June 19,2007

Senators Express Concern over Speculative Hospital Payment Cuts

Baucus, Grassley caution CMS to base any cuts on actual, not speculative, changes in coding practices by hospitals

Washington, DC – Senate Finance Committee Chairman Max Baucus (D-Mont.) and Ranking
Republican Chuck Grassley (R-Iowa) today called on the Centers for Medicare and Medicaid
Services (CMS) to base any planned cuts to certain Medicare hospital reimbursement rates on
actual, not speculative, changes in coding practices by hospitals. The potential cuts are part of a
proposed rule CMS plans to implement regarding Medicare’s Hospital Inpatient Prospective
Payment System (IPPS), which is used to reimburse hospitals for providing inpatient care to
Medicare patients. In a letter to CMS Acting Administrator Leslie Norwalk, the Senators praised
the new system, which will better identify the severity of a patient’s illness. They argued, however, that cuts should not be applied speculatively.

“The financial stability of rural hospitals should not be gambled on guesses about how this
new system will operate,”
Baucus said. “This new method can help the Medicare program
better track patient care and improve the accuracy of payment. But we need to wait and
see exactly how hospitals will react to the new system before we make any payment
adjustments. We can’t get ahead of ourselves and put our hospitals—especially our vital
rural hospitals—in jeopardy.”

Grassley said, “CMS should take action to ensure that Medicare payments are accurate. However, given what’s at stake for many hospitals, this action should be based on reality, not speculation.”

Senators Baucus and Grassley first called for the implementation of this system to better account
for severity of patient illness in February 2006. The Senators are Chairman and Ranking
Republican on the Senate Finance Committee, which has jurisdiction over the Medicare
Program. The text of the letter follows here.

June 19, 2007

Via Electronic Submission

Leslie V. Norwalk
Acting Administrator
Centers for Medicare and Medicaid Services
200 Independence Ave, SW
Washington, D.C. 20201

Dear Acting Administrator Norwalk:

We write to express our views regarding the Medicare Hospital Inpatient Prospective Payment
System (IPPS) proposed rule for fiscal year 2008. As you know, fair and accurate Medicare
payments for hospital services are a priority for the Senate Committee on Finance.

We are encouraged that the Centers for Medicare and Medicaid Services (CMS) has proposed to
implement the Medicare Payment Advisory Commission’s (MedPAC) recommendation to
improve the payment system’s ability to recognize patient severity of illness. These are important improvements to the payment system and we support you moving forward on their
implementation as we called for in our letter last year to CMS on February 9, 2006. However, we
are concerned about the agency’s proposal to prospectively reduce IPPS payments by 2.4 percent
in 2008 and 2009 based on the assumption that the proposed payment system changes will result in hospitals inappropriately changing coding practices to receive higher payments.

We recognize that payment reductions may be necessary to adjust for inappropriate coding
changes. While these changes may ultimately be necessary at some point in the future, these
prospective payment reductions are based on speculative conclusions about how these changes
will be implemented and they may have a negative financial impact, particularly on rural
hospitals. As a result, we believe it is more appropriate to proceed with the implementation of
these vitally needed improvements to the payment system and then determine whether such
adjustments are justified after the payment system reform has actually been implemented. An
evaluation could then be completed to assess whether inappropriate coding has occurred and, if
so, to what degree.

Thank you for your attention to this matter. We look forward to continuing to work with you to
ensure Medicare payments for hospital inpatient services are fair and appropriate. Should you
have any questions regarding this letter please contact [staff].


Max Baucus, Chairman
Charles E. Grassley, Ranking Member

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