MS-DRGs: Winners and Losers

New payment system is designed to compensate providers for taking care of severely ill patients.

Not everyone can be a winner. It remains to be seen who will and will not benefit from changes to the diagnosis-related group system (DRG). As of October 31, the Centers for Medicare and Medicaid Services (CMS) replaced the 538 DRGs with 745 new Medicare-severity DRGs (MS-DRG). “The new system was originally designed to recognize, and more adequately reimburse, hospitals that treat severely ill patients,” says Karen Barrow, vice president, clinical solutions and business development, Amerinet Inc. “Although this seems like a fair and equitable means for reimbursement, the pool of total reimbursement dollars is not increasing, which means there will be winners and losers as dollars are redistributed under the new system.”

Some experts are worried that the original system did not adequately account for variations in the severity of patient cases within each DRG category, or for the expensive technology needed to treat severely ill people. The fear was that physician-owned specialty hospitals would forego severely ill Medicare patients for less severe ones within a diagnosis-related group. At the same time, the old system reportedly would have led to reductions in payments to hospitals for technology-intensive procedures by 10 or 15 percent.

The revised system is based on existing diagnosis-related groups, which have been redefined to differentiate the utilization of different medical or surgical treatments. “It’s projected that the new DRG system will increase payments by 3.3 percent,” says Barrow. “[However], CMS is a budget-neutral system. Payments for some DRGs will increase, while others decrease. Potentially, those hospitals that treat more severely ill patients will see increases, while those serving less severely ill patients will see decreases,” she adds.

Who will pay?
IDNs may question whether only Medicare and Medicaid will recognize MS-DRGs, or whether non-Medicare payers will adopt them as well. “Commercial payers are becoming increasingly unwilling to reimburse for the same procedures and diagnoses as Medicare, but at substantially higher rates,” says Barrow. “It’s not an equitable reimbursement system when commercial payers are required to subsidize a failing budget-neutral Medicare system.”

In addition, as some commercial payers continue to reimburse at higher rates, self-pay patients will have to shoulder more out of pocket costs for their healthcare, Barrows says. “As consumers become increasingly aware of the disparity between Medicare and third party payers, the demand to know the cost of services will rise,” she says. “Paying healthcare consumers are going to want a fair pricing system, and they will shop their business for quality, cost-effective services.”

As more consumers learn of the gap between what some patients must pay vs. what hospitals are charging, Barrow predicts the industry will witness a move to a cost-based MS-DRG system. In addition, a “rational-based pricing of products and services will be needed to allay community concerns and potential government regulation,” she says. “The pricing problem will persist until hospital charges are based on true costs or market prices.”

What does this mean for PPI contracting?
Some contracting professionals may find their physicians have a misconception of how their facility will be reimbursed for different procedures. “Historically, device manufacturers have made broad statements and characterizations of reimbursement changes to physicians in a misleading or outright deceptive manner,” says Barrow. Education and communication on the part of contracting professionals will be key in ensuring that physicians fully understand the impact of the new MS-DRG system.

“I [recently] met with a group of 30 orthopedic physicians at a large IDN,” says Barrow. “Their perception was that hospitals are going to receive a substantial increase in reimbursement for total joints. But, under the new MS-DRG system, reimbursements will actually change, depending on the type of patient acuity.

“A relatively healthy patient who would qualify for a high end/expensive device would likely be assigned a lower paying DRG. However, a sicker patient with comorbidity issues would likely be assigned a higher paying DRG, but may not even qualify for an elective surgical procedure due to anesthesia risks,” she continues. Contracting professionals will have to “collect and benchmark data by creating key performance indicators to measure supply chain performance.” This data will be essential to establish and sustain physician relations needed to negotiate the best contracts with suppliers, she adds.

“As long as the federal government operates a budget-neutral system, revisions will be forthcoming,” says Barrow. For IDNs, this means staying informed and implementing data-driven action plans to address these changes.

About Laura Thill

Laura Thill is a contributing editor for The Journal of Healthcare Contracting.

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