Incorporating Medicare Advantage Beneficiaries into Medicare Data

Clinical documentation integrity (CDI) professionals and inpatient coders understand the relationship between the Inpatient Prospective Payment System (IPPS) and hospital reimbursement.

However, they may be less familiar with how and why the relative weight of Medicare Severity Diagnosis Related Groups (MS-DRGs) can change with annual adjustments, or that the methodology for this calculation will be changing in the coming years. This adjustment could lead to lower case mix indexes (CMIs) during the implementation period as MS-DRGs are adjusted to reflect the new methodology.

MS-DRGs are the payment mechanism under the IPPS, the Medicare policy that applies to Part D hospitals, what we commonly think of as a “hospital,” except for those located in Maryland. According to the Centers for Medicare & Medicaid Services (CMS), each MS-DRG weight represents the average resources required to care for cases in that particular MS-DRG, relative to the average resources used to treat all cases in all MS-DRGs.

Annual adjustments to the MS-DRG classifications and relative weights are required at least annually under the Social Security Act. The adjustments reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources.

One of the greatest impacts on relative weight adjustments is lower length of stays (LOS). In addition to the relative weight, each MS-DRG also has an associated geometric mean length of stay (GMLOS), which represents the statistical range of days associated with the MS-DRG. As a reminder, Medicare counts inpatient days from midnight to midnight. The first day of care is counted as day one, but the day of discharge is not counted as an inpatient day, according to Medicare guidelines.

Room-and-board costs, which include nursing and many ancillary services, are the most expensive line item on a hospital chargemaster and vary by unit, with an intensive care unit (ICU) bed being much more expensive than a general medical/surgical bed. A shorter LOS will translate into fewer resources being expended and lower reimbursement rates.

CMS plans to adopt a market-based MS-DRG relative weight methodology for calculating MS-DRG relative weights. The proposal was first discussed in the IPPS Final Rule for the 2021 fiscal year (FY), but was repealed before it could be implemented with FY 2024. CMS recently announced a finalized proposal to incorporate Medicare Advantage (MA) rates into a market-based MS-DRG relative weight methodology.

To implement this methodology, Medicare cost-report data will require the reporting of the median payor-specific negotiated charges for contracted MA organizations by MS-DRG, beginning with FY 2026. This data will eventually replace hospital chargemaster pricing for determining annual IPPS MS-DRG relative weight updates.

The new methodology will be used to calculate FY 2029 MS-DRG relative weights. CMS believes that at least initially, there would be “minimal impacts to the relative weights under this proposed market-based MS–DRG relative weight methodology.” The ultimate goal of this methodology change, according to CMS, is to better reflect the true market cost based on the relative market value and resources used for inpatient care.

As discussed in prior articles, CMS contracts with insurance companies to offer medical coverage to Medicare-eligible beneficiaries who enroll in an MA plan. Since the early 2020s, the majority of Medicare-eligible beneficiaries (54 percent) chose to enroll in a MA plan. CMS pays each MA organization using a prospective rate per beneficiary that considers the patient’s expected healthcare resource consumption during the plan year.

The MA plan directly reimburses the hospital when plan members receive hospital care. MA organizations usually reimburse hospital inpatient services using MS-DRGs or a per diem rate.

One of the reasons for changing the methodology for calculating MS-DRG relative weights is to reduce Medicare’s reliance on hospital chargemasters. Research has led CMS to conclude that hospitals significantly markup costs to increase profitability. This is attributed to several factors:

• Chargemaster prices are commonly billed to uninsured patients (much of this cost is written off as “indigent care”).
• Higher chargemaster fees may yield higher payments from those who receive out-of-network care.
• The chargemaster often serves as the basis of price negotiation between hospitals and private payors.
• Higher chargemaster fees may increase the cost-savings value of financial liabilities that are written off as bad debt.

Because MA and fee-for-service (FFS) populations should be homologous, inpatient payments should be similar for both populations. Hospitals challenge this assumption because they perceive the MA population to be healthier, and therefore require fewer inpatient resources, compared to the FFS population.

Just like hospitals are incentivized to set chargemaster rates that allow a profit, MA plans can be selective of the type of Medicare beneficiaries they enroll to maximize profits.

Additionally, MA plans are incentivized to control costs and are found to pay 5.6 percent less for hospital services, compared to FFS Medicare. Researchers attribute some of this savings to higher discounts on short-stay admissions, compared to the FFS Medicare rates.

CMS believes that MA-negotiated charges better reflect the relative resources hospitals use to provide services to inpatients while still allowing hospitals to maximize profits or net income.

Why am I addressing this topic now? As noted in a prior article, Aetna is planning to implement a new reimbursement strategy for their MA plans, wherein MS-DRG payments are adjusted for severity using MCG criteria for inpatient stays of fewer than five days. As discussed in my article, MCG is a patient status tool, and not appropriate for adjusting inpatient MS-DRG payments, which already has a mechanism for determining severity: diagnoses classified as complications and major complications.

As an update, I received a comment from Dr. Ronald Hirsch following my Talk-Ten-Tuesdays segment noting that Medicare stated it will not intervene on behalf of hospitals. When the Medicare market-based methodology is implemented, the Aetna policy could have unintended consequences by further lowering MS-DRG relative rates for those with a GMLOS of fewer than five days, as their payment rates are disclosed on hospital cost reports. CDI leaders need to take a proactive role in understanding future adjustments to relative weights so those departments whose performance is measured by CMI can anticipate and explain future reductions, irrespective of CDI efforts.