Medicare Inpatient Hospital Payments: CMS Has Used External Data for New Technologies in Certain Instances and Medicare Remains Primary Data Source
Published: 2007-09-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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. 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.  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.  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. 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. 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) 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, to the extent that  doing so is “feasible” and the data are “reliable” and “validated.” 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. 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.
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. 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. 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.
subsections: section_title: Background
paragraphs: 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, the inpatient stay is assigned to the  appropriate DRG and paid accordingly. In addition, CMS determines if  the inpatient stay is eligible for an outlier payment beyond the DRG  payment. 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.
subsections: section_title: CMS Annually Revises DRG Classifications and Payment Weights
paragraphs: 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. 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. 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. 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. The classification of most DRGs does not change from  year to year.
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.
section_title: 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
paragraphs: 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. 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.)
section_title: Add-on Payments for New Technologies Can Supplement DRG Payments
paragraphs: 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. 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. 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. 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.
section_title: CMS Has Used External Data to Inform DRG Reclassification and to Evaluate New Technology Add-on Payment Applications
paragraphs: 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.
subsections: section_title: CMS Has Used External Data to Inform the DRG Reclassification Process on Inpatient Stays Involving New Technologies
paragraphs: 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. 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. 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.
section_title: CMS Has Used External Data to Evaluate Applications for New Technology Add-on Payments
paragraphs: 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.
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. 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.
section_title: Data from Other Government Agencies Have Limitations for Setting DRG Payments for Inpatient Stays Involving New Technologies
paragraphs: 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. 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. 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. 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). 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. 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. 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. 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.
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. 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.
section_title: Concluding Observations
paragraphs: 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.
section_title: Agency and Other External Comments
paragraphs: 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 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.
section_title: Appendix I: Comments from the Centers for Medicare & Medicaid Services
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: 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.