Understanding Medicare payment systems is crucial for healthcare providers, especially concerning services like hospice care. This guide, tailored for professionals in the automotive repair industry transitioning to healthcare knowledge, clarifies how Medicare handles admissions for hospice care, focusing on the principal diagnosis and its relationship to Medicare Severity Diagnosis-Related Groups (MS-DRGs). While MS-DRGs are primarily used for hospital inpatient services, understanding their context is essential when patients transition to hospice care, often following a hospital stay.
Medicare Payment Systems Overview
Medicare employs various Prospective Payment Systems (PPS) that predetermine reimbursements irrespective of the intensity of services. Payments are often code-based, utilizing classification systems like MS-DRGs for inpatient services and Ambulatory Payment Classifications (APCs) for outpatient services. This document outlines payment systems for:
- Acute Care Hospital Inpatient (IPPS)
- Hospice
- Hospital Outpatient (OPPS)
- Inpatient Psychiatric Facilities (IPF PPS)
- Inpatient Rehabilitation Facilities (IRF PPS)
- Long-Term Care Hospitals (LTCH PPS)
- Ambulatory Surgical Centers (ASC)
- Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS)
- Home Health (HH PPS)
- Skilled Nursing Facilities (SNF PPS)
Acute Care Hospital Inpatient Prospective Payment System (IPPS)
The IPPS governs payments to hospitals for acute inpatient care. Hospitals contract with Medicare, accepting predetermined IPPS rates as full payment for services. This system covers 90 days of care per illness episode with a 60-day lifetime reserve. An episode begins upon hospital admission and concludes after 60 days outside a hospital or Skilled Nursing Facility (SNF).
MS-DRGs: Principal Diagnosis and Severity
Medicare uses MS-DRGs to classify inpatient discharges, reflecting illness severity, service complexity, and resource consumption. An MS-DRG is assigned based on similar clinical conditions (diagnoses) requiring comparable resources. The principal diagnosis—the condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care—is paramount in MS-DRG assignment. Secondary diagnoses, procedures, patient demographics, and discharge status also contribute. Up to 25 diagnosis and 25 procedure codes are considered.
MS-DRGs categorize severity into three levels based on secondary diagnoses:
- Major Complication or Comorbidity (MCC): Highest severity, significantly impacting resource use.
- Complication or Comorbidity (CC): Moderate severity, affecting resource use.
- Non-Complication or Comorbidity (Non-CC): Lowest severity, minimal impact on resource use.
MS-DRGs are annually reviewed and refined to ensure clinical homogeneity and resource utilization similarity within each group. For FY 2025, there are 773 MS-DRGs.
IPPS Payment Determination
- Hospitals submit claims to Medicare Administrative Contractors (MACs).
- MACs assign MS-DRGs based on claim data, including the principal diagnosis.
- A base payment rate, adjusted for labor costs (wage index) and MS-DRG weight, determines the payment.
Figure 1 and Figure 2 illustrate the operating and capital base payment rates adjusted for geographic factors within the Acute Care Hospital IPPS.
Figure 1. Acute Care Hospital IPPS: Operating Base Payment Rate Adjusted for Geographic Factors
Figure 2. Acute Care Hospital IPPS: Capital Base Payment Rate
Hospice Payment System & Coverage
Hospice care provides palliative care for terminally ill patients. Medicare patients electing hospice must:
- Be Medicare Part A eligible.
- Be certified as terminally ill with a prognosis of 6 months or less.
- Enroll in a Medicare-approved hospice program.
- Sign a hospice election statement.
- Waive standard Medicare benefits for the terminal illness and related conditions.
Hospice Eligibility and Principal Diagnosis
While MS-DRGs are not directly utilized in hospice payment, the principal diagnosis from a preceding hospital stay is critical in establishing hospice eligibility. The principal diagnosis reflects the underlying terminal illness that necessitates hospice care. Physicians, including the hospice medical director and the patient’s attending physician, must certify the patient’s terminal illness, based on clinical findings related to this principal diagnosis. This certification confirms that the illness, identified by the principal diagnosis, has a prognosis of 6 months or less.
The Medicare hospice benefit encompasses:
- Physician services
- Nursing care (including Nurse Practitioners)
- Medical equipment
- Medical supplies
- Pain and symptom management drugs
- Hospice aide and homemaker services
- Therapy services (PT, OT, SLP)
- Medical social services
- Dietary and spiritual counseling
- Grief and loss counseling
- Short-term inpatient care (pain control, symptom management, respite)
Hospice Level of Care Payment
Medicare pays hospices a per diem rate for each day a patient is enrolled, regardless of service provision on a given day. Payments cover services in the patient’s Plan of Care (POC). There are four levels of care:
- Routine Home Care: Paid at a higher rate for days 1-60 and a lower rate for subsequent days.
- Continuous Home Care: For short-term symptom crises at home, requiring at least 8 hours of daily care.
- Inpatient Respite Care: Temporary facility care (up to 5 days) for caregiver relief.
- General Inpatient Care: Short-term facility care for symptom management unmanageable in other settings.
A service intensity add-on is paid with the routine home care rate for the last 7 days of life if specific criteria are met, involving RN or social worker direct patient care.
Hospice Payment Updates and Wage Index
Hospice payment rates are annually updated by the hospital market basket index, reduced by a productivity adjustment. For FY 2025, the update is 2.9%. Payments are also adjusted for local wage differences using a wage index.
Table 2 details the labor share for each hospice care level, crucial for wage index adjustments.
Table 2. Hospice Labor Share
| Level of Care | Revised Labor Share | Non-Labor Share |
|---|---|---|
| Routine Home Care | 66% | 34% |
| Continuous Home Care | 75.2% | 24.8% |
| Inpatient Respite Care | 61% | 39% |
| General Inpatient Care | 63.5% | 36.5% |
Conclusion
Understanding the interplay between principal diagnosis, MS-DRGs, and payment systems like IPPS and Hospice PPS is vital for navigating Medicare reimbursement. While MS-DRGs are central to inpatient hospital payments, the principal diagnosis carries significant weight in both IPPS coding and establishing hospice eligibility. For patients transitioning from acute hospital care (IPPS, MS-DRG driven) to hospice, the continuity of care and accurate diagnostic coding are essential for seamless transitions and appropriate Medicare payments. This knowledge ensures healthcare providers can effectively manage care transitions and financial aspects within the Medicare framework.
Resources
- Medicare Payment Systems
- Acute Care Hospital IPPS
- Hospice Care
- MS-DRG Classifications
- Hospice Regulations and Notices
