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entitled 'Medicare Impatient Hospital Payments: CMS Has Used External 
Data for New Technologies in Certain Instances and Medicare Remains 
Primary Data Source' which was released on September 26, 2007. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

September 2007: 

Medicare Inpatient Hospital Payments: 

CMS Has Used External Data for New Technologies in Certain Instances 
and Medicare Remains Primary Data Source: 

Use of External Data in Medicare IPPS: 

GAO-07-46: 

GAO Highlights: 

Highlights of GAO-07-46, a report to congressional committees 

Why GAO Did This Study: 

Under Medicare, hospitals generally receive fixed payments for 
inpatient stays based on diagnosis-related groups (DRG), a system that 
classifies stays by patient diagnoses and procedures. The Centers for 
Medicare & Medicaid Services (CMS) annually uses its own data to 
reclassify DRGs. CMS also makes add-on payments for stays involving new 
technologies that meet three eligibility criteria. Stakeholders may 
submit data that are external to CMS as part of a DRG reclassification 
request or an add-on payment application. The Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 required GAO to 
examine whether CMS could improve its use of external data, including 
using data collected by other government agencies for DRG payments. As 
discussed with the committees of jurisdiction, GAO examined (1) to what 
extent CMS has used external data in determining payments for inpatient 
stays involving new technologies, and (2) to what extent can external 
data from other government agencies be used by CMS in determining DRG 
payments for inpatient stays involving new technologies. GAO 
interviewed officials from CMS and industry stakeholders. GAO 
interviewed officials from Bureau of Labor Statistics (BLS), Department 
of Veterans Affairs (VA), Department of Defense (DOD), and Agency for 
Healthcare Research and Quality (AHRQ) because these agencies may have 
data useful to CMS. GAO also reviewed regulations and other CMS 
materials. 

What GAO Found: 

CMS has used external data for two purposes: to inform DRG 
reclassification and to evaluate new technology add-on payment 
applications. To inform DRG reclassification, CMS accepts the 
submission of external data that are intended to demonstrate that 
inpatient stays involving a new technology are costlier on average than 
the other inpatient stays in the same DRG. CMS uses its data from the 
Medicare Provider Analysis and Review (MEDPAR) file to validate the 
external data submitted. Specifically, when external data are submitted 
for a proposed DRG reclassification for a procedure or new technology, 
CMS’s policy is to find the same or similar evidence in the MEDPAR 
file. Generally, CMS will not make a reclassification decision for a 
DRG involving a new technology if the technology is so new that it does 
not appear in the MEDPAR file. To evaluate new technology add-on 
payment applications, CMS has generally used external data in 
conjunction with data from the MEDPAR file to evaluate whether a new 
technology meets one of the three eligibility criteria, specifically 
the criterion related to cost. 

Data from other government agencies have limitations for CMS’s use in 
setting DRG payments for inpatient stays involving new technologies. 
This is because when setting DRG payments, CMS generally needs data 
that are representative of the Medicare population, timely, and 
complete in that the data include the total charge or other measure of 
costliness for all services provided during an inpatient stay, 
including new technologies. The data we identified from other 
government agencies were either not representative of the Medicare 
population, were not timelier than data from the MEDPAR file, or were 
not complete. 

Data from the MEDPAR file remain the primary data source for setting 
DRG payments because they include all charges from paid inpatient 
claims for inpatient services provided to all Medicare beneficiaries 
across all hospitals paid under the IPPS. In instances where data from 
the MEDPAR file have lacked charge information for certain stays 
involving new technologies, CMS has used external data to inform the 
DRG reclassification process and to evaluate new technology add-on 
payment applications. To set DRG payments, CMS needs data that meet 
criteria of being representative, timely, and complete. Although BLS, 
VA, DOD, and AHRQ collect data for their own purposes that could 
potentially be useful to CMS, these data are limited in their utility 
to set DRG payments because they do not always meet CMS’s criteria. 

In commenting on a draft of this report, CMS stated that it agreed with 
GAO’s findings. 

To view the full product, including the scope and methodology, click on 
GAO-07-46.
For more information, contact A. Bruce Steinwald at (202) 512-7114 or 
steinwalda@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

CMS Has Used External Data to Inform DRG Reclassification and to 
Evaluate New Technology Add-on Payment Applications: 

Data from Other Government Agencies Have Limitations for Setting DRG 
Payments for Inpatient Stays Involving New Technologies: 

Concluding Observations: 

Agency and Other External Comments: 

Appendix I: Comments from the Centers for Medicare & Medicaid Services: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Three Hypothetical Scenarios in Which CMS, during Fiscal Year 
2007, Could Determine Eligibility under the Cost Criterion for Fiscal 
Year 2008 Add-on Payments: 

Figure: 

Figure 1: Process by Which CMS Used the MEDPAR File to Propose and 
Finalize DRGs for Fiscal Year 2007 DRG Payments: 

Abbreviations: 

AAMC: Association of American Medical Colleges: 

AHA: American Hospital Association: 

AHRQ: Agency for Healthcare Research and Quality: 

BBA: Balanced Budget Act of 1997: 

BIO: Biotechnology Industry Organization: 

BIPA: Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000: 

BLS: Bureau of Labor Statistics: 

CMS: Centers for Medicare & Medicaid Services: 

CPI: Consumer Price Index: 

DOD: Department of Defense: 

DOL: Department of Labor: 

DRG: diagnosis-related groups: 

FDA: Food and Drug Administration: 

FSS: federal supply schedule: 

HCUP: Healthcare Cost and Utilization Project: 

HHS: Department of Health and Human Services: 

IPPS: inpatient prospective payment system: 

MEDPAR: Medicare Provider Analysis and Review: 

MFC: Most- Favored Customer: 

MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 

MTF: Military Treatment Facility: 

PPI: Producer Price Index: 

TMA: TRICARE Management Activity: 

VA: Department of Veterans Affairs: 

X STOP: X STOP Interspinous Process Decompression System: 

United States Government Accountability Office: 

Washington, DC 20548: 

September 26, 2007: 

The Honorable Max Baucus: 
Chairman: 
The Honorable Charles E. Grassley: 
Ranking Member: 
Committee on Finance: 
United States Senate: 

The Honorable Charles B. Rangel: 
Chairman: 
The Honorable Jim McCrery: 
Ranking Member: 
Committee on Ways and Means: 
House of Representatives: 

At $119.4 billion, spending for hospital inpatient services accounted 
for more than a third of total Medicare spending in fiscal year 2005. 
Most of these dollars were spent on care provided to Medicare 
beneficiaries by the approximately 4,000 acute care hospitals that bill 
Medicare under its inpatient prospective payment system (IPPS). Under 
the IPPS, a hospital generally receives a fixed, prospectively 
determined payment amount for each inpatient stay.[Footnote 1] Paying 
prospectively encourages hospitals to operate efficiently, as they 
retain the difference if the payment for the inpatient stay exceeds the 
hospital's cost of providing the stay. 

