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On November 15, 2004, the Centers for Medicare and Medicaid Services (CMS) published its final rule for the new Medicare inpatient psychiatric prospective payment system (IPPPS) for inpatient psychiatric facilities (IPFs). The new rules would apply to payments to psychiatric hospitals, distinct part units of acute hospitals, and state psychiatric hospitals.

The system would apply to payments made to hospitals and units for Medicare patients served during cost-reporting periods beginning on or after January 1, 2005 using a four year phase-in.

In this summary of the rule, we provide highlights of the rule's most significant provisions. In each section we provide an indication of the Federal Register (FR) page number where a more elaborate description/discussion can be found.

The various contact individuals listed in the rule for selected areas are:

Janet Samen 410-786-9161 (general information) and Phillip Cotterill 410-786-6598 and Fred Thomas 410-786-6675 (regarding the regression analysis).

Overview

The new system will change the present TEFRA-based (Tax Equity and Fiscal Responsibility Act of 1982) system to a new variable per diem based system. CMS has made numerous changes to the proposed system some in response to comments while others are the result of CMS' ongoing analysis. The updated rates continue to be wage index adjusted while the labor portion of the rate has changed slightly. There continues to be a case mix adjustment accomplished through 15 DRGs with updated codes. Similarly, there continue to be 17 comorbidity categories although there are some changes and expansion of codes.

CMS has adopted a variable per diem adjustment for the first 21 days of the stay. The first day weight is higher if the patient is admitted to a facility with a full service Emergency Department (ED). The weights for most days decline throughout the stay to a low weight of .92 for the 22nd day. This same factor would apply to all the days over 22.

The age adjustment is also variable (across eight ranges) rather than fixed. There continues to be a rural facility adjustment. There is also a stop loss adjustment as well as adjustments for ECT (electro convulsive therapy), teaching, and outliers.

Sample payment calculations are included in the back of the tool kit.

The Payment Rate, Variable Per-Diem, and Emergency Department Adjustments

The revised payment rates were developed using the FFY 2002 cost report data and the FFY 2002 MedPAR (Medicare provider analysis and review file) payment data because these were the latest complete data available.

The final base payment rate of $575.95/day includes capital and is divided into labor and non-labor portions ($417.73 and $158.22 respectively) (FR 66936/66982). This creates a labor proportion of 72.528 % labor and 27.472 % non-labor, which was developed using the CMS TEFRA market basket including capital (FR 66928). [NOTE: CMS has issued Program Transmittal 384 Change Request 3541 in which it provides general instructions to the intermediaries that includes different labor/non-labor proportions and rates from the final rule (labor $416.11/.72247 and non-labor $159.84/.27753 respectively). This change will not materially affect the outcome of any evaluation of the rules impact. We understand that there is a Correction Notice to the final rule that will be published and believe that that correction will incorporate this change. Nevertheless, the examples and discussions in this s ummary will include the amounts in the final rule s ince it is controlling until it is corrected.] The payment for each day is calculated by applying the applicable adjustment factor (FR 66942) which range from 1.31/1.19 (1.31 applies to a full service ED provider (see below) for the first day to .92 for the 22nd day and beyond.

After further analysis CMS has decided that in adjusting the per diem a variable per diem adjustment is warranted (FR 66947). Accordingly, the tiers in the proposed rule are replaced with adjustment weights that generally decrease over the first 22 days of the stay. This means that the payment for the 22nd day represents a decrease in payment as its weight is .92. All days after the 22nd day will be paid using a .92 weight.

CMS has also decided to provide a separate payment adjustment that would be applicable to patients that are admitted to a facility that has a full service emergency department. CMS accomplishes this adjustment by using a different weight for the first day in the variable per diem adjustment (1.31 v 1.19). This first day factor would not apply in the situation where a patient was initially admitted to an acute hospital through its ED then readmitted to a distinct part psychiatric unit .

The resulting rates are further adjusted by factors related to facility and patient characteristics.

Facility Characteristic Adjustments

These adjustments include: an area wage adjustment, rural status adjustment, and teaching status adjustment.

