AAMC Reporter: September 2006

New CMS Rule Affects Payment Rates, GME Reimbursement

A new federal rule governing Medicare reimbursement rates for inpatient hospital services is receiving mixed reviews from the teaching hospital community. Published in the Federal Register August 18 by the Centers for Medicare and Medicaid Services (CMS) and scheduled to take effect October 1, the rule fundamentally changes the methodology for setting inpatient payment rates. Among other effects, the new rule reduces financial incentives for specialty hospitals, which provide a limited range of highly profitable services, often exclude emergency care, and typically are owned partially or wholly by physicians who serve as referral sources.

"These payment reforms respond to many constructive public comments to assure that hospitals get fair and appropriate financial support for all patients, with a smooth and gradual transition to more accurate payments," said Michael O. Leavitt, secretary of the U.S. Department of Health and Human Services, in a statement. "Hospital payments should promote the best care for all patients, not the treatments that happen to be most profitable, and we are now on a path to making sure that happens."

A key item is a move from a charge-based to a costbased methodology for determining diagnosis-related group (DRG) Medicare payment weights. The rule's final methodology contains significant changes from what was originally proposed and will be phased in over three years, in accordance with requests from teaching and other hospitals and organizations like the AAMC.

"While CMS did not implement a one-year delay in the changes, as urged by the hospital community and others, CMS was responsive in making a number of significant technical corrections that had been identified by hospitals," said Karen Fisher, senior associate vice president in the AAMC's Division of Health Care Affairs.

Teaching hospital leaders applauded CMS attempts at reform and responsiveness to feedback but also said not enough was done to address specialty hospitals and that a delay of the rule or a longer phase-in process was necessary for hospitals to understand and account for changes in the reimbursement rates.

The rule is built on recommendations from the Medicare Payment Advisory Commission (MedPAC). Ralph W. Muller, chief executive officer of the University of Pennsylvania Health System and a MedPAC member, said CMS did not fully follow the commission's advice.

"We're not against change, but what CMS has is different from what we recommended, "Muller said. "On MedPAC, we decided we wanted to deal with payment inaccuracy. We said, 'Let's revise the payment system.' And unfortunately, CMS did not comply with us in substantive terms. It will take a while to get it right."

Herbert Pardes, M.D., chief executive officer of New York-Presbyterian Hospital, said the proposed rule would have had a significant financial impact on major teaching hospitals with a large docket of Medicare and Medicaid patients but that the impact of the final rule was mitigated because of technical changes and the three-year phase-in that will allow hospitals to adjust to the new methodology.

However, he echoed the sentiment that hospitals must monitor the new system over time.

"Whatever [financial] hit the hospitals take is attenuated by that phase-in process," he said. "It's very complicated, so it will take some time to study and tell how it will really play out, but I commend them for seeming to have been responsive to inputs from the field."

In aggregate, teaching hospitals — especially larger teaching hospitals — will receive a smaller payment increase in FY 2007 than other hospitals, with a 3.3 percent increase for those with fewer than 100 residents and 3 percent increase for those with more than 100, as compared with 3.8 percent for nonteaching hospitals. In the initial proposal, the gap between teaching and nonteaching hospitals was even larger.

Also changed from the initial version of the rule was a CMS proposal to implement a new consolidated severity adjusted diagnosis-related group (CS-DRGs) system. In accordance with requests from the hospital community, CMS officials will not implement the system now but will add 20 new DRGs to the current system and will revisit the possibility of using a severity-adjusted DRG system next year with an evaluation that includes more public input. The idea of increasing reimbursement for more severe medical cases is being discussed, in part, as a reaction to specialty hospitals pulling less severe, more lucrative procedures away from teaching and other hospitals, and ensuring that facilities treating severe and complicated cases remain well supported.

"I do not think we accomplished one of the main points of this, which was to reduce the spread of specialty hospitals," Pardes said. "More work has to be done there. If you have a complicated problem, you want to be sure places like centers of excellence are still around and well supported. We agree that it's useful to look at reimbursement areas, but one must be careful not to weaken the interest of the institutions with centers of excellence because the reimbursement rates have become too problematic."

CMS also changed its position on when hospitals and other resident training sites may count the time residents spend on didactic activities (such as conferences and educational lectures) for purposes of calculating direct graduate medical education (DGME) and indirect medical education (IME) payments. Initially, the proposed rule stated hospitals could not count much of the time residents spent in didactic activities because the activities are not "related to patient care." According to Fisher, however, more than 1,200 commenters urged CMS to rescind this position.

Citing documentation concerns expressed by the commenters, CMS in its final rule instituted a "one workday" threshold for didactic activities for documentation purposes, while staunchly maintaining its stance that didactic activities are not related to patient care.

"It is very concerning that CMS upheld the principle that pedagogic activities are not a core part of residency training," said Karen E. Broquet, M.D., associate dean for GME at Southern Illinois University School of Medicine. "The ruling really points out the disconnect between what they want to support and the realities of good medical training in 2006."

— By Scott Harris

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