February 2007 FEATURE ARTICLES

Claims and Coding

Hospitals: Get Ready  for Severity- Adjusted Reimbursement

CMS plans to introduce its severity-adjusted DRGs in October 2007. However, the time for the industry to start preparing is now.

By Robert J. Leary

Hospitals remain in a holding pattern as the Centers for Medicare & Medicaid Services (CMS) formulates the final details of how it will implement severity-adjusted reimbursement for inpatient services. In August 2006, CMS announced the timetable for its gradual phase-in of severity-adjusted reimbursement, but the agency is currently deciding on the casemix system that it will use to determine payments under the new program.

While waiting for CMS’ decision, hospitals should monitor CMS’ casemix evaluation process, since the selected solution will have a significant impact on how hospital payments are determined. In particular, hospitals should review the findings of a casemix system evaluation report that had been scheduled for release in January. The report was produced by the RAND Corp., which CMS engaged to evaluate commercially available casemix systems. The report provides an evaluation of commercially available systems, and will be used by CMS as input into their decision-making process to create the proposed rule due in May.

Background: CMS Reimbursement Changes
On April 25, 2006, CMS issued its proposed changes to the Medicare Inpatient Prospective Payment System (IPPS) with the goal of improving the accuracy of payment rates for inpatient stays. These changes include the replacement of the current Diagnosis Related Groups (DRGs) with a new methodology that adjusts for severity of illness and the application of hospital-specific relative value (HSRV) weights based on costs rather than charges. These changes are designed to increase the accuracy of Medicare payments and prevent hospitals from “cherry picking” cases that would be the most profitable.

CMS initially proposed to use its Consolidated Severity-Adjusted DRGs (CSA-DRGs) methodology to implement the severity-adjusted reimbursement. CSA-DRGs are a derivative of All Patient Refined Diagnosis Related Groups (APR-DRGs), a proprietary methodology owned by 3M Health Information Systems. However, concerns about the system’s complexity and the lack of transparency within the logic used to determine reimbursement, resulted in numerous letters sent to CMS during the public comment period. In fact, CMS received more than 2,300 comment letters from hospitals, industry associations, software vendors and other interested parties, including 53 senators and 189 members of Congress.

In response to the many comment letters that it received, CMS modified the details of its proposed changes when it issued its final rule on Aug. 1, 2006. Included in the modifications was a provision that CMS would evaluate alternative methodologies to support its implementation of severity-adjusted reimbursement.

System Evaluation
The fact that CMS is evaluating alternative systems is a partial victory for the industry. It shows that CMS carefully considered the concerns that were expressed in the letters that it received during the public comment period. The sheer volume of letters demonstrates the industry’s strong sense of passion on the issue and the importance of CMS’ decision.

In the RAND report, the classification and weighting methodologies of each system were evaluated in separate phases. The five systems evaluated for the report include:

• Medicare Modified All-Payer Severity-Adjusted Diagnosis Related Groups (MM-APS-DRGs) from Ingenix, Eden Prairie, Minn.
• Consolidated Severity-Adjusted DRGs (CSA-DRGs), a variation of All Patient Rined Diagnosis Related  Groups (APR-DRGs) from 3M Health Information Systems.
• CMS DRG with modifications to adjust for high-risk categories from 3M Health Information Systems.
• Refined DRGs from Solucient, Evanston, Ill.
• Refined DRGs from Health System Consultants, New Haven, Conn.

With CMS still evaluating the RAND report, it’s too early to speculate on which system will be selected. However, when CMS makes its recommendation in May, there will be another public comment period where the industry can voice any concerns that it may have and help shape the final rule.

Implications
CMS is planning to introduce severity-adjusted DRGs in October 2007, and the time for the industry to start preparing is now. The introduction of severity-adjusted DRGs will fundamentally impact the role and level of effort of coding and health information management (HIM) in the hospital revenue cycle. Severity-adjusted DRGs mean that hospitals need to code more completely and make sure that all codes affecting reimbursement make it to the bill. The current DRG system requires at most two diagnosis codes (a principal and one secondary as a complication or comorbidity) and one procedure code for DRG assignment. Severity-adjusted DRGs will change that equation. In fact, depending upon which methodology CMS adopts, it is possible that every complication coded on a bill could increase Medicare payments.

Severity-adjusted DRGs will redistribute dollars across hospitals. Hospitals that code more completely will get a larger share of the reimbursement pool than hospitals that continue to code using today’s DRG schema. As a result, hospitals will need to increase the depth of coding just to maintain the status quo under severity-adjusted DRGs.

