Inpatient Prospective Payment System (IPPS)

The Inpatient Prospective Payment System (IPPS) was established as mandated by the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1983 to provide reimbursement for acute hospital inpatient services. The purpose of the Inpatient Prospective Payment System (IPPS) was to control health care costs through provider incentives to manage the care provided. The system originally implemented under IPPS is known as Diagnosis Related Groups (DRG). Under this system, hospitals are reimbursed a predetermined, fixed rate for services provided based on the patient’s condition and the resources required to treat the condition. The implementation of the DRG system ended hospital reimbursement by government programs based on the amount of charges accrued during the inpatient stay. The DRG system provides incentives for hospitals to ensure cost-efficient care. The original DRG system, now known as CMS-DRG, was replaced with MS-DRG effective October 1, 2007.

During the remainder of the 1980s, payment for hospital outpatient services remained on a cost-based system. Advancements in medical technology increased the number of surgeries performed on an outpatient basis. Congress began to focus on controlling costs for outpatient care through across-the-board reductions of payable amounts for hospital operating costs and capital costs. Different payment methods for specific outpatient services were created, including fee schedules for diagnostic laboratory tests, orthotics, and durable medical equipment.

Outpatient Prospective Payment System (OPPS)

Outpatient Prospective Payment System (OPPS) is the Prospective Payment System (PPS) implemented effective August 2000 by CMS that provides reimbursement for hospital outpatient services. The system implemented under OPPS is known as Ambulatory Payment Classifications (APC).

During the 1990s legislation was passed that mandated the implementation of a PPS for hospital outpatient services for members of government-sponsored health plans. The Omnibus Budget Reconciliation Act (OBRA) of 1986 paved the way for development of a PPS for hospital outpatient services. OBRA legislation included a mandate for hospitals to report services provided on an outpatient basis using the Healthcare Common Procedure Coding System (HCPCS). This information was used by the Centers for Medicare and Medicaid Services (CMS) for the development of the PPS. Revisions to OBRA in 1990 mandated CMS to develop a proposal to replace the existing hospital outpatient payment system with a PPS system. The Balanced Budget Act (BBA) of 1997 required CMS to implement the Outpatient Prospective Payment System (OPPS) effective January 1, 1999. The final rule outlining the establishment of an outpatient PPS was published by CMS in the Federal Register. CMS implemented the OPPS, effective August 2000. OPPS provides reimbursement for hospital outpatient services based on predetermined fixed rates. Table 12-1 outlines legislation that contributed to the development and implementation of PPS systems.

Other Prospective Payment Systems

In an effort to control the rising cost of health care, CMS implemented PPS for services provided by other facilities and providers. In accordance with the BBA of 1997, the Balanced Budget Refinement Act (BBRA) of 1999, and the Benefits Improvement Act (BIPA) of 2000, the following PPS systems were established:

It is important for hospital personnel involved in billing and coding to understand the PPS system that will be used to determine reimbursement for hospital services by government and other payers. The guidelines for coding and PPS assignment vary for each system.

The following section provides an overview of the development, structure, coding, and payment calculations under Medicare’s Inpatient Prospective Payment System (IPPS) for hospital inpatient services.

DRG Development

The Inpatient Prospective Payment System (IPPS) implemented in 1983 by CMS and other payers for reimbursement to hospitals for acute inpatient care is known as the Diagnosis Related Groups (DRG). DRG is a payment classification system that defines patient categories based on diagnosis, procedure, and other clinical factors. Each DRG is a grouping of patient cases that are clinically similar and that require a similar level of resources during the stay. Under the DRG system, the facility is paid a fixed fee based on the patient’s condition and relative treatments.

Diagnosis Related Groups (DRG) classifications were developed by a group of researchers at Yale University in the late 1960s. The classification system was used as a tool to help clinicians and hospitals monitor quality of care and use of services. Medicare adopted the system for use as the basis of the IPPS in 1983. The development of this system required analysis of a large number of actual inpatient cases from hospitals throughout the United States. A database was developed with information regarding inpatient cases including diagnoses, length of stay, procedure(s) performed, and cost. The database was analyzed and used to develop DRG groups that represented average resources required by hospitals to treat conditions included within that group. Significant changes were made to the DRG system to “better account for severity of illness and resource consumption for Medicare Beneficiaries,” as published in the CMS Acute Care Hospital Inpatient Payment System Fact Sheet. This system is the basis of the new Medicare Severity-Diagnosis Related Groups (MS-DRG) system. The old DRG system is now referred to as CMS-DRG.

