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Under what was then the new MS-DRG payment system, the budgetary goal under Medicare was zero change to overall Medicare payments by paying less for less severely ill patients and more for more severely ill patients who, prior to MS-DRGs were paid the same rate. Severity payment rates were put into place and hospitals were paid based upon these rates, but these severity rates were flawed and resulted in billions of dollars in overpayments.


Now understand, these are not undocumented or unsupported overpayments like those being chased by the RACs. When CMS implemented MS-DRGs in 2008 hospitals recognized the financial incentives for improving medical record documentation and diagnosis coding to more fully account for the patient’s severity of illness. And while the Documentation and Coding Improvements (DCI) greatly helped hospitals measure patient severity more accurately, they increased payments without a real increase in patient severity or the resources hospitals used to furnish care to these patients.

Figure 1. Percent of cases with major complications jumped in 2008 and 2009




Source: MedPAC analysis of Medicare fee-for-service claims from IPPS hospitals in proposed rule MedPAR files (December updates) for fiscal years 2006 – 2009 from CMS.

Overpayment Could Top $19 Billion


In a letter from Medicare Payment Advisory Commission (MedPAC) to the Centers for Medicare and Medicaid Services (CMS), dated May 27, 2010, MedPAC confirms that the ongoing efforts of CMS to administer and improve the payment systems for acute inpatient hospital services and long-term care hospital services has resulted in overpayments of $6.9 billion over 2008 and 2009. Plus, they expect an additional $4.8 billion in overpayments in 2010 and overpayments will continue until CMS puts into place a prospective offsetting adjustment to the IPPS payment rates. MedPAC estimates that overpayments could reach $19 billion in total for 2008 through 2012. Cumulative overpayments are increasing at a rate of about 3.9 percent per year this year (2010) and will likely increase 1 percent in 2011 after CMS’s planned recovery adjustment, according to MedPAC. MedPAC calculates the 3.9 percent increase in 2009 represents about $4.5 billion. This means that the “reductions in payment rates that CMS has proposed to offset the effects of coding changes do not represent payment cuts, but rather offset unintended overpayments to hospitals.” MedPAC stated.


So, with a requirement by law for CMS to stay budget neutral for changes in DRGs and relative weights – that is, they do not increase or decrease aggregate IPPS payments to hospitals compared with the payments that would have been made without the changes, CMS needs to implement a way to recoup the current and future overpayments. Plus, section 7 of the Transitional Medical Assistance, Abstinence Education, and Quality Improvement Act of 2007, limits the prospective adjustments that CMS could apply to offset increases due to DCI in 2008 and 2009. But if overpayments occurred because actual DCI exceeded those adjustments, CMS is required to recover the overpayments plus interest and further reduce IPPS payment rates to fully prevent overpayments from continuing to occur.

Possible Solutions


CMS analysis of 2008 and 2009 hospital inpatient claims shows that DCI increased case mix by 2.5 percent in 2008 and 5.4 percent in 2009. This resulted in IPPS overpayments of 1.9 percent in 2008 and 3.9 percent in 2009. MedPAC confirms these numbers and estimates additional overpayments equal to 3.9 percent of annual IPPS payments will continue through 2010, 2011 and all future years until CMS makes prospective offsetting adjustments to the IPPS payment rates.



If CMS did not fully prevent overpayments until 2013, overpayments would be approximately $2.2 billion on 2008, $4.7 billion in 2009, $4.9 billion in 2010, $4.9 billion in 2011 and $2.4 billion in 2012 according to MedPAC, for a total of about $19 billion.



CMS has proposed adjustments of -2.9 percent in 2011 and a future adjustment of -3.9 percent at an undetermined date. MedPAC states this is insufficient because cumulative overpayments would continue through 2010 and 2011. As such, “the reduction in payment rates CMS has proposed to offset the effects of coding changes do not represent payment cuts, but rather offset unintended overpayments to hospitals” says MedPAC.


So now the situation has been clearly stated by MedPAC and CMS does not dispute any of these findings, so what is the commission’s position on the overpayments due to DCI?


