CMS Expands Postacute Transfer Payment Policy

On August 12, 2005, the Centers for Medicare and Medicaid Services issued a final rule revising the Medicare hospital inpatient prospective payment system ("IPPS"). The final rule includes a revision to the criteria that are currently used to determine whether a diagnosis related group ("DRG") qualifies for inclusion in the postacute care transfer payment policy ("transfer payment policy").

A discharge of a hospital inpatient is considered to be a "transfer" for Medicare payment purposes when the patient.s discharge is assigned to one of thirty DRGs described in 42 C.F.R. § 412.4(d) and the patient is discharged to: (1) a hospital, or hospital unit, that is not excluded from IPPS; (2) a skilled nursing facility ("SNF"); or (3) the patient .s home when there is a written care plan for home health services, if the services relate to the condition or diagnosis for which the individual received inpatient hospital services, and those services begin within 3 days after the date of discharge.

The Centers for Medicare and Medicaid Services ("CMS") policy provides that in these transfer situations, full payment is made to the final discharging hospital and each transferring hospital is generally paid a graduated per diem rate for each day of the patient's stay, not to exceed the full DRG payment that would have been made if the patient had been discharged without being transferred. The per diem rate paid to a transferring hospital is calculated by dividing the full DRG payment by the geometric mean length of stay for the DRG, and, subject to an exception for certain specified DRGs, the transferring hospital is paid twice the per diem amount for the first day of the admission.

The purpose of the IPPS transfer payment policy is to avoid providing an incentive for a hospital to discharge a patient to another hospital, a SNF, or the patient's home, early in the patient's stay, in order to minimize costs, while still receiving the full DRG payment, and to adjust the payments to approximate the reduced costs of transfer cases.

As initially enacted by Congress and implemented by CMS, the scope of the transfer payment policy was relatively narrow. Effective for discharges that occurred on or after October 1, 1998, Congress expanded the definition of "transfer" to include qualified discharges assigned to one of ten DRGs selected by CMS, to postacute care providers. CMS later expanded the transfer payment policy to include 29 DRGs for discharges on or after October 1, 2003.

In the final IPPS rule for fiscal year 2004, CMS established the following criteria that a DRG must meet, for both of the two most recent fiscal years for which data is available, in order to be included under the transfer payment policy: (1) the DRG must have a geometric mean length of stay of at least three days; (2) the DRG must have at least 14,000 postacute transfers; (3) the DRG must have at least 10% of postacute transfers occurring before the geometric mean length of stay; and (4) for DRGs not already included in the policy, the DRG must have a decline in its geometric mean length of stay during the most recent five year period of at least 7%.

In the final IPPS rule for fiscal year 2005, CMS again expanded the transfer payment policy to include, for federal fiscal years 2005 and 2006, cases that were previously included in a DRG that have been divided into two new DRGs, when one or the other of the two new DRGs qualified for inclusion in the policy for both of the two previous years. As a result of these changes, 30 DRGs are currently subject to the transfer payment policy for discharges on or after October 1, 2004.

In the May 5, 2005 proposed IPPS rule, CMS proposed expanding the application of the transfer payment policy by applying the policy to any DRG meeting the following criteria: (1) the DRG has at least 2,000 postacute care transfer cases; (2) at least 20% of the cases in the DRG are discharged to postacute care; (3) of the cases discharged to postacute care, at least 10% occur before the geometric mean length of stay for the DRG; (4) the DRG has a geometric mean length of stay of at least three days; and (5) if the DRG is one of a paired set of DRGs based on the presence or absence of a comorbidity or complication, both paired DRGs are included if either one meets the first three criteria above. The adoption of the proposed revision would have expanded the application of the transfer payment policy to 231 DRGs that have both a relatively high volume and a relatively high proportion of postacute care utilization.

In the final 2005 rule, CMS has expanded the application of the transfer payment policy by applying the policy to any DRG that meets the following criteria (using data from the March 2005 update of the FY 2004 MedPAR file and Version 23.0 of the DRG Definitions Manual (FY 2006)): (1) the DRG has at least 2,050 postacute care transfer cases; (2) at least 5.5% of the cases in the DRG are discharged to postacute care prior to the geometric mean length of stay for the DRG; (3) the DRG has a geometric mean length of stay of at least three days; and (4) if the DRG is one of a paired set of DRGs based on the presence or absence of a comorbidity or complication, both paired DRGs are included if either one meets the first three criteria above. As a result of these changes to the criteria, 182 DRGs will be subject to the transfer payment policy for discharges on or after October 1, 2005.

CMS revised the criteria to better reflect the statutory standard that DRGs subject to the transfer payment policy must have a "high volume of discharges" to the postacute care setting and a "disproportionate use of post-discharge services." After reviewing comments received on the proposed rule, CMS concluded that the appropriate threshold to use in identifying DRGs that have a high volume of discharges and a disproportionate use of postacute care utilization is 2,050 discharges to postacute care, rather than the 2,000 discharges initially proposed. CMS also concluded that a criterion focused on the ratio of short-stay discharges to postacute care, rather than on the ratio of all discharges to postacute care as initially proposed, is more consistent with the statutory language addressing the disproportionate use of post-discharge services. CMS then determined that the appropriate threshold to use in identifying such DRGs is if 5.5% or more of the short-stay discharges for that DRG are to postacute care settings.

In its comments on the final rule, CMS announced that it does not plan to revise the list of DRGs subject to the transfer payment policy on an annual basis, unless CMS makes a change to a specific DRG (such as a redesignation of a DRG or the assignment of a new DRG). In that situation, CMS will use the current version of the DRG Definitions Manual (for the year when a new or revised DRG first becomes effective) and the most recent complete year of MedPAR data, and the DRG will be subject to the transfer payment policy if its total number of discharges and proportion of shortstay discharges to postacute care both exceed the 55th percentile for all DRGs. CMS believes that this new policy will promote certainty and stability in the transfer payment policy.

In recognition that certain DRGs that will be subject to the transfer payment policy as of October 1, 2005 may, at some point in the future, no longer exhibit a high volume of postacute discharges or a disproportionate use of post-discharge services, CMS expects to periodically review the criteria set forth in the 2005 final rule that are used to classify DRGs as subject to the transfer payment policy. At this time, CMS has not decided how frequently it will perform this review, but is considering a review every 5 years. However, until the time that CMS performs a review, any DRG subject to the transfer payment policy as of October 1, 2005 will continue to remain subject to the policy, even if the DRG no longer meets the criteria specified in the 2005 final rule.

CMS believes that the expansion of the transfer payment policy, effective for discharges occurring on or after October 1, 2005, will result in a 0.9% decrease in overall Medicare payments to hospitals, with an estimated cost savings to the Medicare program of approximately $780 million for fiscal year 2006. Since urban areas tend to have a greater concentration of postacute care facilities to which to transfer patients, as opposed to rural areas, they are more likely to be impacted by the expansion of the policy.

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