Introduction
The Medicare Inpatient Prospective Payment System
(IPPS) was introduced by the federal
government in October, 1983, as a way to change hospital behavior through financial incentives that
encourage more cost-efficient management of medical care. Under
IPPS, hospitals are paid a pre-determined
rate for each Medicare admission. Each patient is classified into a diagnostic category
(MS-DRG) on the basis of
clinical information. Except for certain patients with exceptionally high costs (called outliers),
the hospital is paid a flat rate for the
MS-DRG, regardless of the
actual services provided.
Each Medicare patient is classified into a Medicare Severity-adjusted Diagnosis Related Group
(MS-DRG)
according to information from the Medical Record that appears on the bill:
- Principal Diagnosis (why the patient was admitted)
- Complications and Comorbidities (other secondary diagnoses)
- Surgical Procedures
- Age
- Gender
- Discharge Destination (routine, transferred, or expired)
How it Works
Diagnoses and procedures must be documented by the attending physician in the patient's medical record.
They are then coded by hospital personnel using ICD-9-CM nomenclature. This is a numerical coding scheme
of over 13,000 diagnoses and 5,000 procedures.
The coding process is extremely important since it essentially determines what
MS-DRG will be
assigned for a patient. Coding an incorrect principal diagnosis or failing to code a significant
secondary diagnosis can dramatically effect reimbursement.
There are over 740 DRG
categories defined by the Centers for Medicare and Medicaid Services
(CMS. Each category is designed
to be "clinically coherent." In other words, all patients assigned to a
MS-DRG
are deemed to have a similar clinical condition. The Prospective Payment System is based on paying
the average cost for treating patients in the same
MS-DRG.
Each year CMS makes technical adjustments to the
MS-DRG classification system that incorporate
new technologies (e.g. laparoscopic procedures) and refine its use as a payment methodology.
CMS also initiates changes to the ICD-9-CM coding
scheme. The MS-DRG
assignment process is computerized in a program called the "grouper" that is used by hospitals and
Medicare Administrative Contractors (MACs).
Each year CMS also
assigns a relative weight to each MS-DRG.
These weights indicate the relative costs for treating patients during the prior year. The national average
charge for each MS-DRG is compared
to the overall average. This ratio is published annually in the Federal Register for each
MS-DRG. An
MS-DRG with a weight of
2.0000 means that charges were historically twice the average; an
MS-DRG with a weight of
0.5000 was half the average.
Top 10 MS-DRG
The ten highest volume Medicare
MS-DRGs
represent about 30% of total Medicare patients. Each of the 10 highest volume
MS-DRG
represent from about 2.1% to 4.6% of total Medicare volume.
|
MS-DRG |
MS-DRG Description |
% Total |
Rel Wt |
1 |
470 |
Major joint replacement or reattachment of lower extremity w/o MCC |
4.6% |
.9871 |
2 |
885 |
Psychoses |
4.5% |
.7783 |
3 |
871 |
Septicemia w/o MV 96+ hours w MCC |
3.0% |
1.7484 |
4 |
945 |
Rehabilitation w CC/MCC |
2.9% |
.1005 |
5 |
392 |
Esophagitis, gastroent & misc digest disorders w/o MCC |
2.8% |
.7121 |
6 |
194 |
Simple pneumonia & pleurisy w CC |
2.8% |
.0235 |
7 |
291 |
Heart failure & shock w MCC |
2.4% |
.2585 |
8 |
292 |
Heart failure & shock w CC |
2.3% |
.0134 |
9 |
690 |
Kidney & urinary tract infections w/o MCC |
2.1% |
.8000 |
10 |
641 |
Nutritional & misc metabolic disorders w/o MCC |
2.1% |
.7248 |
Note: "CC" signifies a significant complication or comorbidity. "MCC" signifies a major CC.
Source: MedPAR, FY 2008 (early release for discharges during first nine months), Short-term acute care hospitals only.
MS-DRG-based Payments
The MS-DRG
payment for a Medicare patient is determined by multiplying the relative weight for the
MS-DRG
by the hospital's blended rate:
- MS-DRG PAYMENT = RELATIVE WEIGHT × HOSPITAL RATE
The hospital's payment rate is defined by Federal regulations and is updated annually to reflect
inflation, technical adjustments, and budgetary constraints. There are separate rate calculations
for large urban hospitals and other hospitals. There are also technical adjustments for local wage
variations, teaching hospitals, and hospitals with a disproportionate share of financially indigent
patients. There are also adjustments applied to certain types of transfers for some
MS-DRG.
Management Perspectives
The average MS-DRG weight
for all of a hospital's Medicare volume is called the case mix index (CMI).
This index is very useful in analysis since it indicates the relative severity of a patient population
and is directly proportional to MS-DRG
payments. When making comparisons among various hospitals or patient groups, the case mix
index can be used to adjust indicators such as average charges. (Case mix adjusted average
charges would be actual charges divided by the CMI. Such
adjustments are sometimes referred to as "Average charges for a weight of 1.0000.")
The MS-DRG classification
system is a useful tool for managing inpatient quality measurements and operating costs. It groups
patients by diagnostic category for analysis and provides several key measurements of resource
utilization (e.g. average length of stay vs published national averages).
The Medicare Inpatient Prospective Payment System was first introduced in 1985 and the patient
classification system was totally revised for the federal fiscal 2008 beginning October 1, 2007.
This revision was designed to better adjust for severity of illness. (At about the same time, CMS
also changed the method of calculating relative weights to base them on allocated costs instead of
charges.) An Outpatient Prospective Patient System was introduced in 2000 to reimburse hospitals
based on over 660 Ambulatory Payment Classifications (APCs).