed under CMS.
New Jersey Model: Medicare chose NJ model of PPS . Based on diagnosis-related groups (DRGs). Developers were charged with creating a classification system that would
monitor quality of care and use of services in a hospital setting. Notice of Proposed Rulemaking: proposed changes must be publicized in advance. Federal agencies post proposed
rules, publicizing intended rules and allowing the public and interested organizations to comment and provide relevant information. The final rule has the effect of law.
Prospective Payment Legislation: Tax Equity And Fiscal
Responsibility Act (TEFRA-1982) mandated changes to
Medicare program. Social Security act amended in 1983,
Rate Year, the 12 month period during which the payment rate is effective. mandating DRGs as the PPS for operating and capitalrelated costs of acute-care hospital inpatient stays under
Medicare part A.
Acute-Care Prospective Payment System (IPPS): payment for facilities does not include professional services.
Conversion From Cost-Based Payment To Prospective
Payment:
1966-1983 Reimbursed based on the cost of services, reasonable cost, and/or per diem costs. 80% M'care.
Hosp. perspective: no incentive to reduce costs.
1970-1972 . Government researched lowering costs.
Concept Of Prospective Payment:
1972 CMS (HCFA) authorized by Congress, began prospective payment demonstration projects following 4 guiding principles of prospective payment:
 payment rates established in advanced and fixed for fiscal period
 payment rates not automatically determined by hospitals past or current actual cost
 prospective payment rates considered to be payment in full
 profit or loss suffered created an incentive for cost control
Demonstration Projects: based on demonstration projects,
CMS concluded
Diagnosis-Related Group Classification System
DRGs are assigned a relative weight (RW) intended to represent resource intensity of the clinical group. Also used to determine payment level for the group.
Case-Mix Index is an average of the sum of the RW of all patients treated during a specified time.
Physician perspective of CMI complexity refers to
 severity of illness,
 risk for mortality,
 prognosis,
 treatment difficulty, or
 need for intervention.
Sickness as proxy resource consumption.
DRG perspective: Case-mix complexity is a direct measure of the resource consumption, and therefore, the cost of providing care.
Classification System Development: 4 guidelines established as guiding principles for DRG system formation:
 patient's characteristics used in the definition of the DRG
limited to information routinely collected on hospital billing form
 there should be a manageable number of DRGs, which
encompass all patients seen on an inpatient basis
 each DRGs should contain patients with a similar pattern of resource intensity

Reimbursement

M'Care-M'Caid Inpatient Prospective Payment System each DRG should contain patients who are similar from a
clinical perspective.
Step 3: Medical/Surgical Determination
All hospitals are able to compute the DRG, because they routinely collect all data needed to calculate the DRG assignment. medical status.
Step 4: Refinement
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Determine whether a qualifying of our procedure was performed. If so, I signed a surgical status. If not assign a
Hospitals can benchmark by DRG.
Refinement questions to isolate the correct MS-DRG
Only one DRG assigned in reimbursed for a single mission. All services are packaged into this payment. assignment allows grouping of patients from similar clinical perspective, and like-resource consumption.
Structure of the Diagnosis-Related Group System:
Major Diagnostic Categories (MDC): 25
Surgical/Medical Sections
Surg/Med Sect of the 25 MDCs
Components of the DRG:
 title
 geometric mean length of stay (GMLOS)
 arithmetic mean length of stay (ALOS)
 relative weight (RW)
 ICD-9-CM code range
 MCC present?
 CC present?

PDx domplicated?

Is a major complication or complex Dx present?
 What is patient's sex?
 What is patient's discharge disposition (alive, expired, or against medical advice)?

