July 07,2006

Grassley, Baucus Ask CMS to Revisit Plans for How it Pays Hospitals for Inpatient Procedures

WASHINGTON — Sens. Chuck Grassley and Max Baucus are asking the government to
retool its proposal for updating the system that pays hospitals for inpatient procedures that are
covered by Medicare.

Grassley and Baucus said that changes need to be made to make sure the system is as fair
and accurate as possible. In a letter sent today, the senators called on the Centers for Medicare
and Medicaid Services to fully engage the stakeholder community in determining how to
implement recommendations made last year by MedPAC and to make sure there is enough time
for hospitals to adjust to a new system. MedPAC is an independent 17-member commission that
advises Congress on issues affecting the Medicare program.

Grassley and Baucus said they appreciated the commitment made by the Medicare
officials to improving the hospital payment system and, especially, to developing pay-forperformance

“It’s very good to see our policy goal embraced,” Grassley said. “Moving toward a fair
and accurate hospital inpatient payment system is long overdue. Now it’s a matter of making
sure the implementation of that policy really works for hospitals.”

“I've long supported a more accurate system for Medicare to pay for hospital inpatient
service, and when changes are made, I want them done right,”
said Baucus. “These are the most significant proposed changes in the 23-year history of the prospective payment program, and we need to proceed carefully.”

The text of the Grassley-Baucus letter to CMS Administrator Mark McClellan follows
here. Grassley is Chairman and Baucus is Ranking Member of the Senate Committee on
Finance, which is responsible for Medicare legislation and oversight.

July 7, 2006

The Honorable Mark McClellan, M.D., Ph.D.
Centers for Medicare and Medicaid Services
Hubert Humphrey Building, Room 314-G
200 Independence Avenue, SW
Washington, DC 20201

Dear Dr. McClellan,

We are pleased that CMS has embraced our policy goal of a fair and accurate hospital
payment system, and has taken steps to implement MedPAC's recommendations on refining
hospital payment policy in its FY 2007 Hospital Inpatient Prospective Payment System (IPPS)
proposed rule. As we indicated in our February 9, 2006 letter to you on this subject, these
changes are needed to improve the accuracy of payments to hospitals. We also appreciate the
Agency's efforts to further develop pay-for-performance in hospital payments by expanding
quality data reporting requirements.

However, upon reviewing the proposed rule, we have serious concerns about CMS'
proposed methodology and implementation strategy and whether it will, in fact, achieve a fairer
and more accurate hospital payment system. We therefore request that you consider beginning
implementation of both the cost-based weights and the consolidated severity DRGs in FY 2008.
Given that CMS' proposed changes differ significantly from those offered by MedPAC last year,
more time is needed to assure an orderly and appropriate implementation of these changes. This
additional time is needed not only to provide stakeholders the opportunity to analyze fully the
proposed changes and provide input to CMS through an open dialogue, but also to ensure that
these changes are implemented in the least disruptive manner.

It has been brought to our attention that CMS' proposed method of basing the DRGs on
costs has the potential to pay inaccurately for certain procedures. We urge you to work with
stakeholders, many of whom agree with the principle of moving to cost-based weights, in
improving the proposed methodology so that hospital payments better reflect the cost of
providing services.

These proposed changes should also be developed through a transparent process in which
stakeholders have access to sufficient information and tools to analyze the changes. One
common concern we have heard is that stakeholders were unable to review fully and analyze the
impact of the proposed rule within the 60-day comment period because of both limited
information and few tools available to evaluate the consolidated severity DRG system. It is also
our understanding that unlike the current DRG system, the proposed DRG system is based on a
system that is proprietary in nature. We urge you to take steps to ensure that interested parties
have access to the information and tools they need to analyze efficiently the proposed changes
and also to ensure that the DRG system that is ultimately adopted is available to everyone for a
nominal charge, just as the current DRG system is today.

We have also heard concerns about CMS' plans to implement cost-based weights in FY
2007, followed by the consolidated severity DRGs in FY 2008. As you know, the
implementation of cost-based weights is expected to shift payments significantly from one group
of hospitals to another, while the implementation of consolidated severity DRGs will likely shift
payments in the other direction. We urge you to implement both changes concurrently in order to
avoid the "whipsaw" effect of wide swings in hospital payments that each of these proposed
changes is expected to cause.

CMS' efforts to implement MedPAC's recommendations are a good first step towards
achieving a payment system that is fair and accurate. It is equally important, however, that these proposed changes are both methodologically sound and implemented in a timeframe that will not disrupt the health care system. Changes to the IPPS such as basing the DRGs on costs rather than charges and using a consolidated severity DRG system are significant, and require an open development process involving stakeholder input as well as a reasonable implementation

Thank you for your consideration of these comments.


Charles Grassley

Max Baucus
Ranking Member