"The new severity-based DRGs represent one of the most significant improvements to the hospital inpatient payment system since the institution of the prospective payment system in 1983." said Norwalk. "When combined with the reforms that were established last year, these refinements to the hospital payment system should significantly improve the predictability, reliability and fairness of Medicare payments."

Payment to all hospitals would increase by an average of 3.3 percent for FY 2008 when all provisions of the rule are taken into account. Payments to specific hospitals may increase more or less than this amount depending on the patients they serve. For instance, urban hospitals generally treat more severely ill patients and are estimated to receive a 3.5 percent increase in payments.


In addition to the base payment for the DRGs, the law requires Medicare to make a supplemental payment to a hospital if its costs for treating a particular case exceed the usual Medicare payment for that case by a set threshold. Medicare sets the threshold for high cost cases at an amount that is projected to make total outlier payments equal to 5.1 percent of total inpatient payments. For FY 2008, CMS is also proposing to adopt a high cost outlier threshold of $23,015, down from $24,475 in FY 2007. By better recognizing severity of illness in the DRGs, fewer cases would be paid as outliers. However, CMS proposed to lower the outlier threshold to meet the legal requirement to continue paying between 5 and 6 percent of payments as outliers.

The proposed rule recommends changes to the way Medicare pays for hospital capital-related costs based on an analysis that showed substantial positive margins experienced by some hospitals. The rule recommends a full payment update for rural hospitals and no update for urban hospitals. The rule also proposes to eliminate the large urban add-on payment and seeks comment on gradually discontinuing the teaching and disproportionate share (DSH) adjustments to capital payments.

The proposed rule would implement a provision of the Deficit Reduction Act of 2005 (DRA) that takes the first steps toward preventing Medicare from giving hospitals higher payment for the additional costs of treating a patient that acquires a condition (including an infection) during a hospital stay. The DRA requires hospitals to begin reporting secondary diagnoses that are present on the admission of patients, beginning for discharges on or after October 1, 2007. In the meantime, the DRA requires the Secretary of Health and Human Services (HHS) to select at least two conditions that are (1) high cost, high volume or both; (2) assigned to a higher paying DRG when present as a secondary diagnosis; and (3) are reasonably preventable through application of evidence-based guidelines. Beginning in FY 2009, cases with these conditions would not be paid at a higher DRG unless they were present on admission. The proposed rule identifies six conditions, including three serious preventable events (sometimes called "never events") that meet the statutory criteria. CMS seeks public comment on 7 additional conditions.

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