Press release



The Centers for Medicare & Medicaid Services (CMS) today proposed a rule for fiscal year 2004 that includes a 3.5 percent increase in payment rates, beginning October 1, 2003, to hospitals for inpatient services furnished to individuals with Medicare coverage. Overall Medicare is expected to pay approximately $100.2 billion to about 4,800 acute care hospitals in fiscal year 2004, an increase of $5.7 billion over FY 2003. Of this amount, approximately $2.1 billion is due to payment rate and other policy changes, and the remaining $3.6 billion is due to anticipated increased inpatient services.

Under the inpatient prospective payment system (PPS), Medicare sets the payment rate for a beneficiary’s stay based on the Diagnosis Related Group (DRG), which reflects the patient’s diagnosis and the procedure performed. CMS has defined over 500 DRGs, ranging from the relatively simple, low cost treatment for eye contusions to more complex and expensive surgical procedures like heart transplants.

Medicare law requires CMS to update the inpatient PPS annually to reflect changes in the “hospital market basket” – that is, the costs of goods and services used by acute care hospitals. The update rule also addresses changes in the weights assigned to individual DRGs – and therefore the payment for those services – as well as payments to be made for new procedures and technologies. The law pegs the annual update for acute care hospitals for fiscal year 2004 to the full estimated market basket, now projected to be 3.5 percent.

“CMS is committed to paying appropriately for hospital services,” said agency administrator Tom Scully. “While this proposed rule would increase overall payments to hospitals, it also proposes a number of changes to current policies that could affect how payments are distributed.”

CMS is proposing to relax the criteria for hospitals to receive add-on payments for new technologies. For a technology to be eligible for add-on payments, it must be “new,” in that data reflecting its costs would not be available for use in setting payment for the associated DRGs. In addition, the new technology must offer a significant clinical improvement over existing technologies and must be much more costly than the DRG payment.

Under current rules, a few applications for the add-on payments have been submitted in the two years since the add-on payments became available. Of those, one has met the existing criteria for eligibility and another is under review. The proposed rule would reduce the high-cost threshold for add-on payments for new technologies. The lower threshold would apply to applications for new technology add-on payments for fiscal year 2005.

Under the proposed rule, the outlier threshold would increase to $50,645, up from $33,560 in 2003, in order to limit outlier payments to 5.1 percent of total payments under the inpatient PPS. CMS estimates outlier spending was 5.5 percent of total payments during the first three months of fiscal year 2003 and was 7.9 percent of total payments during fiscal year 2002.   In a separate rulemaking procedure, CMS is planning to revise the rules governing outlier payments. CMS anticipates that the outlier rule will be finalized during the comment period for the inpatient PPS rule. Changes to the outlier payment methodology adopted in that final rule may make it possible to significantly lower the outlier threshold in the final inpatient rule.

The proposed rule would expand the post-acute transfer policy, which now applies to 10 DRGs, to an additional 19 DRGs. This policy treats discharges involving the designated DRGs from an acute care hospital to a post-acute setting as a transfer. As a result, the transferring hospital is paid a per diem rate, not to exceed the full payment for the DRG.

The proposed rule discusses the potential for excluding wage data from critical access hospitals in calculating the hospital wage index and specifically invites public input on this idea.

The proposed rule will be published in the May 19, 2003 Federal Register. Comments from the public will be accepted until July 8, 2003. A final rule will be published later in the year.