For neonates, what is the birth weight of the baby?
Invalid Coding And Data Abstraction
MS-DRG 998, PDx Invalid as Discharge Dx
MS-DRG 999, Ungroupable
Severity Refinement to DRG
Provisions of the MS-DRG System
MedPAC offered recommendations about adding a severity component to the IPPS. Thought to be necessary to adequately reimburse a facility for the more complex and resource-intensive cases.
Major Complications/Comorbidity (MCC)
Additional payments for specialized programs and unusual admissions that historically add significant cost of patient care.
Disproportionate Share Hospital (DSH)
Complications/Comorbidity (CC)
These allowed greater numbers of subclassifications or
For facilities with a high percentage of low income patients.
These hospitals experienced a financial hardship by providing treatment for patients who are unable to pay for the services rendered. MS-DRGs. Revised criteria for the CC list:



Does this condition require intensive monitoring?
Does this condition results in the use of expensive and technically complex services?
Does this condition results in extensive care requiring a greater number of caregivers?
Codes on the CC list reflect
Acute diseases
Chronic conditions
Assigning MS-DRGs
Acute exacerbations
Advanced/end-stage chronic disesase
Chroniic diseases assoc. w/extensive debility
2 Methods:
 A hospital qualifies by exceeding 15% on the statutory formula (Medicare inpatient days for patients eligible for
Medicare part a, Medicare advantage, and SSI, and total inpatient days for patients eligible for Medicaid but not
Medicare part A.
 Large urban hospitals with more than 30% of their total net inpatient care revenues from state and local governments for indigent care may be granted. DSH status. This payment adjusted his hospital-specific and is based on a formula that incorporates the hospital the size and hospital type (rural, sole-community, urban).
Groupers assign patients to case-mix groups. 4 Steps.
Step 1: Pre-MDC Assignment
The SSI/Medicare part A Disproportionate Share Percentage
File is updated once a year for the IPPS final rule can be found on the Medicare website.
The principal procedure is used to assign the MS-DRG.
Indirect Medical Education
(Procedures, transplant, tracheostomies)
Approved teaching hospitals are provided and indirect
medical education (IME) adjustment. Once an encounter is determined to qualify for pre-MDC assignment, the MS-DRG assignment is made in the process is complete.
Step 2: Major Diagnostic Category Determination
Use principal diagnosis to place the encounter into one of the 25 MDCs. Move on to step three.
Additional reimbursement helps offset the costs of providing education to the physicians. The IME payment adjustment is hospital-specific. The adjustment factor is based on the hospital's ratio of residence defense and the multiplier established by Congress.

Reimbursement M'Care-M'Caid Inpatient Prospective Payment System
The percent increase of 5.5% in the IME payment for every
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If the hospital has DSH status, the established percentage for
10% increase in the resident-to-bed ratio is effective for
FY 2003 and subsequent years. the year for that facility is added into the hospital base rate value.
High Cost Outlier Cases
Medicare approved charges reported on the claim are converted to costs, using the cost-to-charge ratio (CCR), and compared with the fixed-loss cost threshold.
The fixed-loss cost threshold is the sum of the MS-DRG case rate, the IME add-on, the disproportionate share add-on, and the outlier threshold established for that FY.
If the fixed-loss cost threshold is exceeded, additional payment is made. The payment is 80% of the difference between the hospital's entire cost for the stay and the fixed-loss cost threshold amount.
Burn MS-DRGs are 90% rather than 80%.
New Medical Services And New Technologies
Advances in medical technology that substantially in crew, relative to technologies previously available, diagnosis or treatment of Medicare beneficiaries.
To ensure new and innovative services and technologies are provided to Medicare beneficiaries,the IPPS allows additional payments to be made for new services technology.
This payment provision allows for the full MS-DRG payment plus up to 50% of the cost of a new technology or service.
Payment
4 steps to calculate total MS-DRG payment. MACs use grouper, enterprise search software for each hospital encounter.
Step 1: MS-DRG Assignment
Electronic claim submitted to MAC. MAC audits claim, ensuring correct information (clean claim). When clean, the grouper assigns MS-DRG based on demographic and coded data submitted.
Step 2: Establishment Of Initial Payment Rate
A base payment rate is a per encounter rate based on historic claims data.
1981 costs established the base year amount that was adjusted to explain differences among facilities for case mix, wage rates, DSH status, IME status, and certain hospital costs.
Labor-related share is adjusted by the wage index for the hospital's geographic location-based encore-based statistical areas (CBSAs).
The non-labor share is modified by a cost-of-living
adjustment (COLA). If the hospital is located in Alaska or
Hawaii.
A listing of the wage index and COLA values can be found in the IPPS final rule released each year via the Federal
Register.
Likewise for IME payments.
Once the applicable adjustments have been made, the base rate is then considered to be the fully adjusted, hospital specific base payment rate.
The fully digested hospital specific base payment rate is multiplied by the relative weight (RW) for the MS-DRG.
That was assigned in Step 1.
Step 3: Add-on for High-Cost Outlier if an outlier payment is warranted, the additional payment is added on doing this step.
Step 4: Add-on for New Medical Service and Technology
If a new service for technology was used, 50% to calculate the costs are added on to the payment.
Pricer Software
Used to complete steps two through four. When four steps are completed payment is made that facility data from the encounter are included in the National Claims History File.
The Medicare Provider Analysis Review (MedPAR) file, an extract from the national claims history file, is used for statistical analysis and research.
Transfer Cases
Type 1 Transfer: When a patient is discharged from an acute
IPPS hospital and admitted to another acute IPPS hospital on the same day. If the patient leaves AMA, and is admitted to another IPPS Hospital on the same day, the
situation is treated the same.
Payment is altered for transferring hospital, and based on a per diem rate methodology.
 MS-DRG is established and full payment rate is calculated

