CMS: The adjustment is necessary to account for documentation and coding changes.

The Centers for Medicare & Medicaid Services did some heavy number crunching in its newly proposed IPPS and LTCH PPS rule -- and the acute care and long-term care hospitals affected by this rule won’t be happy. 

In the announcement issued May 1, CMS proposed to update acute care hospital rates by 2.1 percent for inflation -- minus 1.9 percentage points to adjust for the increases in aggregate payments. The agency claims the aggregate increases are “"due to changes in hospital coding practices that do not reflect increases in patient’s severity of illness.” 

CMS is similarly proposing to update long-term care hospital rates by 2.4 percent for inflation -- less an adjustment of 1.8 percentage points to account for changes in documentation and coding practices “that do not reflect increases in patient’s severity of illness.” 

The proposed rule would apply to approximately 3,500 acute care hospitals paid under the Inpatient Prospective Payment System (IPPS), and 400 long-term care hospitals paid under the Long-Term Care Hospital Prospective Payment System (LTCH PPS), beginning with discharges occurring on or after Oct. 1, 2009. 

What’s Behind All Those Adjustments

Beginning Oct. 1, 2008, Medicare adopted a new classification system for general acute and long-term care hospitals to better recognize severity of illness and the cost of treating Medicare patients. However, hospitals changed their documentation and coding of patient diagnoses under the new system in a manner that leads to an increase in aggregate payments without corresponding growth in actual patient severity, CMS explained in a release.

The proposed documentation and coding adjustments aims to prevent estimated aggregate payments to these hospitals under the new classification systems from increasing solely as a result of the changes to the classification system and hospital coding practices.

Despite the financial blow, CMS believes it’s doing these hospitals a favor, acknowledging in its announcement that it “has the authority to make a much greater downward adjustment to payment rates to address these changes in hospital coding practices,” but has chosen to "be prudent" and "phase-in the adjustment carefully over time."

CMS also called for a lower inflation update to reflect the slowing rate of inflation in the economy. The inflation updates are designed to measure the inflation in the costs of resources (the market basket) hospitals use when delivering care to inpatients. Because long-term care hospitals generally use a different mix of resources than acute care hospitals, their inflation update of 2.4 percent is determined using a different market basket than the market basket used for acute care hospitals.

More Payment Cuts Yet to Come

CMS will accept comments on the proposed rule until June 30 and will respond to comments in a final rule no later than Aug. 1, 2009.

 “We understand hospitals will be concerned about lower than historical update amounts,” said Charlene Frizzera, CMS Acting Administrator. “However, we are proposing an adjustment that minimizes the effects on FY 2010 payments while still meeting the requirements of the law, which may mean larger reductions in the next two years. We are asking for comments from the public to help us ensure that these proposals are the best ways to meet the requirements of the law.”

The proposed payment rates are based on the most recently available data and are subject to revision in the final rule to reflect more current data, CMS pointed out in the release. Following are significant data the agency has as of now to justify its lower payment update.

• As required by the Transitional Medical Assistance, Abstinence Education, and QI Programs Extension Act of 2007 (TMA), CMS has already applied adjustments of -0.6 percent in FY 2008, and -0.9 percent in FY 2009 to the acute care hospital rates. However, if CMS’s review of claims data shows that the adjustments set by the TMA were too low to maintain budget neutrality under the new classification system, the TMA requires CMS to adjust payment rates to account for that difference in subsequent years. This means that CMS must adjust payment rates between FYs 2010 and 2012 as necessary to recapture any excess payments made to hospitals in FYs 2008 and 2009 that resulted from changes in hospitals’ coding practices.

• The Medicare Actuary found, based on analysis of 2008 data, that additional coding that didn’t reflect actual changes in the severity of patients’ illnesses increased total payments under IPPS by 2.5 percent in FY 2008 -- and will further increase total payments in FY 2009. Based on current estimates, the Medicare Actuary estimates CMS would need to make about an 8.5 percent total adjustment to the acute care hospital rates to address changes in hospitals’ coding practices, including the increase in FY 2008 payments and the estimated increase in FY 2009 payments. 

Bottom line: CMS is proposing a prospective adjustment of 1.9 percentage points for FY 2010, which means the agency will need to make additional adjustments of approximately 6.6 percentage points in FY 2011 and FY 2012. CMS is requesting public comment on whether to apply a different documentation and coding adjustment than the one being proposed for FY 2010.