Medicare Payment Adjustment for Inpatient Psychiatric Facilities: A Review and Potential Refinements

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Posted to Web: November 08, 2010
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In 2005, CMS implemented a prospective payment system (PPS) to pay for Medicare services provided by inpatient psychiatric facilities (IPFs). Using FY 2003 administrative data, this study independently replicates the analyses used in developing the IPF PPS. It considers alternative comorbidity classifiers and conducts the first facility-level analyses of the IPF-PPS. Payments are found to vary less than proportionately with costs at the facility level, suggesting payments may not fully reflect the higher costs of facilities that treat sicker patients.  It also demonstrates how an expansion of the current set of comorbidities would more closely match payments to patient costs.

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In 2005, the Centers for Medicaid and Medicare Services (CMS) implemented a prospective payment system (PPS) to pay for Medicare services provided by inpatient psychiatric facilities (IPFs). The Balanced Budget Refinement Act of 1999 (BBRA), which mandated the switch to a PPS, also required that the PPS use a per day rather than per stay unit of payment and that it reflect differences in IPF patient service use and costs. Prior to PPS implementation, IPFs had been paid according to reasonable costs per discharge, subject to limits established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). IPFs had been exempted from the PPS established for acute care hospitals by the Social Security Amendments of 1983.

The key components of the IPF PPS include 1) a base rate of $595.09 (in 2007), 2) a patient classification system that groups patients according to their psychiatric DRG and 17 separate comorbidity categories, 3) payment adjustments for the DRG, comorbidities, age, day of stay, and patients who receive electro-convulsive treatment, and 4) facility-level payment adjustments for area wage levels, cost of living adjustment (COLA) for IPFs located in Alaska and Hawaii, rural location, teaching hospital status, and maintenance of an emergency department. The IPF PPS also includes an outlier policy with a 2 percent outlier pool and a stoploss policy that guarantees the total payments to facilities under the IPF PPS are no less than 70 percent of their pre-PPS payments under TEFRA.

In shifting from cost-based reimbursement to a PPS, policy makers expect to increase incentives for efficient provision of care. The payment adjustments are meant to account for clinically appropriate variation in resource use across different types of patients. The facilitylevel adjustments are meant to reflect cost variation across facilities (net of patient-level adjustments) that are considered to be appropriate or which are designed to offset the costs of desirable activities (e.g., maintaining an emergency department).

An important question for any PPS is whether its patient classification system and corresponding payment adjustments account sufficiently for variation in patient costs. Insufficient adjustments could create strong incentives for providers to stint on care during a stay and avoid admitting patients whose costs would not be fully compensated. Success in this regard depends on the ability of the patient classification system to capture predictable variation in costs at the patient level and matching adjusted payments and costs at the facility level.

This study re-examines the recently developed IPF PPS using an independentlyconstructed database of IPF stays in fiscal year 2003 (FY 2003). We replicate the regression analyses underlying the IPF PPS, as described in the Federal Register (2003 Preliminary Rule, 2004 Final Rule and corrections published in 2005) and compare our findings with those of the IPF PPS which was based on FY 2002 data.

In the study, we also consider alternative comorbidity classifiers and explore using the history of past inpatient stays to improve cost prediction and suggest new payment adjustors. We conduct the first facility-level analyses of the IPF-PPS in order to understand the relationship between IPF PPS payments and facility-level costs. The facility-level analyses provide information on the way the PPS distributes payments across facilities and the strength of incentives for facilities to select against more or less costly patients.

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