Severity-adjusted DRGs will also create compliance and work flow issues for hospitals. The CMS DRGs have been relatively stable over the last 20 years, making coding and possible compliance issues fairly well known and documented. However, a new system with new relationships between codes and classifications is bound to create new—and unforeseen—risks and areas of concern. Compliance issues, as well as enhanced severity coding, will most likely require that more diagnoses appear on a bill just to sustain historic revenue streams. It stands to reason that this additional coding will need to be supported by more complete documentation. This, in turn, means that coders will need to query physicians more frequently.

There are two ways that HIM professionals can play a critical role in the transition to severity-adjusted DRGs. The first is to be active and vocal participants in the process. CMS will continue to seek public input on the general issue of severity-adjusted DRGs and will accept more formal comments when the new methodology is proposed later this year. The HIM community can help by making sure that CMS understands the operational implications of its proposals, as well as whether its proposals are consistent with current coding guidelines. The second is to begin now to plan for the transition by working with medical staffs to improve documentation, educating finance departments about the revenue implications of severity-adjusted DRGs, and training coding staffs to code more completely and accurately.

Evaluating Maryland’s Experience
For more than a year, the State of Maryland has been using the APR-DRG severity-adjustment system from 3M Health Information Systems as the basis for its all-payer hospital rate-setting system. APR-DRGs form the foundation of the CSA-DRGs that CMS initially proposed to use in its nationwide roll-out of a severity-adjustment system.

Although CMS is now evaluating alternative severity-adjustment systems, APR-DRGs remain in contention for CMS’ selection. Therefore, there is value in examining some of the experiences that health information managers in Maryland hospitals have had with the system:

• The complexity of the APR system, including complicated interactions between multiple diagnoses, major diagnostic category rerouting logic and other factors, makes it difficult to evaluate the accuracy of DRG assignments.
• Coding professionals with APR experience indicate that the complexity of the system makes it nearly impossible to determine why similar cases are classified differently and to identify errors. Currently, most professional coders have a very good understanding of how different diagnosis codes affect assignment to particular CMS DRGs. This knowledge is applied as similar cases are coded. The APR-DRG system, however, contains logic that changes for each secondary diagnosis code, depending upon which principal diagnosis code is assigned, and which other diagnosis codes are assigned.
• It appears that there is a “more is better” mentality to coding, in which the coders have learned to assign codes for “anything and everything” documented in the record, in an effort to capture all conditions that may affect severity. But this method of coding may actually violate official coding guidelines, especially in scenarios indicating that certain codes, such as those for signs and symptoms, should not be reported in the presence of a related specific disease process. There is an inappropriate incentive to assign these additional codes if the severity level is affected.
• The “more is better” mentality also has led to an increase in physician inquiries. This has caused substantial slow-downs from both a coding and a record completion standpoint.
• Many Maryland hospitals report that coding for APR-DRGs has had a negative impact on productivity. Some Maryland hospitals have reported as much as a 30 percent productivity loss since APR-DRG implementation. Additionally, many of these hospitals have dramatically increased their coding staffs to ensure appropriate monitoring and feedback. It’s clear that many hospitals around the country will not have the ability to adjust their staffing levels to this degree if this methodology were to be used for Medicare.

The Time to Prepare is Now
Regardless of the final system selected by CMS, management and compliance staff must ensure that their coding staff receives as much education related to the severity-adjusted system as soon as possible to minimize productivity losses. Some hospitals in Maryland report that additional coder training in pharmacology and diseases processes is a must.

There will be a learning curve for the coding staff and the staff members who are involved in making sure that the clinical documentation is as complete and accurate as possible. Many facilities have implemented documentation improvement programs during the last several years, but these have been based on the current CMS DRGs. As a result, many of the specific guidelines developed for clinicians will now be outdated as a new system is put in place. There will be a necessary lag time between system implementation and the time when most coders are comfortable with the nuances of the system and have recovered some of the downturn in productivity.

Any change to the DRG system will require additional training for coding staffs, and the time to prepare for severity-adjusted reimbursement is now. In addition, hospitals should continue to monitor CMS’ casemix system selection process to stay abreast of upcoming changes. They should take an active role in analyzing alternatives and be prepared to comment on the proposed rule when it is published in May.

Robert J. Leary is the CEO of HSS, an Ingenix company. Contact him at bob.leary@hss-info.com.

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