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That is, if a hospital got paid its full DRG amount and discharged a patient early (before the anticipated length of stay) to a post-acute provider, CMS would recalculate the payment and recoup the difference. This could cost a typical 250-bed facility more than $2 million in a single year. In fiscal year 2009, the number of transfer DRGs has ballooned to greater than 270!


Ok, how might this practice be an easy target, and impacted for RACs? Let’s think about this.


First, RACs can and do actively look for patterns in hospital claims filed for specific MS-DRGs. If you have been following RAC behavior in the demonstration states over past three years, you are aware that RACs perform analyses of the claims data they receive from CMS. So they have all your claims data, which they could use to identify patterns. Transfer DRGs are identified easily and will pose very interesting opportunities over the coming years as RAC efforts target ‘medical necessity’ of inpatient claims with associated ancillary services.


Once claim patterns revealed through actual data are identified, certain MS-DRG categories related to areas of high recoupment rates experienced in demonstration states will be focused on: these include complex MS-DRG areas such as Wound Care, Orthopaedic, Cardiology and the like. If lengths of stay in these categories are below the norm, with discharge to post-acute facilities (such as Skilled Nursing Facilities), RACs can challenge the ‘medical necessity’ of the care, request medical records, and deny if they determine the initial hospitalization to be medically unnecessary. Remember, a denial based upon a lack of documented medical necessity will recoup 100 percent of the claim, including any associated claims by physicians and all other providers. If you think it’s bad to lose a day or two of costs, how about losing the whole stay across the continuum instead?


How bad could this get? CMS estimates that 52 percent of Medicare discharges are made under Transfer DRGs, and there has been discussion CMS might expand the Transfer DRG list to include ALL MS-DRGs.


Hospital Transfer DRG Background


To be sure we understand the issues, let’s look at a brief background of the policy and why it came about.


As a result of the Balanced Budget Act of 1997, a study was conducted in 1998 wherein CMS identified 10 diagnoses related groups (DRGs) they claimed show a high percentage of patients who, shortly after admission to an acute care hospital, were being transferred to post acute care facilities. CMS assumed they were “overpaying” for these patients’ care since they had paid the acute hospital a full DRG rate (which is based upon Length of Stay, or LOS), then paid a home health agency or rehab hospital another full amount for the post-acute phase of patients care.


An early-transfer patient is one who is discharged more than one day sooner than the geometric mean LOS (“GMLOS”) of patients in that DRG. CMS reasoned that since the patient was transferred before the full LOS in the acute facility, at least that facility was being overpaid. Thus “Transfer DRGs” were born. It is typical that the policy uses a “one-way edit” and only identifies overpayments, never underpayments.


So CMS developed transfer DRGS and its “post acute care transfer policy” essentially because it was concerned that hospitals could be paid “twice” for patients transferred to other care levels or service sites. Hospital “transfers” include skilled nursing homes, home health agencies and rehab hospitals.


The purpose of the IPPS transfer payment policy is to avoid providing an incentive for a hospital to transfer patients to other hospitals early in their stays in order to minimize costs while still receiving full DRG payments.


According to the CMS, there are approximately 12 million Medicare discharges per year nationally, with about 52 percent now being Transfer DRGs.


If you were a RAC, wouldn’t you be happy to look automatically for problems in HALF the data?


Hospital Reimbursement Implications


Consider the following: a patient is assigned a transfer MS-DRG and is discharged, for example, to “home”, but an incorrect disposition of “transferred to ABC Skilled Nursing” is placed on the account. The hospital will not receive full reimbursement for the stay, as the claim data incorrectly indicates a post-acute setting and that payment automatically will be ‘shared’.


  • It is the responsibility of the hospital to ensure the correct discharge disposition is included on all accounts, even if the disposition changes post-discharge.

  • Hospitals should keep in mind that 10-15 percent of patients discharged to home health ultimately don’t qualify for these services.

  • Hospitals should follow up on discharged patients to assure the correct discharge disposition (which potentially could change after discharge!) is billed in order to receive full reimbursement, if applicable.


Medicare will catch and correct all overpayments to hospitals, however, it is up to the hospitals to identify and correct underpayments.


