As recently blogged, the latest Centers for Medicare and Medicaid Services semi-annual update on Medicare costs indicates that Medicare Part A (inpatient hospital) expenses remain on the rise. Medicare Part A reimburses for inpatient care based on a prospective payment system that uses diagnositic related groups (“DRGs”). In April, 2006, CMS proposed major changes to this reimbursement system:

CMS is considering a two-step process of transformation. The first step,
set out in the proposed rule, would assign weights to DRGs based on hospital
costs, rather than hospital charges. This would eliminate biases in the
current DRG system arising from the differential markup hospitals assign for
ancillary services among the DRGs. The new DRG weights would go into
effect October 1, 2006.

A second step, currently scheduled for FY 2008, would replace the current 526 DRGs with either the proposed 861 consolidated severity-adjusted DRGs or an alternative severity adjusted DRG system developed in response to the public comments CMS is soliciting on this issue. CMS is also considering ways of improving recognition of severity in the current DRG system by FY 2007. When the two steps are fully implemented, hospitals can expect more accurate payment for their services.

In today’s New York Times, Robert Pear reports that the proposed DRG changes will whack 20 to 30% off current hospital reimbursement for frequently performed procedures, such as the drug coated artery stent, and shift costs onto private payers. The article also reports that Congress is questioning why CMS gave 3M a sole source contract to develop the DRG reforms. Senator Charles Grassley (R Iowa), Senate Finance Committee Chairman, and Sen. Max Baucus (D Mont.), the Committee’s ranking minority member, have asked CMS to delay the payment reforms for a year. However, House Ways and Means Committee Chairman Bill Thomas (R Calif) has supported the reforms — at least before today’s report.