Press release




Inpatient psychiatric facilities would receive an average 4.2 percent increase in their Medicare payment rates for discharges occurring on or after July 1, 2006, under a proposed rule issued today by the Centers for Medicare & Medicaid Services (CMS).  This increase includes the effects of the market basket updates resulting in a 4.7 percent increase in total Rate Year 2007 payments.


Within this average, freestanding governmental psychiatric hospitals receive the largest share of the aggregate increase.  The proposed rule also includes several proposed changes in payment policies for these facilities.


The payment increase would affect approximately 1800 inpatient psychiatric facilities (IPFs), including freestanding psychiatric hospitals and certified psychiatric units in general acute care hospitals and critical access hospitals that are paid under the IPF Prospective Payment System (PPS).  This system, which was mandated by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) of 1999 and made effective January 1, 2005, is intended to foster higher quality and more efficient care for Medicare beneficiaries with severe mental illnesses. 


“We believe the changes we are proposing today will support the continued improvement in quality of care for Medicare beneficiaries with severe psychiatric disorders,” said CMS Administrator Mark B. McClellan, M.D., Ph.D.  “In many cases, appropriate inpatient psychiatric care can make it possible for these beneficiaries to return to their homes or to less restrictive settings.”


Payments under the IPF PPS are based on a single Federal per diem rate that includes both inpatient operating and capital-related costs, including routine and ancillary services.  The proposed per diem rate for Rate Year (RY) 2007 is $594.66, up from $575.95 in RY 2006.  This base rate is adjusted for four patient characteristics: age, diagnosis-related group (DRG) assignment, the presence of certain other diseases or conditions (comorbidities), and the patient’s length of stay.  The base rate is also adjusted to reflect the following facility characteristics: the presence or lack of a qualifying emergency department, teaching status, rural location, and each facility’s wage index.  Facilities in Alaska and Hawaii also receive a cost-of-living adjustment.   In addition, the IPF PPS provides a higher payment for each electroconvulsive therapy (ECT) treatment furnished during the IPF stay.


In addition, Medicare continues to pay separately for certain costs, including the costs of physician and nonphysician practitioner services that are paid under the Medicare Physician Fee Schedule, bad debt, and direct graduate medical education costs.


In this first update to the IPF PPS, CMS is proposing a number of refinements to the payment policies affecting inpatient psychiatric facilities.  These include:


  • A proposal to adopt a new method of determining inflation in the costs of goods and services provided in inpatient psychiatric facilities.  Instead of using the acute care hospital market basket, this new market basket will reflect inflation in three types of hospitals that are excluded from the Inpatient Prospective Payment System (IPPS) for acute care hospitals – inpatient rehabilitation facilities, inpatient psychiatric facilities, and long-term care hospitals.


  • A proposal to adopt the OMB geographic area definitions based on the new Core Based Statistical Areas for use in determining the wage index adjustment.


  • A proposal to increase the fixed dollar loss threshold amount for outlier payments from $5700 to $6200 in order to keep overall outlier payments at 2 percent of total payments as per diem rates increase.   This threshold is the amount by which the hospital’s costs for treating a case must exceed the Medicare payment amount for that case before Medicare will make an additional payment to the facility.  The fixed dollar loss threshold is intended to generate outlier payments equal to 2 percent of total payments to inpatient psychiatric facilities.


  • A proposal to increase payment for electroconvulsive therapy (ECT) based on the latest hospital median cost data for ECT.


The proposed rule would incorporate changes in coding and Diagnosis Related Group classifications that were adopted in the inpatient PPS final rule for fiscal year 2006.


During a three-year period for transitioning from cost-based reimbursement to the PPS, inpatient psychiatric facilities will be paid a blend of costs and the Federal payment rate.  For cost reporting periods beginning in calendar year 2006, IPF payment rates will be based 50 percent on the cost-based methodology and 50 percent on the Federal PPS rate.


The IPF PPS proposed rule went on display January 13, 2006 and will be published in the January 23, 2006 Federal Register. Comments will be accepted until March 14, 60 days from the display date, and a final rule will be published later in the spring.  The new payment rates and policies will become effective for discharges occurring on or after July 1, 2006.


For more information, see