Again, if a patient with one of the Transfer DRGs is transferred to any post-acute provider such as a rehabilitation hospital, skilled nursing facility, or home health, the hospital will not receive full DRG payment for that patient.

The Fiscal Impact: A Case Study

Let’s look at a sample case study: a 260-bed hospital with over 15,000 discharges per year and about $900 million in-patient revenues.


In 2003, this facility was hit with a $2 million recoupment bill due to incorrect discharge dispositions. The hospital immediately assigned someone to examine and improve the process of assigning discharge dispositions.


A review of 200 accounts was conducted, and an error rate of over 20 percent was found for the assigned discharge dispositions. The major source of the errors seemed to be the hospital’s discharge disposition dictionary. It was not current, including deleted codes, and was too large and too difficult to use.


Steps then were taken to correct the situation: first, they cleaned up the discharge dictionary and reduced it down to a reasonable size, making it accurate and easier to use. Second, to make it even easier to get the proper codes, a Disposition Guidelines Sheet was created, including a list of commonly used local post-acute facilities and agencies. Finally, all staff involved in assignment of discharge disposition was fully educated. This included coders, case managers, social workers, nursing staff, and even unit secretaries.


The result of the improvements: internal audits showed the error rate on discharge disposition assignment went from 20 percent to 6 percent within two years. The fiscal result was that the facility kept $1.4 million it would have lost without the improvements.


Does Your Facility Need to Do This?


If you haven’t done it yet, the answer is a resounding “Yes!” If you don’t, another entity surely will.


You should consider the same steps taken by the hospital in the above case study. At a minimum:

1. Review your Discharge Disposition Dictionary in Hospital Information Systems.
2. Create a Disposition Guidelines sheet for distribution throughout the hospital.
3. Educate all staff involved in assigning discharge dispositions.


These departments should be included and actively involved:


  • Case Management
  • Social Work
  • Health Information Management
  • Nursing Services
  • Unit Secretaries


Looking Ahead – What The New Administration Has In Mind


Just this past week, two important events occurred that will affect future Medicare reimbursements, both short- and long-term. First, President Obama released his FY2010 budget outline on Thursday, Feb. 26. Second, the RACs went back into full swing, with an accelerated expansion schedule, as of March 1. Let’s consider the RACs first.

It’s important to think of the RACs as “bounty hunters” because they are paid to bring in suspects, but they are “private sector,” not government, employees. A RAC is paid a percentage of what it brings in – they are in it for profits. In the new reimbursement environment, this is considered a “savings” for the government. Will the government give up these savings? Not likely, and there’s now good evidence to support that conclusion, which leads us to the second event mentioned above.

The Office of Management and Budget published the new budget outline on Thursday, and it is available as a PDF document on the eduTrax® website here. If you look on page 127, table S-6, you’ll find a list of where the administration intends to garner its “savings” of just over $300 billion during the next decade.

One of the lines in the table reads, “Use ‘private sector enhancements’ to ensure that Medicare ‘pays accurately'” and the projected savings total $2.04 billion from 2010-2019. To me, “private sector enhancements” allude to the RACs. So do the math: they expect to save $204 million per year, on average. Can they do that? Recall that after only 18 months of work, the RAC pilot project had recovered over $300 million, and it only operated in three states. That’s an average of $5.5 million in savings per state, per month. With that kind of average, they’ll meet their goal with just a few states. So it would appear that the RACs can and will meet those targets easily.


There is one last thing to notice about the new budget outline. There’s another line in that same table: “Bundle Medicare payments for hospital and post-hospital care,” and they project a whopping $17.84 billion in savings. That’s more than eight times the savings projected through the “private sector enhancements.” There are no details yet on how they expect to achieve this, but given the kind of havoc that a RAC can visit on a provider, it can’t be pretty.


Remember I mentioned there was talk of expanding Transfer DRGs to include all DRGs? It could happen.

So stay tuned to RAC Monitor, and when you’re ready to train your staff on how to protect your bottom line, sign up for RAC University.


About the Author


Patricia Dear has more than 30 years of experience in the healthcare industry, working within corporate healthcare entities, for-profit and non-profit hospital systems, legal defense and plaintiff counsel. She is a recognized national speaker on reimbursement and compliance.

Patricia Dear is Chief Executive Officer and President of eduTrax®

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