Medicare law requires that IPPS payments account for variation in the 
costs of providing different types of inpatient stays.[Footnote 2] 
Consequently, the Centers for Medicare & Medicaid Services (CMS), the 
agency within the Department of Health and Human Services (HHS) that 
administers Medicare, classifies inpatient stays using a system of 
diagnosis-related groups (DRG). The number of DRGs changes from year to 
year. For fiscal year 2007, each inpatient stay billed to Medicare is 
assigned to one of 538 DRGs based on patient diagnosis and procedures 
performed. Inpatient stays assigned to the same DRG are expected to 
have clinical and cost similarities. Hospitals are paid for an 
inpatient stay based on the assigned DRG's weight, which reflects the 
relative costliness of all inpatient stays assigned to that DRG 
compared to inpatient stays assigned to all DRGs.[Footnote 3] DRG 
classifications and weights are the basis for DRG payments to 
hospitals. In addition to the DRG-based payment, hospitals may receive 
a supplemental payment, known as an outlier payment, if the costs of 
the inpatient stay substantially exceed the DRG-based payment for that 
stay. 

A major challenge for the IPPS is to maintain a system of DRGs that 
accounts for the use of new technologies, which can substantially 
change the costs hospitals incur in providing different types of 
inpatient stays.[Footnote 4] For example, a new technology may be 
clinically advantageous yet so expensive that a hospital's overall cost 
increases substantially when it provides the technology as part of an 
inpatient stay. In contrast, the use of an alternative new technology 
may decrease the overall cost of an inpatient stay--even if the 
technology is expensive--because it can reduce complications and the 
length of time patients spend in the hospital. Hospitals consider a 
range of factors--in addition to payment--before they adopt a new 
technology, including the extent of its clinical benefit or the needs 
of their patient populations. 

To address changes in the cost of inpatient care, including the use of 
new technologies, CMS annually revises the DRGs using data that are 
"internal" to the Medicare program--that is, inpatient claims, which 
are bills hospitals submit to CMS for inpatient services rendered to 
Medicare beneficiaries.[Footnote 5] CMS compiles data from these 
inpatient claims into an electronic file, known as the Medicare 
Provider Analysis and Review (MEDPAR) file. The MEDPAR file includes 
all charges from inpatient claims for inpatient services provided to 
all Medicare beneficiaries across all hospitals paid under the IPPS. In 
a process known as DRG reclassification, CMS uses the data from the 
MEDPAR file to revise the assignment of diagnoses and procedures to 
particular DRGs to ensure that each DRG continues to represent 
inpatient stays with cost and clinical similarities. Once inpatient 
stays assigned to various DRGs have been reclassified, CMS calculates 
the payment weights for all the DRGs, so that each weight reflects the 
average expected costliness of inpatient stays that will be assigned to 
that DRG relative to inpatient stays that will be assigned to all DRGs. 
Because CMS does not have a direct measure of the actual cost of 
inpatient stays, it has relied on a proxy measure--the amount hospitals 
charge Medicare on claims. Until October 1, 2006, CMS had used the 
average charges of all inpatient stays assigned to each DRG to 
represent the relative costliness of inpatient stays in that DRG 
compared to the average charge for all inpatient stays. Effective 
October 1, 2006, CMS uses the average estimated cost per inpatient stay 
to measure the relative costliness of each DRG. 

The DRG classifications and weights are based on data from inpatient 
claims for inpatient services provided 2 fiscal years prior.[Footnote 
6] As a result, certain DRG weights do not reflect the cost of the most 
recent technologies, or those adopted by hospitals in the previous 
fiscal year. Manufacturers of new technologies have raised concerns 
that CMS's reliance on data from the MEDPAR file to annually revise the 
DRG classifications and weights may result in inadequate payments to 
hospitals for inpatient stays involving the new technologies. 
Furthermore, they have raised concerns that inadequate payments could 
jeopardize beneficiary access to these technologies. 

To address concerns about the timeliness of data from the MEDPAR file 
with respect to new technologies, the conference report for the 
Balanced Budget Act of 1997 (BBA)[Footnote 7] directed CMS to consider 
using data that are "external" to the Medicare program--for example, 
claims data from other payers--when it reclassifies and weights the 
DRGs,[Footnote 8] to the extent that doing so is "feasible" and the 
data are "reliable" and "validated."[Footnote 9] In response to the BBA 
conference report, CMS instituted a policy whereby manufacturers and 
other stakeholders--for example, hospitals--could submit external data 
to CMS to help demonstrate that inpatient stays involving a particular 
new technology are costlier on average than other inpatient stays 
assigned to the same DRG, and should be assigned to a DRG with a higher 
payment weight. The Medicare, Medicaid, and SCHIP Benefits Improvement 
and Protection Act of 2000 (BIPA) required CMS to make additional 
payments for inpatient stays that, because they involve new 
technologies that may increase overall costs, would be inadequately 
paid under DRG-based payments alone.[Footnote 10] In response to the 
BIPA provision, CMS implemented "add-on payments" to hospitals for 
certain expensive new technologies that meet three eligibility criteria 
for being new, costly, and a substantial clinical improvement over 
existing technologies. CMS stated that it could use data from external 
sources to identify technologies that are appropriate for these add-on 
payments, because those technologies would not be represented in 
inpatient claims. CMS projected that it would spend approximately $32 
million in fiscal year 2007--approximately 0.03 percent of total IPPS 
spending--on add-on payments.[Footnote 11] 

Manufacturers of new technologies have stated that CMS has not 
sufficiently used external cost data they may provide on behalf of 
their products when it reclassifies and weights DRGs or evaluates new 
technologies for the add-on payments. The Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003 (MMA), required us to 
examine whether CMS could improve its use of external data under the 
IPPS, including whether data collected by other government agencies 
would be best suited for CMS to use in setting payments for inpatient 
stays.[Footnote 12] As discussed with the committees of jurisdiction, 
we examined (1) to what extent CMS has used external data in 
determining payments for inpatient stays involving new technologies, 
and (2) to what extent external data from other government agencies can 
be used by CMS in determining DRG payments for inpatient stays 
involving new technologies. 

To examine to what extent CMS has used external data in determining 
payments for inpatient stays involving new technologies, we reviewed 
IPPS regulations and other CMS materials and interviewed officials from 
CMS and HHS.[Footnote 13] We interviewed representatives from two 
hospital associations--the American Hospital Association and the 
Association of American Medical Colleges--and two associations of 
technology manufacturers--the Advanced Medical Technology Association 
and the Biotechnology Industry Organization. Additionally, we 
interviewed officials from four individual drug and device 
manufacturers and one hospital that we identified as having submitted 
external data to CMS. 

