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CMS' Proposal to Update MS-DRGs Based on Market Prices

Analysis  |  By Valerie Rinkle  
   September 07, 2020

A key objective is to enable updates to the MS-DRG payment rates that are no longer dependent on gross charges billed by hospitals that are reduced to cost using hospitals' cost report data.

This article appears in the July/August 2020 edition of HealthLeaders magazine.

Included in the FY 2021 inpatient prospective payment system (IPPS) proposed rule are proposals for hospitals to report their negotiated payment rates.

CMS considers these new proposals as an evolution of the existing requirements concerning price transparency.

CMS states that its proposals are in response to two Executive Orders: Executive Order 13813, Promoting Healthcare Choice and Competition Across the United States, and 13890, Protecting and Improving Medicare for Our Nation's Seniors.

A key objective in the proposals is to enable updates to the MS-DRG payment rates that are no longer dependent on gross charges billed by hospitals that are reduced to cost using hospitals' cost report data.

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CMS proposes to collect data from PPS hospitals through their annual cost reports. CMS asserts that this reporting will not add much burden because hospitals are already required to report similar information on their websites for the price transparency requirements CMS previously finalized effective January 1, 2021.

CMS would require that hospitals report the median Medicare Advantage (MA) negotiated payment rates by MS-DRG for all their MA contracts and the median commercial payer negotiated payment rates by MS-DRG for all their commercial contracts.

Hospitals would crosswalk MA and commercial payment rates other than MS-DRG rates, such as per diems or case rates, to the Medicare MS-DRGs when reported on the cost report. Hospital reporting would begin for cost reporting periods ending on or after January 1, 2021.

Related: 2021 OPPS Proposed Rule: CMS Looks to Eliminate Inpatient-only List, Increase 340B Payment Cuts

CMS proposes using the median MA rates for updating the MS-DRG payment system for FY 2024, but it is alternatively considering using rates for all payers (both MA and commercial payers) or some other approach that would reflect relative market-based payments by MS-DRG.

CMS acknowledges that the negotiated rates are not the final payment on most accounts, yet CMS proceeds with a proposal for using the contract rates rather than actual reimbursement.

Contract rates are often significantly different than final reimbursement due to common contract provisions such as carve-outs related to expensive devices and drugs. 

CMS seeks comment on these issues and the burden of calculating and submitting a median actual reimbursement amount for MA organizations and for all other third-party payers as compared to calculating and submitting the median negotiated rates for MA organizations and commercial payers by MS-DRG.

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To help inform advocacy regarding these proposals, hospitals should compare negotiated rates in their contracts with final reimbursement under the terms of their contract inclusive of carve-out and outlier payments.

Both final payment and negotiated rates can be crosswalked to MS-DRGs, so which would be better for CMS to use as it intends? What about specialty pharmacies where certain expensive drug costs are no longer included in negotiated rates or hospital payment at all?

CMS does not discuss capitated rates as these would be difficult to crosswalk to MS-DRGs.

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Valerie Rinkle, MPA, is a regulatory specialist for HCPro, a division of Simplify Compliance.

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