1. Overpayments should be stopped. MedPAC concurs with CMS that they need to permanently reduce payment rates by 3.9 percent. Now CMS’s decision to delay making a -3.9 percent adjustment to prevent future overpayments is not without good reason. If CMS combines the -3.9 percent adjustment to make up for overpayments in 2008 and 2009 with their proposed recovery adjustment for 2011 (-2.9 percent) the resultant -6.8 percent reduction in rates could be “financially disruptive” to many hospitals. But delaying the prevention of overpayments creates a problem because until this is done, overpayments will continue to accumulate. But under the law, CMS is empowered to collect only the 2008 and 2009 overpayments (plus interest). So the “Catch 22” is that CMS will not achieve budget neutrality unless Congress directs it to recover all overpayments.


2. All overpayments should be recovered.


a. By law CMS must recover overpayments from 2008 and 2009 by the end of 2012.


b. MedPAC has recommended that Congress change the law to require CMS to recover all overpayments (plus interest), including those that will occur in 2010 and 2011, by 2012.


i. First CMS should concentrate on preventing future overpayments.


ii. To prevent a financial shock to hospitals, reductions in payment rates should be made gradually over three years with a maximum annual reduction of 2 percent per year.


The net results of MedPAC recommendations are the following:


· Reduce Medicare payments in increments of not more than 2 percent for three years

· Hospitals keep getting their scheduled updates, which will offset these reductions

· After three years hospitals will get their updates without any reductions

· After about six years, all overpayments and interest will be fully recovered and hospitals will recognize an increase in payments of about 2 percent in addition to their scheduled updates.


3. What should CMS do if Congress does not change the law to permit full recovery?

Rough Road Ahead


Without a change CMS, hospitals and taxpayers are in a difficult situation. CMS will have to move very quickly to both recover the 2008 and 2009 overpayments as well as stay on top of accumulating overpayments. In 2012, CMS will have to replace the 2011 recovery adjustment with one sufficient to recover the remainder of overpayments (plus interest). And CMS will likely have to make downward adjustments in IPPS rates in 2012 and 2013. And after all of this there could be funds for an increase in payment rates of about 1 percent in 2013.


In their conclusion on documentation and coding in this letter from MedPAC to CMS, MedPAC acknowledges that both they and CMS predicted an improvement in medical record documentation and coding and both recommended prospective adjustments to correct for the expected effect of these on Medicare payments to hospitals. These adjustments were limited by law to recover only the overpayments that occurred in 2008 and 2009 but CMS must recover those and prevent further overpayments. With analysis of 2009 claims data it appears that hospitals were overpaid about $6.9 billion through 2009. And overpayments are continuing, but under current law only overpayments for 2008 and 2009 can be recovered and ongoing overpayments are ignored. In the view of MedPAC, the most important priorities for CMS are to stop further overpayments and then restore budget neutrality.

Providers Take Note


An important priority for providers now is to ensure their organization’s own Documentation and Coding Improvement initiatives are underway because the recoupments can otherwise be financially devastating for those hospitals that haven’t been realizing increased payment levels since 2008 due to documentation and coding improvements.


So stay tuned, in a year where with much controversy Congress has passed a massive healthcare reform bill and scrutiny of additional governmental increases in spending and expenses are closely watched with every dollar outside of budget highly criticized, we will see if election-year politics will allow them to do what’s right and fair to the taxpayers and hospitals or if this will be swept under the rug until after election day.

About the Author


Michael (Mike) is Senior Vice President, Client Services for RACmonitor.com.  Mike has over 35 years experience in healthcare information technology systems and services.  Throughout his career Mike has been successful in bringing technology and technology services to facilitate and improve healthcare administration and operations. Mike holds a BA in English from the University of Cincinnati and proudly served in the US Army from 1971 – 1977.

Contact the Author






HFMA, News and Opinions, “MedPAC: Recoup Hospital Overpayments”, http://www.hfma.org/templates/blogpost.aspx?id=21235 (June 4, 2010)

Federal Register Book 2 of 2 Books, Pages 23815 – 24362, Part II Dept. of Health and Human Services, Centers for Medicare & Medicaid Services, 42 CFR Parts 412, 413, et. Al. “Medicare Program; Proposed Rule”, (May 4, 2010)

MedPAC, Medicare Payment Advisory Commission, “Re: file Code CMS-1498-P”, letter to Marilyn Travenner, Principal Deputy Administrator, CMS, (May 27, 2010)




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