How Medicare changes will affect your cardiovascular service line: FY08 is just around the corner; do you know where your CV service line is?

Healthcare Financial Management, May, 2007 by Nancy A. Lyle

Since its inception in 1983, the diagnosis-related groups system has remained relatively unchanged with respect to the construct and methodologies for determining relative weights and payment. However, on Aug. 1, 2006, the Centers for Medicare and Medicaid Services issued FY07 final rules that take considerable steps toward reforming and improving the accuracy of Medicare's inpatient prospective payment system. Medicare's most recent changes to the IPPS have strategic implications for cardiovascular services particular to academic medical centers as well as teaching, specialty, and community hospitals.

Many of the recent IPPS changes were based on recommendations from the 2005 Medicare Payment Advisory Commission's March 2005 report to Congress regarding physician-owned specialty hospitals. In that report, MedPAC concluded that the current Medicare payment system created financial incentives that encouraged hospitals to focus on specific DRGs that were more profitable. The commission recommended considerable changes to the IPPS system to improve the accuracy of DRG payments; those recommendations served as the impetus and foundation for CMS's FY07 proposed rules and subsequent policy. Although the initial focus was physician-owned specialty hospitals, the CMS changes have implications for all acute care hospitals.

Overview of CMS FY07 IPPS Final Recommendations

Although the changes to Medicare's IPPS were not as far-reaching as initially proposed, they represent the first step in what promises to be sweeping reform. CMS announced that it will transition over the next three years from a charge-based method for determining DRG relative weights to a cost-based methodology. CMS believes this new method of calculating DRG weights will better align hospital payments with the actual cost of patient care and eliminate bias caused by using hospital charges.

Among several other changes, Medicare's inpatient rates for operating expenses will increase by 3.4 percent for those hospitals that report the 20 Hospital Quality Alliance-approved measures. Hospitals that do not participate will receive only a 1.4 percent increase. Many of these quality indicators are related to cardiovascular care; nonetheless, in order for hospitals to receive the full market basket increase in FY07, all 20 quality indicators must be reported. CMS plans to continue expanding the quality criteria that hospitals must track and report to support its objective of improving quality of care for the Medicare population.

Implications for Cardiovascular Services

Modifications to the DRG payment system will have significant bearing on CV services because the payer mix is predominantly Medicare. Traditionally, the CV service line has been one of the most lucrative business lines for most hospitals, from a financial perspective as well as the significant market size it represents. With considerable changes implemented by CMS in FY06, along with the reform outlined over the next three years, many CV programs will be faced with future payment reductions, particularly in the historically profitable DRG cases.

The FY07 final rules outlined reductions in relative weights for several CV DRGs--in particular, percutaneous coronary intervention/stents, coronary artery bypass grafts, and defibrillators. However, with the 3.4 percent market basket increase, only a few will have reduced payments. Numerous CV DRG weights and payments increased--most notably heart transplant, valves, pacemakers, heart-assist devices, and medical conditions. The surgical DRG "winners" represent some of the most resource- intensive patients within the CV service line.

How will CV services be affected in the future? Two key CMS changes on the horizon that will likely have the greatest impact on CV services include:

* Shifting from a charge-based system to a cost-based method for determining DRG weights. This transformation will likely result in significant declines in reimbursement as charges for CV ancillary services have historically been appreciably marked up from their actual costs, resulting in a greater bias in the overall DRG relative weight.

* Adopting a consolidated DRG system that accounts for severity of illness by FY08. Although CV programs that treat a preponderance of high-acuity patients will benefit from the new DRG system, many teaching and specialty heart hospitals that have historically treated the "bread and butter" cases will observe a reduction in their ease mix and Medicare reimbursement.

Preparing for the Changes

How can your organization prepare for these changes? The first step is to analyze your CV program's current strategic capabilities along with the impact Medicare changes will have on the service line (both FY07 and anticipated future modifications). The analysis should include evaluation of the following:

* The impact of FY07 changes to DRG weights and reimbursement based on the CV program's current Medicare volumes

* The long-term impact of CMS moving to a cost-based method for determining case mix and reimbursement