This payment rate is divided by the GMLOS for the MS-
DRG, thus creating a per diem rate.
 The transferring facility receives double the per diem rate
 for the first day, plus the per diem rate for each day thereafter for the patient LOS, DHS, IME, an outlier addons are applied after the per diem rate is established.
The receiving facility receives full PPS payment for the case.

Exception: 789, Neonates Died Or Transferred To Another
Acute Care Facility. GMLOS based on historical data; no reduction is necessary because it is a transfer-related MS-
DRG.
Type 2 Transfer: transfer from an IPPS hospital to a hospital or unit excluded from IPPS.

The full PPS payment is made to the transferring hospital,
 The receiving hospital or unit is paid on a reasonable cost basis or under prospective payment, whichever is applicable for setting.
There are exceptions:

Post-Acute-Care Transfer (PACT) Discharge from IPPS hospital to an excluded IPPS hospital or unit

Reimbursement M'Care-M'Caid Inpatient Prospective Payment System
Facilities excluded from IPPS
 Inpatient rehabilitation facilities or units
 Long-term care hospitals
 psychiatric hospitals and units
 children's hospitals

Cancer hospitals
275 MS-DRGs that qualify for the PACT policy (type 2 above), is considered a type I transfer rather than a discharge.
Discharge from IPPS hospital and
 admitted to an SNF or
 sent home with written plan of care for home health services that will begin within 3 days after discharge from
IPPS hospital.
These are each exclusions and handled as Type 1
transfer cases for 245 of the 275 qualifying MS-DRGs.
For the remaining 30 MS-DRGs, there is a special payment
Patient demographics and length of stay (LOS; independent variables) were used to predict cost (dependent variable).
Patient-Level Adjustments
Facility-Level Adjustments
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
Length of Stay Adjustment: Per diem cost per psychiatric cases decreased as the L0S increased.
 MS-DRG Adjustment: IPF PPS will provide reimbursements for psychiatric code identified in chapter 5 of the codebook as principal diagnosis.

Comorbid Conditions: conditions that were found to be more costly to treat for psychiatric patients in IPFs.
 Older patients: regression analysis showed that the cost per
 day increased with increasing patient age.
Electroconvulsive Therapy: providing ECT is costly.
Encounters with ECT were twice as expensive as encounters without. The IPF PPS provides a patient-level adjustments for this service (additional payment for each ECT session).
policy that allows for 50% of the full MS-DRG payment plus the per diem amount to be made for the first day of stay and then 50% of the per diem each day thereafter. These
30 have significantly higher costs on admission.
The post-acute-care transfer policy ensures that an incentive is not created for hospitals to discharge patients early to reduce costs while still receiving full MS-DRG payment.
This concept allows for proper reimbursement levels when the full course of treatment is divided across to healthcare settings.
Maintenance of MS-DRG System
CMS is responsible for updating the MS-DRG system.