Area Wage Index - AWI
CMS will use an AWI developed from data and areas from the final acute care prereclassified area wage index for FY 2005 for the geographic adjustment to the rates (FR 66952). Implicit in this decision CMS will not be adopting the new labor market areas it adopted for the acute PPS in FY 2005. The use of the prereclassified AWI is consistent with CMS' decisions on the other non-acute inpatient PPS'. The applicable AWIs for each area are listed in a Table at the end of the rule (FR 66985).

Rural Status Adjustment
Analysis by CMS continues to indicate that there are wide differences in costs between urban and rural providers, which are possibly the result of a low-volume effect. These cost differences are so great that CMS believes it warrants an adjustment. Accordingly, based on CMS' new analysis it has decided to increase the rural add-on to 17% (FR 66954) as opposed to 16% in the proposed rule.

Teaching Adjustment
CMS has decided to adopt its proposed teaching adjustment concept (FR 66954). The teaching adjustment would be a multiplier on the otherwise applicable per diem rate. It would work similar to the way in which the indirect medical education adjustment works under the acute care PPS system.

Consistent with the proposed rule CMS has adopted a facility specific teaching adjustment. The adjustment would be applied to the payment for the day/stay using a teaching factor (FR 66954). This adjustment is based on the ratio of the number of psychiatric interns and residents (I and R) to the average daily census (ADC) (as opposed to beds) in the psychiatric facility or unit.

The adjustment continues to be based on an exponential relationship of the I + R/ADC factor with a coefficient of .5150 (which is updated from the proposed rule). The net effect is that providers with a .10 ratio would have approximately a 5.0% increase in payment, while a provider with a .25 ratio would have about 10.0% increase in payments.

CMS also adopts a CAP on the I + R factor (numerator only)(FR 66955). The CAP would be determined based on the I + R FTEs on the hospitals final settlement of the cost report that was most recently filed before November 15, 2004. Thus there would be some retroactivity to the settlement for teaching payments.

Cost of Living Adjustment (COLA)
After analysis of costs and the impact of various adjustments CMS decided that there should be an additional cost of living adjustment to the rates paid to hospitals in Alaska (AK) and Hawaii (HI). These adjustments (for AK and HI) are similar to the adjustment for providers in these states in the acute care PPS and are applied to the non-labor portion of the rate. The additional payment adjustments that apply to Hawaii vary by county (FR 66982). CMS' analysis suggests that an additional payment adjustment is also warranted because large differences in the cost of living in these areas that is not included in the base rate (FR 66957).

CMS considered but decided not to establish a COLA for California providers (FR 66958).

Patient Characteristic Adjustments

The patient-related adjustments include: case complexity, cormorbidity, and age.

Case Complexity Adjustment
CMS has adopted essentially the case complexity adjustment it proposed (FR 66936). CMS has updated/modified several of the DRGs. CMS is providing payment for all psychiatric ICD9 and DSM codes; however, only those cases that group into the 15 DRGs will receive the DRG adjustment (FR 66937). The applicable weights range from a 1.22-.88 (FR 66938).

Comorbidity Adjustment
The final rule continues the adjustment for comorbidity (CC). This is accomplished through a series of weights used as multipliers to the otherwise applicable rate (FR 66938). CMS has made some changes to the CC adjustment and to the corresponding weights. Several changes of note include:

• A CC for developmental disabilities is added (weight 1.04).
  
• Deleting the separate HIV CC and combining it with the broader "Infectious Disease" category (weight of 1.07).
  
• Change the Oncology Treatment CC slightly (weight of 1.07).

The net effect of these changes is that there are still 17 cormorbidities with a range of adjustments from 1.03-1.13.

Table 4 of the rule (FR 66940) has a comparison of the proposed and final CC codes and Table 5 (FR 66944) has the final codes and applicable adjustments.

