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CMS issued its final 2,141-page rule for inpatient hospital services (IPPS) for 2008 this week.

The news for orthopedics remains positive. While no one in the industry and medical profession should suffer from hypertension as a result of the new rule, we predict we’ll see more hypertension diagnosed in spinal patients. We’ll explain later.

More DRGs

The biggest change from 2007 is the adoption of severity-based diagnostic-related groups (DRGs). The new rule creates 745 severity-based DRGs (MS-DRGs) to replace the previous 538 DRGs. The new MS-DRGs will be phased in over two years. CMS is also continuing the three-year transition to adopt cost-based weights.

The DRGs changes are being made, according to CMS, "to account more fully for the severity of each patient’s condition." In addition, the rule includes important provisions to ensure that Medicare no longer pays for the additional costs of certain preventable conditions (including certain infections) acquired in the hospital. The rule also expands the list of publicly reported quality measures and reduces Medicare’s payment when a hospital replaces a device that is supplied to the hospital at no or reduced cost.

Hospital Payments Up 3.5%

Payments to all hospitals will increase by an estimated average of 3.5% for FY 2008 when all provisions of the rule are taken into account, primarily as a result of the 3.3% market basket increase. Payments to specific hospitals may increase more or less than this amount depending on the patients they serve. For instance, urban hospitals generally treat more severely ill patients and are estimated to receive a 3.8% increase in payments.

Hospitals will see their payments increase by nearly $4 billion from 2007.

Specifically, orthopedic procedures saw increases in payments from the proposed rule announced in April.

Orthopedic Payments Up

Larry Biegelsen, senior analyst as Wachovia Capital provided us with the following breakdown of DRG weighted averages.

Source: Larry Biegelsen, Wachovia Capital

Robin Young reported in our April 24th edition of OTW that, while on average, spine fusion reimbursement appears to be rising, 360° fusions (dual incision) reimbursements without comorbidities appear to be dropping. It is unknown at this time what exact impact the new CMS MS-DRGs will have on private payers.

Mike Matson of Wachovia estimates that less than 15% of spinal fusions are performed on Medicare patients. Of the companies he covers, NuVasive derives 100% of its revenue from spine fusion procedures, Orthofix 50%, Stryker 6%, and Zimmer 5%. On the other hand, over 60% of joint replacements are performed on Medicare patients. Zimmer derives 76% of its revenue from hips and knees, Wright Medial 64%, Stryker 35%, and Smith & Nephew 32%.

The Hypertension Comorbidity Incentive

Payments for patients with complications and comorbidities will be higher with “major” complications and comorbidities paying the most. PearlDiver analyst Matt Menze says that evidence shows that hypertension is one of the most common comorbidities for spinal disorder diagnoses. We predict that there will be an outbreak of hypertension in spine patients over the next couple of years.

Implant Inflation

Overall, Matson believes that the CMS changes "are positive for the implant firms but we note that changes to DRGs have only an indirect effect on the implant companies. The key question is how much of this increase the implant firms can capture. On a dollar basis, hip and knee DRGs are up by about $465; assuming this is split evenly between the hospital and implant company, that leaves room for $232 of implant '”inflation” or pricing and mix growth (4.3% assuming the average implant costs $5,400). While this may prove optimistic, the DRG increases do seem to provide room for further implant price and mix growth in FY 2008.”

Specialty Hospitals Take Lumps

Continuing their long-running campaign against specialty, physician-owned hospitals, CMS said, "The new MS-DRGs should help reduce the potential for abusive practices. Under the old DRG system (with payments based on broad averages) incentives could lead hospitals to ‘cherry pick’—the practice of treating only the healthiest and most profitable patients. The new MS-DRGs help address the concerns that certain specialty hospitals—hospitals that provide a limited range of services and typically are owned in whole or in significant part by physicians who serve as referral sources—may selectively provide such profitable services. Finally, by paying more accurately for inpatient services, MS-DRG’s will minimize the cost shifting hospitals now say they have to make to account for variation in payment among Medicare inpatient procedures.”

The new rule also creates new disclosure requirements for these hospitals. The rule requires physician-owned hospitals to disclose such ownership to patients and provide the names of the physician owners upon request. The rule also requires physician-owned hospitals to require physician owners who are members of the hospital’s medical staff to disclose their ownership to the patients they refer to the hospital. Disclosure would be required at the time of referral. In addition, the rule requires a hospital to notify all patients in writing if a doctor of medicine or doctor of osteopathy is not present in the hospital 24 hours a day, seven days per week, and describe how the hospital will meet the medical needs of a patient who develops an emergency condition while no doctor is on site. CMS now has the authority to terminate a provider agreement for noncompliance with these disclosure requirements.

Recalled Device Payments

There is also a change in the way CMS will pay for medical devices that are recalled or replaced at no or reduced cost to the hospital. Payment for these devices are now included in the payment for the DRG. Currently, Medicare pays the same for the second procedure even if the hospital acquires the device for free or at reduced cost, as it did for the initial procedure when the hospital had to purchase the device. The rule reduces payment when hospitals use a recalled or replacement device at no cost or with partial credit.

So, everybody in Warsaw, Kalamazoo, Memphis, the West Coast, Massachusetts, and parts in-between can take a deep breath and get back to the business of competing in the marketplace. But watch that hypertension.