Summary of Final Rule for Medicare Prospective Payment System for Inpatient Psychiatric Facilities

The final rule establishing a Medicare prospective payment system (PPS) for inpatient psychiatric facilities (IPFs) was published in the November 15, 2004 issue of the Federal Register. This rule becomes effective with cost reporting periods beginning or or after January 1, 2005. This summary covers highlights of the rule that are of particular interest to health information management (HIM) professionals. Changes that were proposed in the proposed rule but not adopted in the final rule are not addressed. The final rule can be reviewed in its entirety by downloading it from this link:

Key Provisions of the Regulations (69FR66925)

Effective with cost reporting periods beginning or or after January 1, 2005, a Medicare PPS for IPFs will be implemented. A standardized Federal per diem payment will be paid to IPFs based on the sum of the national average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF (adjusted for budget neutrality). The Federal per diem payment will be adjusted to reflect certain patient and facility characteristics that were found to be associated with statistically significant cost differences. Patient-level adjustments will be provided for age, specified diagnosis-related groups (DRGs), and selected comorbidity categories. This PPS uses the same DRGs as the acute-care hospital inpatient PPS. The rationale for using these DRGs is that they are currently used to pay inpatient psychiatric cases under the hospital inpatient PPS.

Facility adjustments will be provided, including a wage index adjustment, rural location adjustment, and a teaching status adjustment. The PPS recognizes variable per diem adjustments to account for the higher costs incurred in the early days of a psychiatric stay.

An outlier policy will be adopted as part of the PPS that provides additional payment for high cost cases. An interrupted stay policy will also be adopted to prevent IPFs from prematurely discharging a patient and then readmitting him in an attempt to increase their Medicare payments.

IPFs are required to use ICD-9-CM for reporting patient diagnoses and procedures on claims.

DRG Assignment (69FR66936)

The Federal per diem base rate payment under the IPF PPS will be made for claims with a psychiatric principal diagnosis (Chapter Five of ICD-9-CM). A payment adjustment factor will be applied to 15 DRGs. Only those claims that group to one of these DRGs will receive this DRG payment adjustment. Although the IPF will not receive a DRG payment adjustment for a principal diagnosis not found in one of the 15 specified DRGs, the IPF will still receive the Federal per diem base rate and all other applicable adjustments. The list of 15 DRGs and associated adjustment factors can be found in Table 1.

Table 1 – Psychiatric DRGs and Adjustment Factors

DRG DRG Description Adjustment Factor


Procedure with principal diagnosis of mental illness



Acute adjustment reaction



Depressive neurosis



Neurosis, except depressive



Disorders of personality



Organic disturbances






Childhood disorders



Other mental disorders



Alcohol/Drug use, left against medical advice



Alcohol/Drug use, w CC



Alcohol/Drug use, w/o CC



Alcohol/Drug use, w/o rehab



Degenerative nervous system disorders



Non-traumatic stupor & coma


Comorbidities (69FR66938)

Seventeen comorbidity categories will generate a payment adjustment. These categories include ICD-9-CM diagnosis codes for medical and psychiatric conditions that the Centers for Medicare & Medicaid Services (CMS) believe require comparatively more costly treatment during an IPF stay than other comorbid conditions. IPFs may only receive one adjustment factor for each comorbidity category. However, if a patient has multiple diagnoses in several categories, the adjustment factors for each applicable category are multipled by the Federal per diem base rate. The comorbidity adjustments are applied to each day of the stay.

CMS determined that the cost to treat a patient with a malignant neoplasm is related primarily to the cost of the therapy to treat the tumor. Therefore, in order to receive the comorbidity adjustment for malignant neoplasm, IPFs will need to report the ICD-9-CM diagnosis code for the malignant neoplasm as well as the procedure code for the type of treatment being provided (chemotherapy or radiation therapy). In the final regulation, the diagnosis codes for encounter for chemotherapy and radiation therapy were erroneously listed instead of the procedure codes. AHIMA contacted CMS about this error and was informed that this error will be corrected. To receive the comorbidity adjustment for malignant neoplasm, the appropriate procedure code for chemotherapy (99.25) or radiation therapy (92.2x) must be reported, not the V code.

Commenters expressed concern that the comorbidity policy does not account for the costs associated with social issues (such as poverty, lack of housing, poor nutrition, lack of primary medical care). CMS noted that since many social issues are not captured in claims data, they were not able to deetermine whether the psychiatric hospitalizations of patients with various social issues are more costly on a per diem basis than other psychiatric patients. Therefore, they could not provide an adjustment for these cases. ICD-9-CM codes exist for some of the social issues that impact care delivery and management, such as problems with sight or hearing or lack of housing. CMS encourages IPFs to code all relevant diagnoses that impact the resources associated with their patient population for future analysis.

The list of comorbidity categories, their associated ICD-9-CM diagnosis codes, and the adjustment factors can be found in Table 2.