Patient Age Adjustment
The proposed rule included an age adjustment that was a flat 13% add-on adjustment for patients that were 65 years of age and older. Based on comments and further analysis CMS has decided to adopt a variable adjustment that changes with the age of the patient. Under this concept the range of the adjustments are broadened. For example, patients that are 50 but less than 55 would receive a 2% add-on while patients 80 and over would receive a 17% add-on (FR 66946). The eight ranges of adjustment (FR 66983)are as follows:

< 45          No adjustment
45= 50          1.01
50= 55          1.02
55= 60          1.04
60= 65          1.07
65= 70          1.10
70= 75          1.13
75= 80          1.15
=80              1.17

Specifically, the payment of an individual over 50 but less than 55 years of age would receive a 2 % add-on to the otherwise applicable payment accomplished by a 1.02 adjustment factor applied to the payment.

ECT (Electro Convulsive Therapy)
As rumored CMS' analysis supports an additional adjustment when a patient receives ECT services during their stay. The payment would be separate and outside the otherwise applicable payments. The payment would be $247.96 per treatment (FR 66951 and FR 66982). This payment will be adjusted for wage differences in the same manner that the per diem payment is adjusted. (See note regarding revised labor/non-labor correction). The COLA adjustment would apply to the non-labor portion of the rate. CMS used the hospital OPPS unadjusted claims data for its analysis in developing the IPPPS ECT payment. Providers will be required to code the ECT service on the bill (procedure 90870) along with the number of units the patient received (FR 66951).

Physician Re-Certification
CMS has decided to retain the current recertification requirement at the 18th day following admission to the IPF (FR 66964). CMS had proposed reducing this time to the 10th day.

CMS considered but will not implement the following:

Gender
While CMS' analysis continues to indicate that there is about a 2% difference between the cost of treating females verses males, it believes that this differential does not warrant a payment adjustment (FR 66950).

Involuntarily Committed Patients
Based on CMS analysis of relative costs it has decided not to implement a payment adjustment for patients who are involuntarily committed to an IPF (FR 66951).

Other Payment Provisions

Transition Period
CMS has adopted its proposed a four-year transition period. For the initial year, cost-reporting periods beginning on or after January 1, 2005, providers in their initial year will have their payment based upon 75% present system and 25% PPS. Thereafter, the blends would be 50%/ 50% for year 2, 25%/75% for year 3, and 100% PPS thereafter (FR 66964). Accordingly, for the initial three years, hospitals/units will be operating under two payment systems - albeit for difference proportions of their payments. CMS reemphasizes that there will be no 100% opt in to the IPPPS.

Interrupted Stays
CMS is concerned that under a variable per-diem system there would be an incentive to discharge and re-admit patients to obtain the higher payment adjustments from the earlier days of the stay, twice. The final rule defines an interrupted stay as one in which the patient is discharged from an IPF and returns to the same or another IPF within three consecutive calendar days. In this situation, the patient would be regarded as having one continuous hospitalization (FR 66962).

Outlier Pool and Adjustment
The final rule adopts an outlier payment calculated on a per case of discharge basis. It updates and increases the outlier cost threshold to $5,700 (FR 66960). Qualifying cases will receive 80% of the cost of cases through the 9th day of the stay and 60% thereafter (FR 66962). This represents a change of one day from the proposed rule, which CMS asserts is based on its change to a variable per diem adjustment. The outlier pool continues at an estimated 2.0 % of total payments.

In adopting this policy CMS links the definition of the cost to change ratio (CCR) to its inpatient acute care PPS definition. As such a providers adjustment for outliers would be based on its actual CCR for the period in which the discharge occurred. Thus, final outlier payments will be subject to retroactive settlement (FR 66962). CMS also identifies the specific cost report lines that would be used to determine CCRs.

Stop-Loss Payments
In response to comments CMS is instituting a stop-loss payment that would guarantee that each facility receive total payments under the IPF PPS portion of its payment that are no less than 70% of its payments under TEFRA (FR 66964). The stop-loss would apply only during the transition period. As such a facilities payments under the IPPPS portion of its payments would be adjusted to 70% of what it would have received under TEFRA.

Coding
In the final rule CMS clarifies its policy and approach in response to comments on the subject. In the proposed rule CMS inadvertently omitted the ICD 9-CM instructions pertaining to the "code first" diagnosis codes. CMS reminds providers of the "Instructional Notations" in ICD 9, which explains the "code first" concept (FR 66945).

