Medicare Inpatient Psychiatric Facilities Prospective Payment System
Final Rule--Summary

A Medicare prospective payment system (PPS) for inpatient psychiatric facilities (IPFs) is scheduled to be implemented by the Centers for Medicare and Medicaid Services (CMS) on January 1, 2005 according to a final rule to be published in the Federal Register on November 15, 2004. As required by the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, the new per diem based prospective payment system would replace the reasonable cost-based payment system currently in effect. The final rule was posted for public inspection on November 3 and can be found at http://www.cms.hhs.gov/providers/ipfpps/cms-1213-f.pdf. AAGP’s comments on the proposed rule, sent on February 17, 2004, are available at http://www.aagponline.org/advocacy/letter.asp?id=10.

According to the final rule’s impact table, during the first "year" (January 1, 2005 through June 30, 2006) free-standing psychiatric hospitals, on average, are projected to benefit (government-owned = 13 percent, non-profit = 2 percent and investor-owned = 5 percent). However, rural hospitals, on average, will lose about 2 percent with rural psychiatric units of less than 12 beds losing about 4 percent.

Using FY 2002 data, CMS calculated an adjusted Federal per diem rate of $575.95 (this is an increase from the proposed rate of $530), which would be effective for the first payment period running from January 1, 2005 through June 30, 2006. Subsequent payment periods would run from 1 July through 30 June. The amount was determined from the average routine operating, ancillary and capital costs for each patient day of psychiatric care. The adjusted rate reflected a 16.33 percent reduction (a slight decreased from the proposed 19 percent reduction) to assure budget neutrality with an outlier adjustment, a stop-loss provision, and a behavioral offset. This base rate would be increased in the second and following years on the basis of changes in the hospital market basket.

The base rate would subsequently be adjusted to minimize the effect of certain patient and facility characteristics on a provider’s cost. These adjustments include:

Patient level factors:

• Psychiatric diagnosis adjustment as reflected by assignment to one of 15 designated diagnostic related groups (DRGs). Adjustment factors range from a 22 percent increase for DRG 424 O.R. Procedure w/ Principal Diagnosis of Mental Illness to a 12 percent decrease for DRG 523 Alcohol/Drug Use without Rehabilitation Therapy and without Complications and Comorbidities.
  • In a change from the proposed rule, CMS will pay the Federal per diem base rate and all other applicable adjustments for all DRGs that contain a psychiatric ICD-9-CM code. However, the IPF will not receive a DRG adjustment for a principal diagnosis not found in one of the 15 DRGs.
• The presence of one or more of 17 designated comorbidities with increases ranging from a 13 percent increase to 3 percent increase. The final rule significantly expanded the list of ICD-9-CM codes that were eligible for a comorbidity adjustment.
• Eight age adjustment factors beginning with age groups of 45 and under to patients 80 years and over. The adjustments range from 0 percent for the 45 and under group to 17 percent for the 80 and over age group.
• Variable rate adjustments to recognize that psychiatric facilities incur higher costs in the early days of a psychiatric stay.
  • Day 1 variable payment would be increased 31 percent or 19 percent depending on whether the IPF has or is a psychiatric unit in an acute care hospital with a qualifying emergency department (see below),
  • Day 3 payment would be increased 8 percent,
  • Day 4 payment would be increased 5 percent,
  • Day 5 payment would be increased 4 percent,
  • Day 6 payment would be increased 2 percent,
  • Days 7-8 payment would be increased 1 percent,
  • Days 9-10 payment would be increased 0 percent,
  • Days 11-14 payment would be reduced 1 percent,
  • Day 15 payment would be reduced 2 percent,
  • Days 16-17 payment would be reduced 3 percent,
  • Day 18 payment would be reduced 4 percent,
  • Days 19-21 payment would be reduced 5 percent, and
  • Over 21 days payment would be reduced 8 percent.
• IPFs that provide electroconvulsive therapy (ECT) treatments will receive $247.96 per treatment during the first payment period.

Facility level factors

• A wage index adjustment using the acute inpatient hospital wage index.
• IPFs located in rural areas will receive a 17 percent payment increase (this is a 1 percentage point increased from the proposed rule).
• An indirect teaching adjustment similar to that used in the inpatient hospital PPS but with the teaching variable raised to the 0.5150 power.
  • CMS is imposing a cap on the number of FTE residents that may be counted under the IPF-PPS for the teaching adjustment.
• A cost-of-living adjustment is provided to IPFs in Alaska and Hawaii.
• IPFs with full service emergency departments will be provided a payment adjustment – a 12 percent adjustment will be incorporated into the variable per diem adjustment for the first day of each stay (see above).

Outlier payments will be made for discharges in which estimate costs exceed an adjustment threshold amount ($5,700 multiplied by the IPF facility adjustments) plus the total PPS adjustment payment amount for the discharge. Two marginal cost ratios would be applied to the difference between the computed cost of the discharge and the threshold: 80 percent for the first nine days of the stay and 60 percent applied to the tenth day and after. CMS has set the threshold to limit the aggregate spending on outliers to no more than 2 percent of total payments.

Interrupted stay adjustment would be applied to situations in which the patient is discharged from an IPF and returns to the same IPF within three consecutive calendar days. This is a reduction from five days in the proposed rule. In such situations, CMS would treat the two admissions as one and pay accordingly.

CMS noted that it considered other adjustments, i.e. disproportionate share status, patient gender, patients who were admitted involuntarily, administrative days, and distinct part units, but decided for various reasons not to provide adjustments for these factors.

Coding Policy The final rule requires IPFs to (1) report patient diagnoses using the International Classification of Diseases-9th Revision, Clinical Modification (ICD-9-CM) code set for psychiatric diagnoses; and (2) select the DRGs (from Chapter Five – mental Disorders) that would be used for payment adjustments.

Transition CMS is proposing a three-year transition to fully implement the new PPS. During the first year (January 1, 2005 through June 30, 2006) the payment blend would consist of 75 percent of the current payment rate, i.e. based on the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and 25 percent based on the proposed IPF-PPS. In the second year the blend would be 50/50 and the third year the blend would be 25 percent TEFRA payment and 75 percent IPF-PPS payment. In the fourth year, payment would be based entirely on the IPF-PPS.

Psychiatric facilities or units would not be allowed to go directly to the full IPF-PPS before the end of the transition period.

Stop-loss The final rule includes a new stop-loss provision, which would hold an IPF harmless for payments below 70 percent of what they would have received had not the IPF-PPS been implemented.

According to CMS, the combined effect of the transition and the stop-loss policies will ensure that the total estimated IPF-PPS payments would be no less than 92.5 percent in year 1, 85 percent in year 2, 77.5 percent in year 3. CMS estimates that about 10 percent of IPFs would receive stop-loss payments under this policy.

Physician Re-Certification Changes While initially proposing a change in the timing the currently required physician recertification notices, the final rule did not include any changes.

Periodic Interim Payments The proposal would continue to allow facilities to receive Periodic Interim Payments (PIP) and accelerated payments as under current law.

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