To examine to what extent external data from other government agencies 
can be used by CMS in determining DRG payments for inpatient stays 
involving new technologies, we reviewed IPPS regulations and other CMS 
materials and interviewed officials from CMS and HHS. In addition, we 
interviewed officials from the Bureau of Labor Statistics (BLS) in the 
Department of Labor (DOL) because BLS collects price information for 
new technologies. We also interviewed officials from the Department of 
Veterans Affairs (VA), the Department of Defense (DOD), and the Agency 
for Healthcare Research and Quality (AHRQ) in HHS because we identified 
these agencies as having inpatient stay information, including cost or 
charge data, that they collect for their own purposes that could be 
useful to Medicare. We conducted our work from December 2004 through 
January 2006 and from August 2006 through August 2007 in accordance 
with generally accepted government auditing standards. 

Results in Brief: 

CMS has used external data for two purposes: to inform DRG 
reclassification and to evaluate new technology add-on payment 
applications. To inform DRG reclassification, CMS accepts the 
submission of external data that are intended to demonstrate that 
inpatient stays involving a new technology are costlier on average than 
the other inpatient stays in the same DRG. CMS uses data from the 
MEDPAR file to validate the external data submitted. Specifically, when 
external data are submitted for a proposed DRG reclassification for a 
procedure or new technology, CMS's policy is to find the same or 
similar evidence in the MEDPAR file. Generally, CMS will not make a 
reclassification decision for a DRG involving a new technology if the 
technology is so new that it does not appear in the MEDPAR file. To 
evaluate new technology add-on payment applications, CMS has generally 
used external data in conjunction with data from the MEDPAR file to 
evaluate whether a new technology meets one of the three eligibility 
criteria, specifically the criterion related to cost. 

Data from other government agencies have limitations for CMS's setting 
DRG payments for inpatient stays involving new technologies. This is 
because, when setting DRG payments, CMS generally needs data that are 
representative of the Medicare population, timely, and complete in that 
the data include the total charge or other measure of costliness for 
all services provided during an inpatient stay, including new 
technologies. The data we identified from BLS, VA, DOD, and AHRQ were 
either not representative of the Medicare population, were no timelier 
than data from the MEDPAR file, or were not complete. 

Data from the MEDPAR file remain the primary data source for setting 
DRG payments because they include all charges from inpatient claims for 
inpatient services provided to all Medicare beneficiaries across all 
hospitals paid under the IPPS. CMS needs these data to determine 
payment for each DRG relative to other DRGs. In instances where data 
from the MEDPAR file have lacked charge information for certain stays 
involving new technologies, CMS has used external data to inform the 
DRG reclassification process and to evaluate new technology add-on 
payment applications. To set DRG payments, CMS needs data that meet 
criteria of being representative, timely, and complete. Although BLS, 
VA, DOD, and AHRQ collect data for their own purposes that could 
potentially be useful to CMS, these data are limited in their utility 
to set DRG payments because they do not always meet CMS's criteria. 

In commenting on a draft of this report, CMS stated that it agreed with 
our findings and reiterated its commitment to using external data when 
appropriate. DOD offered no comments on the draft of this report. VA 
agreed with the facts as they pertain to the department. We also sent a 
draft to DOL. DOL did not provide comments. Industry association 
reviewers agreed with our findings but said that we should have 
discussed CMS's use of data from sources other than the federal 
government. As we discussed in the draft report, CMS has used external 
data from sources other than the federal government including 
manufacturer data to inform DRG reclassification and evaluate new 
technology add-on applications. 

Background: 

Under the IPPS, hospitals are not paid separately for each item or 
service they provide. Rather, payment is based on the DRG to which the 
entire inpatient stay is assigned. Each of the 538 DRGs has a 
classification, that is, an assigned combination of any of the 
approximately 17,000 diagnoses and procedures codes. When codes for 
these diagnoses and/or procedures appear together on a claim,[Footnote 
14] the inpatient stay is assigned to the appropriate DRG and paid 
accordingly.[Footnote 15] In addition, CMS determines if the inpatient 
stay is eligible for an outlier payment beyond the DRG 
payment.[Footnote 16] Hospitals can receive outlier payments for 
individual inpatient stays determined to be extremely costly if a 
hospital can demonstrate that the estimated cost of an individual 
inpatient stay exceeds a cost threshold established by CMS. 

CMS Annually Revises DRG Classifications and Payment Weights: 

Medicare law requires CMS to revise the DRG classifications and payment 
weights at least annually to reflect changes in treatment patterns, new 
medical services and technologies, and other factors that may change 
the relative costliness of an inpatient stay.[Footnote 17] To 
accomplish this, CMS assembles a MEDPAR file from inpatient claims for 
a fiscal year, so that the file contains one record for each inpatient 
stay provided during that year. A MEDPAR record includes the admission 
and discharge dates, patient and hospital identifiers, and codes that 
identify the diagnosis and the procedures delivered during the 
inpatient stay. The record also contains the hospital's total charge 
for the inpatient stay. The total charge represents the charges for all 
services--including any new technology, drugs, or supplies--provided 
during the inpatient stay. The total payment to the hospital is also 
included in the MEDPAR record. MEDPAR records do not indicate the 
hospital's actual cost for the inpatient stay or the cost of individual 
procedures, which are not recorded on claims by hospitals. 

CMS uses data from the MEDPAR file to revise the DRGs for the coming 
fiscal year. It revises the DRGs in a two-step process: 
reclassification of DRGs and calculation of DRG payment weights. First, 
CMS incorporates new codes into the IPPS that represent new diagnoses 
or procedures by assigning them to the same DRGs as existing codes for 
clinically similar diagnoses or procedures.[Footnote 18] Using data 
from the MEDPAR file, CMS may reclassify the DRG assignment of 
inpatient stays with a particular procedure or diagnosis code if it 
determines the inpatient stays are more similar in their clinical 
characteristics and costliness to a DRG other than the DRG to which 
those stays were previously assigned.[Footnote 19] CMS will create a 
new DRG if it determines that the inpatient stays involving newly 
identified diagnoses and procedures cannot be described by any of the 
existing DRGs.[Footnote 20] The classification of most DRGs does not 
change from year to year.[Footnote 21] 

The second step in revising the DRGs involves calculating weights 
across all DRGs, so that the DRGs reflect the expected relative 
differences in costliness of inpatient stays for the upcoming fiscal 
year. Prior to fiscal year 2007, CMS annually derived each DRG's weight 
by dividing the average charge per inpatient stay for that DRG by the 
average charge per inpatient stay across all DRGs for a fiscal year. 
Effective fiscal year 2007, CMS uses charge data from the MEDPAR file 
and hospitals' cost-to-charge ratios from Medicare cost reports to 
estimate the costs per inpatient stay. CMS then uses these average 
estimated costs to measure the relative costliness of inpatient stays 
that will be assigned to each DRG. 

In reclassifying and weighting DRGs, CMS generally requires that the 
data meet three criteria: (1) the data must be representative of the 
Medicare population; (2) the data must be timely--that is, they should 
be the most recent data available; and (3) the data must be complete-- 
meaning that CMS needs total charges or other measure of costliness for 
all services provided during an inpatient stay. Charge data collected 
at the inpatient-stay level allow CMS to appropriately measure relative 
costliness across the DRGs. 

DRG Classifications and Payment Weights for Any Given Fiscal Year Are 
Based on Inpatient Claims Data That Do Not Reflect the Cost of the Most 
Recent Technologies: 

The DRG classifications and payment weights for any given fiscal year 
are based on data from the MEDPAR file for inpatient services provided 
2 fiscal years prior, and therefore, do not reflect the cost of the 
most recently used technologies. For example, during the summer of 
2006, when CMS was finalizing the DRGs for fiscal year 2007, the most 
recent data pertained to inpatient services provided through the end of 
fiscal year 2005, and did not reflect the cost of technologies first 
adopted by hospitals in fiscal year 2006. 

The time lag in the data that are used to set DRG classifications and 
weights is primarily due to two factors in combination: the time it 
takes to annually finalize the DRGs, and the time it takes for CMS to 
process each inpatient claim into a MEDPAR record. First, Medicare law 
requires that DRG classifications and weights be revised annually and 
published in the Federal Register on or before the August 1 before each 
fiscal year.[Footnote 22] Fiscal years begin October 1 and end the 
following September 30. In order to obtain public input, CMS generally 
publishes its proposed DRGs for the coming fiscal year in the Federal 
Register each April and accepts comments for 60 days before publishing 
the final DRGs by August. 

The second factor that affects the incorporation of the cost of new 
technologies into the MEDPAR file involves the time it takes for CMS to 
process each inpatient claim into a MEDPAR record. Before a record for 
an inpatient stay can be added to the MEDPAR file, the hospital must 
submit the claim, a private contractor must process and pay the claim, 
and CMS must create a MEDPAR record using information on the claim. It 
takes about 6 months from the time of the inpatient stay to the time 
the MEDPAR record for that inpatient stay is created. In addition, the 
MEDPAR record may not be added to the MEDPAR file until as much as 3 
months later, since the MEDPAR file is updated quarterly--in December, 
March, June, and September. This means that MEDPAR records are not 
available to CMS until 6 to 9 months after the inpatient stay has 
occurred. (See fig. 1.) 

Figure 1: Process by Which CMS Used the MEDPAR File to Propose and 
Finalize DRGs for Fiscal Year 2007 DRG Payments: 

[See PDF for image] 

Source: GAO analysis of CMS's fiscal year 2007 proposed and final 
rules. 

[End of figure] 

Add-on Payments for New Technologies Can Supplement DRG Payments: 

Because DRG payments for a given fiscal year are based on claims for 
inpatient services provided 2 fiscal years prior, Medicare can provide 
hospitals with add-on payments, in addition to the DRG-based payments, 
for inpatient stays involving certain new technologies. CMS designates 
technologies for add-on payments if they meet specified criteria for 
being new, costly, and a substantial clinical improvement over existing 
technologies. CMS considers a technology new if no more than 2 to 3 
years have passed between the date when the technology was first 
introduced on the market, as identified by CMS, and the payment 
year.[Footnote 23] At the end of this period, CMS assumes the costs for 
the technology to be fully reflected in the most recent MEDPAR file and 
supplemental add-on payments are no longer necessary. CMS considers a 
new technology costly if the average amount charged by hospitals for 
all inpatient stays involving the technology exceeds a charge threshold 
or a predetermined amount.[Footnote 24] CMS considers a new technology 
a substantial clinical improvement over existing technologies if the 
technology has one or more unique clinical advantages--for example, the 
technology diagnoses a medical condition in a patient population where 
that condition was previously undetectable. 

Every year, CMS accepts applications from technology manufacturers, 
hospitals, and other stakeholders, in which they present evidence that 
certain technologies meet the criteria for add-on payments in the 
coming fiscal year. When CMS publishes its final DRG classifications 
and weights, it summarizes each application, and explains why the 
particular technology was approved or rejected for add-on payments. For 
fiscal year 2007, CMS approved one new application and continued add-on 
payments for two technologies approved for fiscal year 2006.[Footnote 
25] As a result, hospitals receive an add-on payment, in addition to a 
DRG payment, when they submit a claim to Medicare that includes the 
code for a procedure involving one of those three technologies. The 
amount of the add-on payment is determined on a claim-by-claim basis; 
the hospital receives up to half the estimated cost of the technology, 
depending on the amount by which the total cost of the inpatient stay 
is estimated by CMS to exceed the DRG-based payment.[Footnote 26] 

CMS Has Used External Data to Inform DRG Reclassification and to 
Evaluate New Technology Add-on Payment Applications: 

CMS has used external data for two purposes: to inform DRG 
reclassification and to evaluate new technology add-on payment 
applications. To inform DRG reclassification, CMS accepts the 
submission of external data that are intended to demonstrate that 
inpatient stays involving a new technology are costlier on average than 
the other inpatient stays in the same DRG. CMS uses data from the 
MEDPAR file to validate the external data submitted. Generally, CMS 
will not make a reclassification decision for a DRG involving a new 
technology if the technology is so new that it does not appear in the 
MEDPAR file. To evaluate new technology add-on payment applications, 
CMS has generally used external data in conjunction with data from the 
MEDPAR file to evaluate whether a new technology meets one of three 
eligibility criteria, specifically, the criterion related to cost. 

CMS Has Used External Data to Inform the DRG Reclassification Process 
on Inpatient Stays Involving New Technologies: 

CMS officials told us they have used external data to inform the DRG 
reclassification process. External data are submitted by stakeholders 
as part of a request to reclassify--from one DRG to another--certain 
procedure codes involving particular new technologies. Although CMS 
will accept the submission of external data, it has used data from the 
MEDPAR file to validate the external data submitted.[Footnote 27] 
Specifically, when external data are submitted for a proposed DRG 
reclassification for a procedure or new technology, CMS's policy is to 
find the same or similar evidence in the MEDPAR file. CMS encourages 
stakeholders to submit their external data for DRG reclassification 
purposes by the December before the issuance of the proposed rule the 
following April. 

Although there is no formal application process to request a DRG 
reclassification, CMS explained its policy for accepting external data 
submissions in its July 30, 1999, notice of final rulemaking.[Footnote 
28],[Footnote 29] It stated that external data submissions must be 
sufficiently detailed--include applicable hospital and beneficiary 
identifiers, procedure and diagnosis codes, admission and discharge 
dates, and total charges for each inpatient stay involving the codes-- 
so that CMS can validate whether the same, or similar, inpatient stays 
appear in the MEDPAR file. CMS also requires that the external data 
submitted comprise a complete set, or representative sample, of cases 
involving the technology. CMS will not reclassify a procedure code from 
one DRG to another based on the external data submission alone. As a 
result, CMS generally will not make a DRG reclassification involving a 
technology that is so new it does not yet appear in the MEDPAR 
file.[Footnote 30] 

CMS Has Used External Data to Evaluate Applications for New Technology 
Add-on Payments: 

CMS has used external data to evaluate applications for new technology 
add-on payments to better recognize the cost of technologies that are 
clinically beneficial yet would not be fully reflected in the MEDPAR 
file. CMS designates technologies for add-on payments if they meet 
specified criteria for being new, costly, and a substantial clinical 
improvement over existing technologies. CMS's use of external data is 
limited to its evaluation of the cost criterion. CMS has generally used 
external data and data from the MEDPAR file to evaluate whether a new 
technology that is being considered for an add-on payment meets the 
criterion for being considered costly.[Footnote 31] 

As of fiscal year 2007, according to our review of CMS regulations and 
our interviews with CMS officials, CMS has received few applications 
for add-on payments--a total of 25, which is an average of about 5 per 
year since fiscal year 2002. All but two applications were submitted by 
device and drug manufacturers. When CMS receives an application for a 
new technology add-on payment, it first evaluates whether the 
technology meets the criterion of being new before it evaluates the 
technology under the cost and clinical improvement criteria. The 
majority of new technology add-on payment applications have been 
rejected because the technology failed to meet the newness criterion. 
For these applications, CMS did not have to review any information 
related to the cost and clinical improvement criteria, including 
external data related to the cost criterion. Of the 25 applications 
received, CMS evaluated 14 under the cost criterion. Of these 14 
technologies, CMS approved 7 for new technology add-on payments. 

When CMS evaluates new technologies under the cost criterion, it uses 
external data in conjunction with data from the MEDPAR file to 
determine whether the technology meets the cost criterion.[Footnote 32] 
Table 1 illustrates three hypothetical scenarios in which CMS, during 
fiscal year 2007, could use external data in conjunction with data from 
the fiscal year 2006 MEDPAR file in determining if a new technology is 
eligible for add-on payments for fiscal year 2008 under the cost 
criterion. 

Table 1: Three Hypothetical Scenarios in Which CMS, during Fiscal Year 
2007, Could Determine Eligibility under the Cost Criterion for Fiscal 
Year 2008 Add-on Payments: 

Scenario: The new technology became available on the U.S. market in 
2006, was adopted by a few hospitals by the end of that year, and was 
provided by those hospitals to Medicare beneficiaries; 
Does the fiscal year 2006 MEDPAR file contain data on stays involving 
the new technology?: Yes; 
Is the charge for the new technology included in the total charge in 
the fiscal year 2006 MEDPAR file for each stay involving the 
technology?: Yes; 
What data does the applicant[A] submit to CMS to demonstrate that the 
new technology meets the charge threshold[B] established by CMS for the 
cost criterion?: The applicant submits an analysis comparing the 
average charge of the stays involving the new technology based on data 
from the fiscal year 2006 MEDPAR file to the charge threshold; 
How does CMS use data from the fiscal year 2006 MEDPAR file to verify 
that the new technology meets the charge threshold established by CMS 
for the cost criterion?: CMS conducts its own analysis using data from 
the fiscal year 2006 MEDPAR file to validate the accuracy of the 
applicant's analysis. 

Scenario: The new technology was not available on the U.S. market until 
2007. However, in 2006 it was provided to Medicare beneficiaries by a 
few U.S. hospitals that received the technology at no charge for use in 
clinical trials; 
Does the fiscal year 2006 MEDPAR file contain data on stays involving 
the new technology?: Yes; 
Is the charge for the new technology included in the total charge in 
the fiscal year 2006 MEDPAR file for each stay involving the 
technology?: No[C]; 
What data does the applicant[A] submit to CMS to demonstrate that the 
new technology meets the charge threshold[B] established by CMS for the 
cost criterion?: Using external data, the applicant estimates what U.S. 
hospitals would have charged for the technology on average in 2006. The 
applicant then submits an analysis comparing the average charge of 
inpatient stays involving the new technology in 2006 based on data from 
the fiscal year 2006 MEDPAR file to the charge threshold; 
How does CMS use data from the fiscal year 2006 MEDPAR file to verify 
that the new technology meets the charge threshold established by CMS 
for the cost criterion?: CMS evaluates the reasonableness of the 
applicant's estimated hospital charges for the technology. If CMS 
determines the estimates are reasonable, it verifies the accuracy of 
the applicant's analysis of data using the fiscal year 2006 MEDPAR 
file. 

Scenario: The technology was not available on the U.S. market until 
2007. Although it was provided to patients in 2006 in clinical trials, 
the trials were conducted in Europe and the patients were not Medicare 
beneficiaries; 
Does the fiscal year 2006 MEDPAR file contain data on stays involving 
the new technology?: No; 
Is the charge for the new technology included in the total charge in 
the fiscal year 2006 MEDPAR file for each stay involving the 
technology?: Not applicable; 
What data does the applicant[A] submit to CMS to demonstrate that the 
new technology meets the charge threshold[B] established by CMS for the 
cost criterion?: The applicant submits external data from U.S. 
hospitals from 2007--for example, copies of bills from hospitals that 
provided the technology to Medicare beneficiaries during inpatient 
stays. The applicant compares the average charge calculated for these 
stays, which includes charges for the new technology, to the charge 
threshold; 
How does CMS use data from the fiscal year 2006 MEDPAR file to verify 
that the new technology meets the charge threshold established by CMS 
for the cost criterion?: CMS verifies the accuracy of the applicant's 
external data analysis using data from the fiscal year 2006 MEDPAR 
file. For example, CMS could locate stays in the fiscal year 2006 
MEDPAR file that likely would have involved the technology had it been 
available to U.S. hospitals. CMS would calculate an average charge for 
those stays, add the estimated charge for the new technology, and 
subtract the estimated charge for the technology it may be replacing to 
arrive at a total estimated charge for those stays had they involved 
the new technology. 

Source: GAO based on CMS regulations and interviews with CMS officials. 

[A] "Applicant" refers to a manufacturer, hospital, or other 
stakeholder. Although hospitals receive the add-on payment, almost all 
applicants for new technology add-on payments have been technology 
manufacturers. 

[B] Specifically, the charge for the inpatient stay involving the new 
technology must exceed the lower of two thresholds: (1) 75 percent of 
the base payment amount adjusted to reflect charges, or (2) 75 percent 
of a standard deviation beyond the average charge of all stays that 
fall within the DRG to which the new technology is assigned. 42 U.S.C. 
§ 1395ww(d)(5)(K)(ii)(I) (2000 & Supp. III 2003). 

[C] Data from the MEDPAR file may not include charges for a new 
technology if patients were in a clinical trial and the technology was 
provided to hospitals at no charge. 

[End of table] 

Data from Other Government Agencies Have Limitations for Setting DRG 
Payments for Inpatient Stays Involving New Technologies: 

Data collected and used by other government agencies have limitations 
for CMS's use in setting DRG payments for inpatient stays involving new 
technologies. This is because, when setting DRG payments, CMS generally 
needs data that are representative of the Medicare population, timely, 
and complete in that the data include the total charge or other measure 
of costliness for all services provided during an inpatient stay, 
including new technologies. The data we identified from BLS, VA, DOD, 
and AHRQ were either not representative of the Medicare population, 
were no timelier than data from the MEDPAR file, or were not complete. 

BLS collects monthly selling prices for samples of products from three 
industries that may have data relevant to CMS because these data 
include price information for new technologies: medical instruments, 
pharmaceuticals, and biological products.[Footnote 33] These data, 
collected from manufacturers, are used to publish the Producer Price 
Index (PPI), which tracks the inflation of prices by producers of goods 
and services at the national level.[Footnote 34] Because BLS cannot 
obtain pricing for every medical instrument and pharmaceutical and 
biological product sold, it employs a sampling methodology to track 
prices. Using probability statistics, BLS selects a sample of products 
whose price changes over time will be representative of the price 
changes characteristic of the medical instrument and pharmaceutical and 
biological product industries. Generally, BLS selects a new sample of 
products per industry every 7-8 years.[Footnote 35] The monthly selling 
prices collected include prices for transactions between manufacturers 
and hospitals, wholesalers, group purchasing organizations, or other 
customers. 

BLS data have a number of limitations that would affect CMS's use in 
setting DRG payments. Because the selling prices reflect transactions 
between manufacturers and a variety of purchasers such as group 
purchasing organizations as well as hospitals, not all of these prices 
are directly relevant for setting DRG payments. To set payments, CMS 
needs data that reflect hospitals serving Medicare beneficiaries. In 
addition, since BLS relies on a sample of products from each industry, 
and the sample is generally updated on average every 7-8 years, it is 
unlikely that BLS will have price data for a new technology that CMS 
does not already have, or cannot obtain from a manufacturer. Finally, 
the BLS data lack information needed by CMS on the costliness of 
inpatient stays involving the technology relative to other inpatient 
stays; instead, they only include price data for the technology alone. 

Two types of VA data, price data from the federal supply schedule (FSS) 
and data on inpatient stays at VA hospitals, also have limitations that 
would affect CMS's use in setting DRG payments. VA collects data from 
drug and device manufacturers on the prices manufacturers charge their 
Most-Favored Customers (MFC).[Footnote 36] These data are used to 
negotiate prices on the FSS, which is a schedule of prices for products 
used by federal agencies. Prices on the FSS are awarded at equal to or 
better than the prices manufacturers charge their MFCs. Because all 
federal agencies and programs may access FSS price information on the 
Internet, CMS already has access to these prices. Similar to BLS data, 
FSS data are not complete for CMS's purposes because they lack 
information on the costliness of inpatient stays involving the 
technology relative to other inpatient stays. 

VA also collects data on inpatient stays at its medical 
centers.[Footnote 37] These data are complete for CMS's purposes in 
that they include all services provided during inpatient stays and 
their associated costs, including the cost of any new technologies. 
However, there are still limitations for CMS's use of these data in 
setting DRG payments. First, the costs of providing care at VA medical 
centers may not be representative of the costs of providing care at 
hospitals that provide care to Medicare beneficiaries. VA is a provider 
of services and, as such, VA has the authority to purchase new 
technologies at discounted rates through various federal purchasing 
options, such as the FSS. Medicare, on the other hand, is a payer--not 
a provider--of services and does not purchase drugs and devices for 
hospitals. Therefore, Medicare does not negotiate discounts on behalf 
of hospitals providing services to Medicare beneficiaries. Furthermore, 
VA inpatient stay data are no timelier than MEDPAR data for determining 
payments to hospitals. For example, VA's allocation of funding to its 
medical centers for fiscal year 2007 is based on data spanning fiscal 
years 2003 through 2005.[Footnote 38] Medicare used fiscal year 2005 
data to develop fiscal year 2007 DRG payments. 

DOD data also have limitations for CMS's use in setting DRG payments. 
DOD health care delivery consists of two integrated systems: the direct 
care system delivered by DOD hospitals, known as Military Treatment 
Facilities (MTF), and the civilian system. The latter is coordinated by 
the TRICARE Management Activity (TMA), which contracts with managed 
care organizations to deliver care, including inpatient services. Data 
from the DOD direct care system would not meet CMS's criterion for 
completeness for two reasons. First, DOD collects overall cost data at 
the facility level rather than the inpatient-stay level. CMS needs 
charge or cost data at the inpatient stay level to set DRG payments. 
Second, while DOD uses cost and pricing data from a variety of sources 
when purchasing medical products, such as drugs and devices for its 
MTFs, these data alone are not appropriate for CMS's use in setting DRG 
payments because CMS needs information on the costliness of inpatient 
stays involving the technology relative to other inpatient stays. 

Data from the DOD civilian system also have limitations for CMS's use 
in setting DRG payments. TMA pays for inpatient stays using a DRG-based 
payment system that is modeled on the Medicare IPPS.[Footnote 39] 
Although TMA's data would be complete for CMS's purposes in that the 
data include total charges for all services provided during an 
inpatient stay, they would not meet CMS's criterion for 
representativeness. According to DOD, its population tends to be 
younger and healthier and, therefore, not comparable to the Medicare 
population.[Footnote 40] 

AHRQ collects claims data from nearly all nongovernmental acute care 
hospitals in 38 states and these data represent approximately 90 
percent of inpatient stays in the United States. AHRQ partners with 
state organizations, which collect claims data directly from hospitals; 
these data are then submitted to AHRQ. According to AHRQ, these data, 
which are available to researchers through the Healthcare Cost and 
Utilization Project (HCUP) claims database, are representative of the 
Medicare population overall.[Footnote 41] The data from the HCUP 
database are also complete in that they include charge, diagnosis, and 
procedure information from Medicare as well as private payers. Although 
data from the HCUP database would meet CMS's criteria for being 
representative of the Medicare population and are complete, these data 
are less timely than data from the MEDPAR file. AHRQ data lag between 
15-18 months, so, for example, if CMS were to use data from the HCUP 
database to set payments for fiscal year 2007, the latest available 
data from AHRQ would include inpatient services for calendar year 2004, 
while the latest available data from the MEDPAR file would include 
inpatient services from fiscal year 2005. 

Concluding Observations: 

Data from the MEDPAR file remain the primary data source for setting 
DRG payments because they include all charges from inpatient claims for 
inpatient services provided to all Medicare beneficiaries across all 
hospitals paid under the IPPS. CMS needs these data to determine 
payment for each DRG relative to other DRGs. In instances where data 
from the MEDPAR file have lacked charge information for certain stays 
involving new technologies, CMS has used external data to inform the 
DRG reclassification process and to evaluate new technology add-on 
payment applications. To set DRG payments, CMS needs data that meet 
criteria of being representative, timely, and complete. Although BLS, 
VA, DOD, and AHRQ collect data for their own purposes that could 
potentially be useful to CMS, these data are limited in their utility 
to set DRG payments because they do not always meet CMS's criteria. 