Essentially "code first" places an emphasis on sequencing diagnosis codes and requires that the underlying disease (etiology) be coded first (principal diagnosis) with the code the note is applied to being coded second. This concept guides the principal and secondary diagnoses. In addition, there are code first notes under selected codes, which guide their order of presentation. Essentially, causal conditions are coded before manifestations (effects).

New Providers
Once the PPS begins, new providers that open will be placed 100% on the new fully prospective system (with no transition). A new provider is a provider of inpatient psychiatric hospital services otherwise meeting the criteria whose first cost-reporting period as an IPF begins on or after January 1, 2005 (FR 66966).

In the Future

Future Updates
The rule would not update the federal per-diem rate ($575.95) for 18 months after the effective date of January 1, 2005. Therefore, beginning on July 1, 2006, and subsequent years, the federal per-diem would be updated for the subsequent 12 month period using the excluded hospital with capital market basket increase in order to reflect the price of goods and services used by IPFs. The present (final) market basket uses the 1997 based weights for goods and services to update the labor share and obtain the update for the ratio (FR 66928/66982).

Future Refinements/Research

CMS plans to conduct ongoing monitoring and research on various payment elements.

This research will include the Case Mix Assessment Tool (CMAT), which CMS described in the proposed rule. In the final rule, CMS responded to a wide range of comments on the proposed CMAT (FR 66967). The CMAT as modified is being reviewed by the Executive Office of Management and Budget. Thereafter, it will be pilot tested and potentially edited before use in their research.

Plans are to relate the data obtained in the CMAT to claims and cost report data before deciding on what to implement nationally and what changes to make to the data collected that would determine potential future payment system adjustments or other changes. CMS' response to comments did not preclude ways to electronically collect the data necessary for the payment system (or CMAT type data).

CMS is clearly interested in collecting data that will help it refine the payment system, understand relationships among variables or contribute to development of outcome measures.

Calculation of Estimated Payments

PPS Payment Example # 1
Payments under the final inpatient psychiatric facility (IPF) prospective payment system would be determined by adjusting the per-diem base amount by the appropriate wage index and applicable IPF prospective payment system payment adjustments and adding any applicable outlier amounts. An example of how to calculate payment under the proposed IPF prospective payment system follows.

Example: Jane Doe, a 78-year-old female, is admitted to a psychiatric unit within an acute General Hospital located in Richmond, Virginia, which has a full service Emergency Department. The patient was admitted to this hospital's unit directly. The hospital is a teaching facility with a teaching adjustment of 1.07. Ms. Doe presents with signs and symptoms indicating a primary diagnosis of Major Depressive Disorder (ICD-296.33, DRG-430). Her medical history includes Uncontrolled Type 1 Diabetes with Ophthalmic manifestations (ICD-250.53) and Chronic Renal Failure (ICD-585). Ms. Doe remains in the hospital for 11 days. This patient also received 4 ECT treatments.

Example of Payment Calculation

* Note: The labor and non-labor proportions in these examples are from the Final Rule November 15, 2004 Federal Register. On December 1, 2004 CMS published a Program Transmittal 384 Change Request 3541 which includes different labor/non-labor proportions (labor $416.11/.72247 and non-labor $159.84/.27753), which may ultimately be included in a forth coming Federal Register Correction Notice. Use of the corrected proportions will not materially affect the results of any impact analysis calculations related to the new IPPPS.

Calculation of Estimated Payments

PPS Payment Example # 2
This example is identical to Example #1 except for the following four changes; the hospital is located in rural Virginia, it does not have a full service ED, it does not have a teaching program, and the patient did not receive any ECT treatments.

Example Outlier Payment Calculation

Example Outlier Payment Calculation

Mr. Smith's case is $18,000 ($25,000 x.72). Because the IPF is a non-teaching urban facility, the fixed dollar threshold is adjusted by the wage index 0.9397.

Example Stop Loss Calculation

An Estimate of the Hospital's Stop Loss Payment for FYE 12/31/2005 is as follows:

Rate and Adjustment Factors

Per Diem Rate:

Facility Adjustments:

Cost of Living Adjustments (COLAs):

Patient Adjustments: