5 nuances of Medicare billing: Medicare billing includes intricacies that all healthcare financial leaders should understand. Do you know how to minimize their impact on your organization?

Healthcare Financial Management, Jan, 2008 by Billy K. Richburg

Some say life was simpler in the 1960s. Medicare certainly was.

When Medicare debuted in 1965, its simple payment system paid inpatient claims based on hospital-specific per diems and outpatient claims based on "reasonable costs."

Today, there is no "simple" version of Medicare. But Medicare drives most hospitals' business and continues to affect the private managed care side of the industry, so providers tolerate it because they have no choice.

The increasing complexity of payment calculations has created an environment where important payment details are embedded in thousands of pages of "final rules" and "manuals." Following are five commonly misunderstood components of the inpatient and outpatient prospective payment systems-and how providers can minimize their impact.

MS-DRG: Same Song, Different Verse

Most healtheare finance professionals would agree that severity-adjusted diagnosis-related groups (DRGs) of some sort are a logical evolution of the case rate prospective payment system (PPS). Two individuals with the same diagnosis rarely require exactly the same resources to meet their care needs, and severity adjustment is a first step toward compensating providers appropriately. The Medicare severity-adjusted DRG (MS-DRG) system is one of several available to the industry, and although it may not be the best option, it generally meets the requirements that the Centers for Medicare and Medicaid Services (CMS) specified for a severity-adjusted system.

Unfortunately, however, CMS created confusion by using the same three-digit DRG numbers (up to 579) that have been in use since 1983.

For example, this system lacks a "one-to-one" crosswalk. The only crosswalk possible is one driven by the grouper itself, using the billing codes and patient demographics. Even the crosswalk published by CMS took a "one-to-many" approach, as illustrated in the exhibit at right.

This system is costly to implement, due to the need to distinguish DRG 001 in the first 24 grouper versions from DRG 001 in the current version. Although there are always costs associated with each grouper change, this is the first time in many years that providers have been obligated to reeducate their staff on the 100 percent change reflected in Grouper 25. Yet absorbing these training costs has been necessary to allow providers to transition to the MS-DRGs without incurring losses due to underdocumentation and weak coding.

Unfortunately, many providers choose not to group their own claims under MS-DRG, and this may be the worst example of unnecessary risk exposure. Due to the complexity of the system, providers should not presume fiscal intermediaries (FIs) and Medicare administrative contractors (MACs) will group claims correctly. Instead, providers should group claims on "bill drop" or immediately thereafter if a third-party grouping function is used.

What Is a "Specialty Hospital"?

CMS has been quite open in its intention that "specialty hospitals" would bear the brunt of the reduced payments under MS-DRG.

Unfortunately, the payment reductions are not limited to specialty hospitals. In fact, any hospital that doesn't serve a general cross section of the Medicare population is likely to suffer. And the majority of these hospitals are not "specialty" at all. They are rural hospitals under 100 beds and urban hospitals under 50 beds.

In the correction to the 2008 final rule for IPPS, CMS lists the estimated impact of all the changes for 2008, primarily driven by the severity-adjusted DRGs and their cost-based weights. All hospitals were estimated to gain 3.7 percent over average 2007 payments, with urban hospitals gaining 3.3 percent to 4.3 percent.

By comparison, rural hospitals were expected to gain only 2.4 percent, and urban hospitals with less than 100 beds, only 2.2 percent.

Although there is no short-term fix, there are several longer-term strategies for small urban and rural hospitals.

If your facility has fewer than 25 beds (excluding designated psychiatric and rehabilitation beds), you can pursue critical access hospital (CAH) status. This affords you payment "at cost," just as hospitals were paid prior to PPS. Consider, for example the DRG reimbursement and the C, AH reimbursement for a fictitious South Dakota facility with a $1,500 per diem. For DRG 194 (simple pneumonia or pleurisy with complications or comorbidity), with no outlier and a six-day length of stay, the payment would be $7,520.21. By comparison, the CAH payment for the same services would be $9,000, for an increased payment of $1,479.79.

If your facility has 25 to 99 beds, you should investigate the possibility of qualification as a sole community hospital (SCH). As an SCH you could be entitled to a "hospital-specific" payment in also could receive a 7.1 percent bonus on your addition to your DRG, and, if you are rural, you outpatient APC payments.

If your facility is larger, a strategic review of clinical services is in order. Although they require time and money, upgrades to ICU, diagnostic imaging, and surgery can help recruit medical staff in other specialties, allowing you to approach the "average" Medicare demographic that drives MS-DRGs and their cost-based weights.