Agency and Other External Comments: 

In commenting on a draft of this report, CMS stated that it agreed with 
our findings and reiterated its commitment to using external data when 
appropriate. (See app. I.) DOD said it had no comments on the draft of 
this report. (See app. II.) We received comments from VA via email. The 
department agreed with the facts as they pertain to VA. We also sent a 
draft of this report to DOL. DOL did not provide comments. 
Representatives from American Hospital Association (AHA), Association 
of American Medical Colleges (AAMC), and the Biotechnology Industry 
Organization (BIO) provided oral comments on a draft of this report. 
They said they agreed with our findings related to the use of external 
data by CMS. 

With regard to our finding that data from other government agencies 
have limitations for CMS's use in setting DRG payments, both AAMC and 
BIO said we should have discussed CMS's use of data from sources other 
than the federal government. As we discussed in the draft report, CMS 
has used external data from sources other than the federal government 
including manufacturer data to inform DRG reclassification and evaluate 
new technology add-on applications. 

AAMC said it was concerned that we only examined how CMS used the 
external data and did not conduct an evaluation of CMS's policy for 
using external data. However, as discussed in the draft report, an 
examination of CMS's policy for accepting external data was not within 
the scope of the report. 

In addition, CMS, AAMC and AHA offered technical comments on the draft 
of this report, which we incorporated as appropriate. 

We are sending a copy of this report to the Administrator of CMS and 
interested congressional committees. We will also provide copies to 
others on request. The report is available online at no charge on GAO's 
Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions, please contact me at (202) 512-
7114 or steinwalda@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix III. 

Signed by: 

A. Bruce Steinwald: 
Director, Health Care: 

[End of section] 

Appendix I: Comments from the Centers for Medicare & Medicaid Services: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services: 

Deputy Administrator: 
Baltimore, MD 21244-1850: 

July 27, 2007: 

To: A. Bruce Steinwald: 
Director, Health Care: 
Government Accountability Office: 

From: Herb B. Kuhn: 
Acting Deputy Administrator: 
Centers for Medicare & Medicaid Services: 

Subject: Government Accountability Office's Draft Report: "Medicare 
Inpatient Hospital Payments: CMS Has Used External Data for New 
Technologies in Certain Instances and Medicare Remains Primary Data 
Source" (GAO-07-46) 

Thank you for the opportunity to review and comment on the Government 
Accountability Office's (GAO) draft report entitled, "Medicare 
Inpatient Hospital Payments: CMS Has Used External Data for New 
Technologies in Certain Instances and Medicare Remains Primary Data 
Source." We appreciate GAO's efforts to examine whether the Centers for 
Medicare & Medicaid Services (CMS) could improve our use of external 
data with respect to new technologies in informing diagnosis-related 
group (DRG) reclassification and evaluating new technology add-on 
applications for technologies used in hospitals paid under the 
inpatient prospective payment system (IPPS). CMS agrees with GAO's 
findings which suggest that we utilize external data, "to inform DRG 
reclassification and to evaluate new technology add-on payment 
applications" to the extent possible considering limitations of 
external data (including other government agencies' data). We are 
pleased that GAO's report acknowledges that data CMS uses for purposes 
of DRG reclassification and new technology add-on payment application 
evaluation needs to be "representative of the Medicare population, 
timely, and complete" and we agree with that assessment. 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 required GAO to examine whether CMS could improve its use of 
external data, including using data collected by other government 
agencies for DRG payments. The GAO report acknowledges the limitations 
in using such data and generally reinforces our approach for using 
external data for DRG reclassification and new technology add-on 
application evaluation. The GAO report did not suggest any alternatives 
for our use of external data. We agree that there are currently no good 
alternatives for us to use external data to a greater extent than we 
presently do. However, we remain committed to using external data when 
appropriate in the new technology add-on payment application evaluation 
process. By using the best data available, we are better able to ensure 
that Medicare beneficiaries will continue to have access to innovative 
new technologies that might otherwise be too expensive to be used in 
the inpatient hospital setting 

Once again, thank you for your analysis of this issue and the 
opportunity to review and comment on your report.

[End of section] 

Appendix II: Comments from the Department of Defense: 

Office Of The Assistant Secretary Of Defense: 
Washington, DC 20301.1200: 

Health Affairs: 

July 23, 21107: 

Mr. A. Bruce Steinwald: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street, N.W.: 
Washington, DC 20548: 

Dear Mr. Steinwald: 

This is the Department of Defense (DoD) response to the GAO Draft 
Report, GAO- 07-46, "Medicare Inpatient Hospital Payments: CMS Has Used 
External Data for New Technologies in Certain Instances and Medicare 
Remains Primary Data Source." 

Thank you for the opportunity to review and provide comments on the GAO 
Draft Report. I have no comments to offer. 

My points of contact are Lt Col Jeanne Yoder (Functional) at (703) 681-
3492 ext. 4068 and Mr. Gunther Zimmerman (Audit Liaison) at (703) 681-
3492 ext. 4065. 

Sincerely, 

Signed by: 

Stephen L. Jones: 
DHA Principal Deputy Assistant Secretary: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

A. Bruce Steinwald, (202) 512-7114 or steinwalda@gao.gov: 

Acknowledgments: 

In addition to the contact above, Maria Martino, Assistant Director; 
Melanie Anne Egorin; Yorick F. Uzes; and Craig Winslow made key 
contributions to this report. 

[End of section] 

Footnotes:  

[1] Throughout this report, we use "stay" to represent a patient's 
hospitalization. 

[2] 42 U.S.C. § 1395ww(d)(4)(C) (2000). 

[3] Under the IPPS, payment also includes adjustments for geographic 
variation in hospital wages, indirect expenses related to medical 
education, a hospital's caseload of low-income patients, and other 
factors. 

[4] For purposes of this report, "new technology" is defined as a new 
medical device, drug, or procedure. 

[5] CMS also uses hospital cost reports, which are submitted annually 
to CMS. Cost reports contain each hospital's aggregate information on 
charges for services and the actual costs of providing those services 
to all patients, as well as information on total charges and estimates 
of costs for services provided to Medicare beneficiaries. 

[6] For example, payments for fiscal year 2007 are based on data from 
claims for services provided in fiscal year 2005. 

[7] Pub. L. No. 105-33, 111 Stat. 251. 

[8] External data can also include, but are not limited to, 
manufacturer invoices and data from hospital data vendors. 

[9] H. R. Rep. No. 105-217, at 734 (1997) (Conf. Rep.) External data 
are not defined in statute. We define external data as data that are 
not collected from hospitals by CMS. 

[10] Pub. L. No. 106-554, app. F, sec. 533(b), § 
1886(d)(5)(K)(ii)(III), 114 Stat. 2763, 2763A-548 (codified at 42 
U.S.C. § 1395ww(d)(5)(K)(ii)(III) (2000)). 

[11] 71 Fed. Reg. 47,870, 48,344 (Aug. 18, 2006). 

[12] Pub. L. No. 108-173, § 942(c), 117 Stat. 2066, 2422. 

[13] We did not examine or evaluate the add-on payment application 
process, CMS's policy for accepting external data, or the adequacy of 
the add-on and outlier payments made to hospitals. 