Wage -Index Adjustment: adjustment provided to account for wage differences among geographic areas.
(Fed. per diem base rate  Labor %  Wage index)
+ (Fed per diem base rate

Nonlabor %)
= Wage-index adjustment formula
 Cost-Of-Living Adjustment: COLA made for IPFs in Hawaii and Alaska.
 Rural Location Adjustment: IPFs in rural locations incurrec costs 17% higher than in urban locations.

Teaching Hospital Adjustment: adjustment based on the number of full-time residents at the facility.
 Emergency Facility Adjustment: IPFs with qualifying EDs receive the greater per diem adjustment for the first day of each state for all patients.
Social Security Act?
Provisions of IPF PPS
 Outlier Payment Provision: outlier payments for high-
Requires MS-DRG classifications and relative weights (RWs) are adjusted. At least annually.
Claims from the MedPAR file are used to evaluate possible changes to the system. cost and counters. The cost of an encounter must exceed the adjusted threshold amount to qualify for an outlier payment.
Interested parties can submit change requests to Medicare.
Cost is determined by converting charges to cost using cause to charge ratio (CCR) from the facilities. Most recently
Non-MedPAR issues should be submitted to CMS no later than December. For consideration for the next federal fiscal year (beginning Oct. 1). settled or tentatively settled Medicare cost reports.
Trim Points:
The group adjustments and we calibration of group waits are published in the Federal Register. At least 45 days before the start of the new federal fiscal year.

Initial Stay And Readmission Provisions: IPF PPS designed to provide higher payment for initial days
Inpatient Psychiatric Facility Prospective Payment System
1982-2004 except from IPPS payments. of stay to adequately reimburse facilities for the higher costs associated w/a new admission.
Interrupted state provision: patients discharged from an IPF who are then admitted to the same or
Balanced Budget Refinement Act (BBRA) of 1999 required development of a per diem PPS for inpatient psychiatric services provided in inpatient psychiatric facilities (IPFs).
It wasn't until November 2004 that the final rule for the
IPS PPS was released: Implementation date of April 1, 2005
CMS used a regression analysis model to determine the type and level adjustments were necessary to create a payment system that would explain cost variation among the IPFs. another IPF within 3 consecutive days (before midnight of 3rd day) of discharge from original facility stay with be treated as continuous. For purposes of the variable per diem adjustment and outlier calculation.
 Medical-Necessity Provision: physician recertification to establish continued need for inpatient psychiatric care is required on the 18th day after admission.

Reimbursement M'Care-M'Caid Inpatient Prospective Payment System
Payment Steps: 9 step process for calculating the IPF payment.
Step 1: wage index, just the labor portion of the per diem rate.
Step 2: Apply COLA to the nonlabor portion of the per diem rate if applicable.
Step 3: Add the results of steps 1 and 2 together to determine the wage-adjusted per diem rate.
Step 4: Apply the following patient-level and facility-level adjustments:

Rural location

Teaching

Full-service ED

DRG

Comorbid condition
 Age
Determine each level of adjustment for the case. Multiply the individual to just once to determine PPS adjustment factor.
Step 5: multiply the PPS adjustment factor by the wageadjusted per diem rate determined in step 3 to calculate the adjusted per diem.
Step 6: identify whether the facility has qualifying ED. If so, choose the appropriate (higher) adjustment factor for the first day of stay. Determine the patient's LOS and LOS adjustment factor for each day.
Step 7: multiply the adjusted per diem rate (step 5) by the
LOS adjusted factor for each day of his stay to calculate the per diem adjustment amount.
Step 8: Sum the per diem payment amounts calculated for each day the state.
Step 9: calculate the adjusted ECT and mount for the encounter if applicable. Multiply the national payment amount, by the labor share in the area wage index. Then multiply the national payment amount of the nonlabor share in the applicable COLA. Sum these two products to calculate the adjusted ECT amount. Multiply the adjusted
ECT amount by the units of service. At the total ECT payment to the total per diem payment amount (step 8).
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