Medicare Severity-Diagnosis Related Groups (MS-DRG) is the Inpatient Prospective Payment System (IPPS) implemented in 2007 to provide reimbursement for hospital inpatient services. MS-DRG replaced the CMS-DRG system effective October 1, 2007. The MS-DRG system was implemented and transitioned in during a 2-year period with a final implementation date of October 1, 2009. A CMS fact sheet on MS-DRG can be viewed at http://www.cms.hhs.gov/MLNProducts/downloads/AcutePaymtSysfctsht.pdf.

MS-DRG Structure

The MS-DRG system classifies hospital inpatient cases based on the patient’s diagnosis and the procedures required to treat the patient’s condition. There are more than 900 MS-DRG groups classified into categories based on the patient’s diagnosis, referred to as Major Diagnostic Category (MDC). There are two types of MS-DRG payment groups: surgical and medical. Each MS-DRG group contains related principal diagnoses and procedures where appropriate. MS-DRG assignment is determined based on the principal and secondary diagnoses that describe the patient’s condition and complications and comorbidities. The following elements are assigned to each MS-DRG payment group: geometric mean length of stay (GMLOS), arithmetic mean length of stay (AMLOS), and relative weight (RW). Figure 12-2 illustrates the ICD-10 MS-DRG 339 “Appendectomy with complicated principal diagnosis with CC.” The illustration highlights the DRG elements: MS-DRG number, type, and description, Major Diagnostic Category (MDC), principal diagnoses, and procedures for the group. It is important to note that many reference manuals refer to the MS-DRG as DRG.

Information for these values was compiled using Medicare inpatient stay data from all U.S. hospitals. These values are used to calculate the MS-DRG payment for the hospital inpatient case. CMS updates the relative weight (RW), length of stay, and national average charge for each MS-DRG on an annual basis. MS-DRG groups are organized into categories based on the patient’s condition, referred to as Major Diagnostic Categories (MDC).

Major Diagnostic Category (MDC)

A Major Diagnostic Category (MDC) is a grouping of hospital inpatient cases based on body system, which is used to further categorize MS-DRG groups. MDCs were developed to further categorize more than 900 MS-DRG groups into smaller groups. Each MDC is based on conditions related to specific organ systems. All principal diagnoses within the MS-DRG system are grouped into 25 MDC categories. Some MS-DRG groups may relate to any of the MDCs, referred to as “All MDC”, such as MS-DRG 981. Table 12-2 illustrates MDC categories along with the related MS-DRG ranges.

TABLE 12-2

MAJOR DIAGNOSTIC CATEGORIES (MDC)

MDC	Category	MS-DRG Range
	Pre-MDC	001-015
	All MDC	981-999
1	Diseases/Disorders Nervous System	020-103
2	Diseases/Disorders Eye	113-125
3	Diseases/Disorders Ears, Nose, Mouth, Throat	129-159
4	Diseases/Disorders Respiratory System	163-208
5	Diseases/Disorders Circulatory System	215-316
6	Diseases/Disorders Digestive System	326-395
7	Diseases/Disorders Hepatobiliary System/Pancreas	405-446
8	Diseases/Disorders Musculoskeletal System/Connective Tissue	453-566
9	Diseases/Disorders Skin, Subcutaneous Tissue, Breast	573-607
10	Endocrine, Nutritional, Metabolic Diseases/Disorders	614-645
11	Diseases/Disorders of the Kidney/Urinary Tract	652-700
12	Diseases/Disorders Male Reproductive System	707-730
13	Diseases/Disorders Female Reproductive System	734-761
14	Pregnancy, Childbirth, Puerperium	765, 782, 998
15	Newborns, Neonates with Conditions Originating in Perinatal Period	789-795
16	Diseases/Disorders Blood, Blood-Forming Organs/Immunological	799-816
17	Myeloproliferative Diseases/Disorders and Poorly Differentiated Neoplasms	820-849
18	Infectious/Parasitic Diseases	853-872
19	Mental Diseases/Disorders	876-887
20	Alcohol/Drug Use/Drug-Induced Organic Mental Disorders	894-897
21	Injuries, Poisonings, Toxic Effect Drugs	901-923
22	Burns	927-935
23	Factors Influencing Health Status, Other Contact Health Services	939-951
24	Multiple Significant Trauma	955-965
25	Human Immunodeficiency Virus Infections	969-977

Data from Ingenix Encoder ProP 2013, and Centers for Medicare and Medicaid Services Web site, https://www.cms.gov.

