5.2 IPPS and MS-DRGs
Key Takeaways
- The Inpatient Prospective Payment System (IPPS) pays acute-care hospital inpatient stays a fixed amount per discharge based on the assigned MS-DRG.
- Medicare Severity Diagnosis Related Groups (MS-DRGs) group stays by clinical similarity and severity using the principal diagnosis, procedures, and any CC or MCC secondary diagnoses.
- Base payment equals the MS-DRG relative weight multiplied by the hospital's base payment rate; outlier payments add money for extraordinarily costly cases.
- Disproportionate Share Hospital (DSH) and Indirect Medical Education (IME) adjustments increase payment for qualifying hospitals.
- Present-on-admission (POA) indicators, the Hospital Readmissions Reduction Program (HRRP), and Value-Based Purchasing (VBP) can all reduce a hospital's IPPS reimbursement.
The Inpatient Prospective Payment System
The Inpatient Prospective Payment System (IPPS) pays acute-care hospitals a predetermined fixed amount per inpatient discharge rather than reimbursing itemized charges. The amount is determined by the Medicare Severity Diagnosis Related Group (MS-DRG) assigned to the stay. Because payment is fixed in advance, accurate diagnosis and procedure capture directly drives hospital revenue.
How an MS-DRG Is Assigned
MS-DRGs group hospital stays that are clinically similar and consume similar resources. Assignment depends on:
- Principal diagnosis — the condition, established after study, chiefly responsible for the admission.
- Secondary diagnoses — conditions that coexist or develop during the stay.
- Procedures performed, patient discharge status, and sometimes age or sex.
Many MS-DRG families split into severity tiers based on secondary diagnoses:
| Severity Tier | Secondary Diagnosis Present | Effect |
|---|---|---|
| Without CC/MCC | None qualifying | Lowest relative weight |
| With CC | A Complication or Comorbidity | Higher relative weight |
| With MCC | A Major Complication or Comorbidity | Highest relative weight |
A CC (Complication or Comorbidity) is a secondary condition that increases resource use; an MCC (Major Complication or Comorbidity) increases it substantially. Capturing a valid MCC can move a stay to a higher-paying MS-DRG tier.
The Base Payment Calculation
Each MS-DRG carries a relative weight reflecting its average resource intensity. Base payment is:
IPPS Base Payment = MS-DRG Relative Weight x Hospital Base Payment Rate
The hospital base rate combines a labor-related portion (wage-index adjusted) and a non-labor portion. A relative weight of 1.0000 represents an average-cost case.
Add-On Payments and Adjustments
- Outlier payments — extra payment for cases whose costs far exceed the MS-DRG payment plus a fixed-loss threshold.
- Disproportionate Share Hospital (DSH) — added payment for hospitals serving a high share of low-income patients.
- Indirect Medical Education (IME) — added payment for teaching hospitals to offset higher costs of training residents.
- New technology add-on payments — temporary extra payment for qualifying new technologies.
Present-on-Admission Indicators
Each diagnosis on an inpatient claim carries a Present-on-Admission (POA) indicator. Conditions that were NOT present on admission — such as certain Hospital-Acquired Conditions (HACs) — may be excluded from severity grouping, so a hospital cannot earn a higher MS-DRG for a complication it caused.
Quality Programs That Reduce IPPS Payment
- Hospital Readmissions Reduction Program (HRRP) — reduces payments for hospitals with excess 30-day readmissions for targeted conditions.
- Hospital Value-Based Purchasing (VBP) — redistributes a withheld percentage of IPPS payments based on quality and efficiency performance.
- HAC Reduction Program — penalizes the worst-performing quartile on hospital-acquired conditions.
Billers should expect these as line-level or claim-level adjustments on the remittance, not as denials.
An acute-care hospital submits an inpatient Medicare claim. A coder later adds a valid secondary diagnosis classified as an MCC that was present on admission. What is the most likely effect?
Which program reduces a hospital's IPPS payments when it has excess 30-day readmissions for targeted conditions such as heart failure or pneumonia?