[14] Hospitals bill procedures and diagnoses with codes provided by The 
International Classification of Diseases, 9th Revision, Clinical 
Modification Hyattsville, Md.: Centers for Disease Control and 
Prevention, National Center for Health Statistics (Jan. 11, 2007). 

[15] For example, a claim with a diagnosis code for heart failure and a 
procedure code for the implantation of a pacemaker would be assigned to 
DRG 115, "Permanent Cardiac Pacemaker Implant with Acute Myocardial 
Infarction, Heart Failure, or Shock." CMS would then multiply the 
weight for DRG 115 by a base payment amount, or the amount that 
Medicare would pay for an average unit of service if no other payment 
adjustments applied, to determine the hospital's base payment amount 
for the stay. The higher the DRG weight the more costly the stays 
assigned to that DRG are estimated to be and the higher the payment. 

[16] For example, in fiscal year 2007, a hospital receives an outlier 
payment if its estimated cost for a stay is at least $24,485 more than 
its DRG payment for that stay. The actual amount of the outlier payment 
will equal 80 percent of the difference between the two amounts. 

[17] 42 U.S.C. § 1395ww(d)(4)(C) (2000). 

[18] Codes for new procedures and diagnoses are assigned by CMS and the 
National Center for Health Care Statistics, respectively, in a process 
that is separate from the DRG reclassification process. New codes are 
assigned for procedures and diagnoses that are deemed so different from 
existing procedures and diagnoses that they warrant their own unique 
identifiers. 

[19] CMS makes a clinical determination to reclassify a DRG based on 
input from the public as well as its own clinical staff. CMS evaluates 
costliness by comparing the average charge for inpatient stays with the 
particular code--as calculated using data from the MEDPAR file--to the 
average charges for all stays assigned to the current and proposed 
DRGs, respectively. 

[20] For fiscal year 2008, CMS has proposed to refine the 
classification of and expand the number of DRGs from 538 to 745 to 
better reflect severity of illness and the cost of treating Medicare 
beneficiaries. 72 Fed. Reg. 24,680, 24,687 (May 3, 2007). 

[21] For fiscal year 2007, for example, CMS added 20 new DRGs, made 
changes to the classifications of approximately 32 existing DRGs, and 
deleted 8 DRGs. See 71 Fed. Reg. 47,870, 47,879 (Aug. 18, 2006). 

[22] 42 U.S.C. § 1395ww(d)(6) (2000). 

[23] BIPA required that CMS collect cost data on a new technology for a 
2 to 3 year period and that a new technology be eligible for add-on 
payments during that period. Pub. L. No. 106-554, app. F, sec. 533(b), 
§ 1886(d)(5)(K)(ii)(III),114 Stat. 2763, 2763A-548 (codified at 42 
U.S.C. § 1395ww(d)(5)(K)(ii)(III) (2000)). CMS established that the 
beginning of the 2 to 3 years would be the date it determines that the 
technology became available on the market. 69 Fed. Reg. 28,196, 28,237 
(May 18, 2004). 

[24] Specifically, the charge for the inpatient stay involving the new 
technology must exceed the lower of two thresholds: (1) 75 percent of 
the base payment amount adjusted to reflect charges, or (2) 75 percent 
of a standard deviation beyond the average charge of all stays that 
fall within the DRGs to which the new technology is assigned. 42 U.S.C. 
§ 1395ww(d)(5)(K)(ii)(I) (2000 & Supp. III 2003). 

[25] Specifically, CMS approved the new technology application for the 
X-STOP Interspinous Process Decompression System and continued add-on 
payments for the Endovascular Graft Repair of the Thoracic Aorta and 
Restore ® Rechargeable Implantable Neurostimulator. 

[26] To calculate the amount of the add-on payment, CMS converts the 
charges billed for the inpatient stay to an estimated cost using the 
hospital's cost-to-charge ratio. If the total estimated cost for the 
inpatient stay is higher than the DRG-based payment, then the add-on 
payment is 50 percent of the difference, up to half of the estimated 
cost of the new technology. 

[27] CMS was directed by the conference report accompanying the BBA to 
only use external data it can validate. H.R. Rep. No. 105-217, at 734 
(1997) (Conf. Rep.)

[28] CMS maintains a list of DRG issues raised throughout the year by 
manufacturers, providers, and the general public. It reviews these 
requests with its staff and analyzes external data if those data were 
submitted. CMS does not address each and every DRG reclassification 
request it receives throughout the year in its proposed or final rules 
for the upcoming year, nor does it track how many times external data 
were submitted with those reclassification requests. 

[29] 64 Fed. Reg. 41,490, 41,499-504. 

[30] CMS has made one reclassification decision for a medical 
technology--drug-eluting stents--that had not yet received Food and 
Drug Administration (FDA) approval, and therefore, did not appear in 
the MEDPAR file. CMS explained that it took this action because of the 
potential for drug-eluting stents to significantly impact the treatment 
of coronary blockages, and the expectation that hospitals would rapidly 
adopt the technology upon FDA approval. 67 Fed. Reg. 49,983, 50,004 
(Aug. 1, 2002). 

[31] CMS outlined the new technology add-on application process in its 
September 7, 2001, final rule. 66 Fed. Reg. 46,902, 46,916. 

[32] For example, in explaining the fiscal year 2007 final rule, CMS 
summarized the application for the X STOP Interspinous Process 
Decompression System (X STOP). The device manufacturer provided CMS 
with data from clinical trials demonstrating that the total costs of 
inpatient stays involving X STOP met the cost criterion. CMS verified 
the standardized charge for the stays in the MEDPAR file. 71 Fed. Reg. 
47,870, 48,003 (Aug. 18, 2006). 

[33] BLS collects data on approximately 800 industries. 

[34] BLS collects data for other purposes, including the Consumer Price 
Index (CPI), which tracks the price of goods purchased by consumers. 
BLS also collects data on the total reimbursement to hospitals and 
other medical facilities for providing a sample of medical procedures. 

[35] For pharmaceuticals, BLS augments its sample continuously to 
reflect new products. 

[36] MFC is generally the customer that receives the best discount or 
has the best price arrangement on a given item. 

[37] Although medical care to eligible veterans is provided by the VA, 
some care is provided through arrangements with affiliated academic 
medical centers and other contractors. 

[38] VA's fiscal year 2007 budget for its medical centers and other 
medical services was based on actuarial projections of expected 
enrollees and patients for fiscal year 2007. 

[39] 71 Fed. Reg. 60,112 (Oct. 12, 2006). DOD noted that the vast 
majority of DOD's DRGs are the same as CMS's DRGs; however, DOD has 
additional DRGs for neonatal cases and age-defined mental health and 
substance abuse diagnoses. 

[40] 52 Fed. Reg. 32,992, 32,998 (Sept. 1, 1987). 

[41] Researchers must sign a data use agreement with AHRQ to access 
HCUP data. 

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