A side-by-side summary of BIO's comments to the IPPS proposed rule and CMS' response

On August 1, 2006 the Centers for Medicare and Medicaid Services (CMS) released the fiscal year (FY) 2007 hospital inpatient prospective payment system (IPPS) final rule.

On August 1, 2006 the Centers for Medicare and Medicaid Services (CMS) released the fiscal year (FY) 2007 hospital inpatient prospective payment system (IPPS) final rule. /1 The rule will be published in Federal Register on Friday, August 18, and applies to hospital discharges occurring on or after October 1, 2006.

Overall, the final rule increases Medicare payments to hospitals that report quality data by 3.4 percent. The rule also implements a cost "outlier" threshold of $24,475, which is lower than the $25,530-threshold originally proposed for FY 2007, but higher than the $23,600-threshold in effect for FY 2006.

In general, the changes to the diagnosis-related group (DRG) system adopted by CMS in the final rule are not as drastic as those CMS presented in the proposed rule published in April. For FY 2007, CMS elected to transition to DRG relative weights based on hospitals' estimated costs rather than charges; however, in doing so, CMS did not adopt the hospital specific relative value cost center (HSRVcc) approach, and made several other technical refinements based on stakeholder comments. In addition, CMS will phase-in cost-based DRGs payments over three years. CMS also elected not to implement the proposed consolidated severity-adjusted DRG (CS DRG) system for FY 2007, and instead, will evaluate alternative systems that take into account for severity in preparation for FY 2008.

In the table below, we summarize CMS' responses contained in the IPPS final rule to BIO's specific comments on the provisions of the proposed rule.

Issue BIO Comment CMS Response /2
Timing of Refinements to DRG Relative Weight Methodology BIO urged CMS to delay the implementation of the revised DRG relative weight methodology for at least one year to allow stakeholders more time to fully evaluate and validate and prepare for its impact. CMS will begin a three-year transition to cost-based DRG relative weights in FY 2007. However, CMS will not adopt the hospital-specific relative value cost center (HSRVcc) methodology it proposed. Instead, the agency says it will further analyze the HSRVcc methodology over the next year, including the impact of and feasibility of adjustments for "charge compression." CMS will consider proposing further changes to implement HSRVcc in FY 2008, (pg. 69).
Use of Unweighted Mean Cost-to-Charge Ratios (CCRs) to Set Relative Weights BIO raised concerns regarding CMS' use of unweighted geometric mean CCRs rather than CCRs weighted by hospital size to set relative weights, and requested that CMS further explain its rationale and work with stakeholders to determine if that is the most accurate approach to setting relative weights. CMS reconsidered its approach to setting relative weights, and will adopt a charge-weighted method of calculating CCRs in FY 2007. Specifically, CMS states that it believes it may be more appropriate to apply CCRs based on aggregate costs and charges among hospitals to the charges aggregated by DRG, (pg. 74).
Hospitals' Mapping of Costs and Charges to Cost Centers BIO pointed out that the accuracy of CMS' proposed relative weight setting methodology depends on uniform mapping of hospitals' costs to the applicable cost centers. However, in practice, hospitals often assign costs to their cost centers in non-standard ways. CMS refused to modify its cost report or cost reporting instructions for FY 2007. Although CMS acknowledges that hospitals have some flexibility in reporting costs and charges to accommodate their institutions accounting systems, the agency believes the burden on providers of specifying exact components of individual cost centers may not outweigh the "marginal improvement in precision" it would achieve, (pg. 93).
Implementation of Severity Adjusted DRGs BIO urged CMS to implement severity-adjusted DRGs at the same time as the refined DRG weight methodology, in accordance with MedPAC's recommendation, to prevent additional instability and further distortion in DRG payment rates. CMS will adopt cost-based relative weights in FY 2007 (without the HSRV component of the methodology). In addition, while not adopting CS DRGs in FY 2007, CMS will create 20 new DRGs and modify 32 others to improve the current DRG system's recognition of severity. According to CMS, adopting some of the basic aspects of a severity-adjusted DRG system is an "interim steps" that will allow hospitals to take advantage of improved recognition of severity in the context of the current DRG system, (pg. 180-181).
Accounting for Complexity in Severity-Adjusted DRGs BIO urged CMS to develop a severity-adjusted DRG system that recognizes technologies that represent increased complexity, but not necessarily greater patient severity of illness. CMS will "carefully consider" the issue of refining CS DRGs to better account for complexity before proposing to adopt them for FY 2008. In addition, CMS has engaged a contractor to conduct an evaluation of alternative DRG systems that may better recognize severity, which it expects to complete this fall. According to CMS, some of the alternatives may be based on the current DRG system, in which case the issue of accounting for complexity may no longer be a concern. However, if CMS proposes to adopt the CS DRGs in FY 2008, the agency will consider further refinements to the system so it accounts for complexity in addition to severity, (pp. 134-135).
Introduction of ICD-10 Coding Set BIO recommended that CMS adopt the ICD-10-CM coding set as soon as possible to ensure that IPPS can continue to recognize new technologies and to help CMS set appropriate rates for all services. CMS will continue to evaluate whether to adopt ICD-10, acknowledging the importance of an "accurate and precise coding system." In the meantime, however, CMS will continue to update the ICD-9 coding set, (pg. 332).
Effects of DRG Changes on New Technology Provisions BIO requested that CMS examine the effects of its proposed DRG changes on new technology add-on payments, and urged the agency to reconsider recent applicants for new technology add-on payments in light of any methodological changes adopted in the IPPS final rule. CMS will continue to apply the new technology cost criterion using standardized charges "consistent with the statute." /3 Further, CMS notes that changes to the DRG system to better recognize patient severity will have no effect on the agency's application of the new technology provision, but rather will merely result in the calculation of different thresholds for the revised DRGs, (pg 460).
Initiating New Technology Status Based on FDA Approval BIO reiterated its previous requests for CMS to use the date of issuance of a new ICD-9-CM code, rather than the date of FDA approval, as the starting date for new technology status. This is consistent with both the statute and CMS' own regulations. CMS refused further discussion on this topic, and instead referred to previous discussion that appeared in the FY 2005 IPPS final rule (69 FR 49002) and the FY 2006 IPPS final rule (70 FR 47343), (pp. 458).
Determination of "New" for Existing Therapies with New Indications BIO also requested that CMS provide clear guidance and greater transparency as to how CMS will make a determination of "new" for existing therapies that have new FDA-approved indications or new therapies that are appropriately captured under existing ICD-9 codes that may otherwise meet the criteria of the new technology provision. CMS did not offer further comment on this topic, citing previous discussion of situations in which a new technology "is described under an existing ICD-9 code, but subsequently receives approval for a new indication from the FDA," referring to the September 7, 2001 new technology final rule (66 FR 46915) and the FY 2005 IPPS final rule (69 FR 49011) concerning INFUSE® Bone Graft for tibia fractures, (pg. 460).

Please feel free to contact John Siracusa at (202) 312-9281 or or Jayson Slotnik at (202) 312-9273 or for additional information.


1/ The CMS display copy of the IPPS final rule is available at:

2/ Note that page numbers provided in italics throughout this column correspond to the display copy of the final rule.

3/ SSA 1886(d)(5)(K).