"The good news is that hospitals across the Nation, the District of Columbia, and Puerto Rico will see their payments increase under this final rule by nearly $4 billion. This three year effort to reform Medicare's hospital payment system will ensure predictability, reliability, and fairness of Medicare payments well into the future," said Kuhn.

In the previous two years, Medicare made important, incremental changes while it studied comprehensive reform of the inpatient hospital payment system. This year, the rule creates 745 new severity-adjusted diagnosis-related groups (Medicare Severity DRGs or MS-DRGs) to replace the current 538 DRGs. Projected aggregate spending will not change as a result of the reforms. However, payments will increase for hospitals serving more severely ill patients and decrease for those serving patients who are less severely ill.


The changes Medicare is adopting are consistent with public comments on how the reforms should occur and were widely praised in the public comments. Based on these public comments, the new severity-adjusted DRGs will be phased in over two years, rather than one year, as detailed in April's proposed rule. In addition, important first steps are taken in response to an extensive study of "charge compression." CMS is making some initial changes this year and is further studying how to better recognize the cost of expensive devices as it considers other improvements to its payments for FY 2009.

The Medicare Actuary estimates that without an adjustment to account for changes in how hospitals document and code patient severity of illness, the new system would increase payments.

"In keeping with the law, the new basis for DRGs is not intended to reduce overall Medicare costs or to increase them. Based on more than 20 years of program experience with such changes, a documentation and coding adjustment is needed to make sure the new system is budget neutral," said CMS Chief Actuary Richard Foster. "Substantial evidence supports our conclusion that, absent such an adjustment, aggregate payments for inpatient hospital services would increase significantly under the new system-without any corresponding growth in actual patient severity. If we didn't make this adjustment, the Medicare Part A Trust Fund would be exhausted an estimated 18 months earlier than previously forecast."

The changes reflect recommendations from the Medicare Payment Advisory Commission (MedPAC). CMS took its initial steps toward implementing the new system when it created new DRGs for cardiac procedures performed in FY 2006. An additional set of DRGs reflecting severity of illness was introduced for more procedures in FY 2007.

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