There are many MS-DRG groups associated with each MDC. For example, MDC 1 contains MS-DRG payment groups 020 to 103 that represent diseases or disorders of the nervous system. MDC 4 contains MS-DRG payment groups 163 to 208 that represent diseases or disorders of the respiratory system. Figure 12-3 illustrates examples of MS-DRG groups associated with Major Diagnostic Categories (MDC) 1 and 4.

Within each MDC the groups are further categorized as surgical or medical. Surgical MS-DRG includes conditions that require surgical intervention. Medical MS-DRG includes conditions that do not require surgical intervention.

Surgical MS-DRG

Principal diagnoses requiring one or more surgical procedures are assigned to a surgical MS-DRG. Surgical MS-DRG groups are further classified based on the principal procedure, anatomic area, and the presence of complications or comorbidities. Procedures within the MS-DRG are further categorized as either major or minor operating room (OR) procedures.

Medical MS-DRG

Principal diagnoses that do not require surgery are assigned to a medical MS-DRG. Medical MS-DRG groups are further classified based on the principal diagnosis, and the presence of complications or comorbidities. Figure 12-4 illustrates the ICD-10 surgical MS-DRG 117, which illustrates the operating room procedures and code ranges categorized within the MS-DRG along with the GMLOS, AMLOS, and RW. The same illustration highlights the medical MS-DRG 122 and the related principal diagnoses along with the GMLOS, AMLOS, and RW.

MDC Decision-Making Tree

A decision-making tree was developed for each MDC. The decision tree follows the logic of MS-DRG assignment. Decision trees illustrate the surgical and medical partition. The surgical partition is followed if a surgical “OR procedure” is performed. The medical partition is followed when surgery is not required. The tree branches off to various MS-DRG groups based on the procedure, diagnosis, and the presence of complications and comorbidities. The relative weight (RW) for each MS-DRG is listed on the tree. Figure 12-5 illustrates an MS-DRG decision tree for MDC 2 “Diseases and Disorders of the Eye.”

Coding for MS-DRG Assignment

In accordance with provisions outlined under HIPAA, the standard code set required today includes HCPCS, ICD-9-CM, and NDC. Inpatient services and procedures are reported using the HCPCS and ICD-9-CM Volume III procedure codes for significant procedures performed during the inpatient stay. NDC codes may also be required. Diagnoses are reported using ICD-9-CM Volumes I-II.

In accordance with HIPAA provisions, the ICD-9-CM will be replaced with the International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) and the International Classification of Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS). The compliance date for implementation of ICD-10 was set for October 1, 2013. However, the Department of Health and Human Service (DHHS) has published a final rule that delays the ICD-10 compliance date to October 1, 2014.

MS-DRG groups were developed based on the patient’s condition and resources required to treat the condition. Accurate diagnosis and procedure coding is critical to ensure the correct MS-DRG is assigned. The principal diagnosis is the condition determined after study to be chiefly responsible for the hospital admission. The principal diagnosis code assigned to the patient case essentially drives the MS-DRG assignment. Inaccurate code selection for the principal diagnosis can lead to an incorrect MS-DRG assignment, resulting in lost revenue. Figure 12-6 illustrates correct versus incorrect MS-DRG assignment for Patient Case 1 using the ICD-10-CM coding system. The case involves a patient who is diagnosed with pneumonia due to anaerobic gram-negative bacilli. Secondary diagnoses emphysema and chronic bronchitis are also documented.

Inaccurate code selection – The coder selected J18.9 “Pneumonia, unspecified organism” along with the secondary diagnoses of J43.8 “Emphysema” and J42 “Chronic bronchitis.” Based on this coding, MS-DRG 195 is assigned, which provides reimbursement to the hospital in the amount of $3,949.66.

Accurate code selection – The coder assigned J15.8 “Pneumonia, due to other specified bacteria” as the principal diagnosis. The coder also assigned the following secondary diagnoses codes: J43.8 “Emphysema” and J42 “Chronic bronchitis.” This code assignment leads to the correct MS-DRG 179, which provides reimbursement in the amount of $5,488.67.

Health Information Management (HIM) coding personnel abstract information from the patient’s medical record for the purpose of coding and MS-DRG assignment. HIM coders must follow inpatient coding guidelines as outlined in the coding manuals. Some facilities use a coding worksheet or other form to abstract and code information in the patient’s record. Figure 12-7 illustrates a sample HIM coding worksheet. Coding worksheets may include the patient’s name, medical record number, race, sex, address, admission date, discharge date, admitting physician, and operating physician name. Most facilities use a computer program called an encoder or grouper for coding and MS-DRG assignment. The steps to coding for MS-DRG assignment are outlined below:

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