Table 2 – Comorbidity Categories

Category ICD-9-CM Diagnosis Codes Adjustment Factor
Developmental Disabilities 317, 318.0, 318.1, 318.2, and 319


Coagulation Factor Deficit 286.0 through 286.4


Tracheostomy 519.00 through 519.09; V44.0


Renal Failure, Acute 584.5 through 584.9, 636.3, 637.3, 638.3, 639.3, 669.32, 669.34, 958.5


Renal Failure, Chronic 403.01, 403.11, 403.91, 404.02, 404.03, 404.12, 404.13, 404.92, 404.93, 585, 586, V45.1, V56.0, V56.1, V56.2


Oncology Treatment 140.0 through 239.9 with either 99.25 a code from 92.21 through 92.29 (NOTE: The final rule erroneously listed V58.0 and V58.1 instead of the procedure codes for chemotherapy and radiation therapy)


Uncontrolled Type I Diabetes Mellitus with or without Complications 250.02, 250.03, 250.12, 250.13, 250.22, 250.23, 250.32, 250.33, 250.42, 250.43, 250.52, 250.53, 250.62, 250.63, 250.72, 250.73, 250.82, 250.83, 250.92, 250.93


Severe Protein Calorie Malnutrition 260 through 262


Eating and Conduct Disorders 307.1, 307.50, 312.03, 312.33, 312.34


Infectious Diseases 010.0 through 041.10, 042, 045.00 through 053.19, 054.40 through 054.49, 055.0 through 077.0, 078.2 through 078.89, 079.50 through 079.59


Drug and/or Alcohol Induced Mental Disorders 291.0, 292.0, 292.12, 292.2, 303.00, 304.00


Cardiac Conditions 391.0, 391.1, 391.2, 402.01, 404.03, 416.0, 421.0, 421.1, 421.9


Gangrene 440.24, 785.4


Chronic Obstructive Pulmonary Disease 491.21, 494.1, 510.0, 518.83, 518.84, V46.1


Artificial Openings – Digestive and Urinary 569.60 through 569.69, 997.5, V44.1 through V44.6


Severe Musculeskeletal and Connective Tissue Disorders 696.0, 710.0, 730.00 through 730.09, 730.10 through 730.19, 730.20 through 730.29


Poisoning 965.00 through 965.09, 965.4, 967.0 through 969.9, 977.0, 980,0 through 980.9, 983.0 through 983.9, 986, 989.0 through 989.7


Other Coding Issues (69FR66944)

CMS acknowledged the value of using certified coding professionals in the assignment and validation of ICD-9-CM codes. They also noted that IPFs are required to follow the ICD-9-CM Official Guidelines for Coding and Reporting. This requirement is consistent with the regulations regarding electronic transactions and code sets promulgated under the Health Insurance Portability and Accountability Act (HIPAA).

In instances when the principal diagnosis involves a psychiatric diagnosis code that has a “code first” note, indicating that the underlying etiology must be sequenced first, the IPF should sequence the codes according to the ICD-9-CM instructions. For example, a “code first” note applies to all of the codes in category 290, Dementias, which indicates that the associated neurological condition should be sequenced first. For these types of cases, the CMS claims processing system will identify the principal diagnosis as non-psychiatric and search the secondary diagnosis fields for a psychiatric code in order to assign a DRG code for payment adjustment.

Patient Age Adjustment (69FR66946)

A payment adjustment will be provided for eight age categories, starting with age 45. CMS’ data analysis found that, with the exception of the 40 through 44 age group, all the older age groups are more costly than the under age 40 group, and that the differences increase for each successive age group. The age groupings and associated adjustment factors can be found on page 66947 of the Federal Register.

Variable Per Diem Adjustments (69FR66947)

Payment adjustments will be made to account for ancillary and certain administrative costs that occur disproportionately in the first days after admission to an IPF. Details of the variable per diem adjustment can be found on page 66949 of the Federal Register.

Electroconvulsive Therapy (69FR66951)

Since CMS determined that cases with electroconvulsive therapy (ECT) are substantially more costly than cases without ECT, an adjustment will be provided for each ECT treatment furnished during the IPF stay. In order for an IPF to receive this payment adjustment, it must indicate the revenue and procedure codes for ECT and the number of units of ECT (the number of ECT treatments the patient received during the IPF stay). Note that in the final rule, the procedure code given is incorrect. The correct procedure code for IPFs to report for ECT is ICD-9-CM code 94.27.

IPFs with Full-Service Emergency Departments (69FR66959)

A facility-level adjustment to the Federal per diem base rate will be provided for psychiatric hospitals and acute care hospitals with a distinct part psychiatric unit that maintain a qualifying emergency department. This adjustment is intended to account for the costs associated with maintaining a full-service emergency department. Although CMS’ analysis indicated that patients admitted through the emergency department are more costly on a per diem basis than cases without an emergency department admission, CMS chose not to include an adjustment for each patient admitted through the emergency department. They were concerned that a per-patient adjustment would create an incentive for psychiatric units in acute care hospitals with emergency departments to inappropriately admit all psychiatric patients through the emergency department.

Outlier Policy (69FR66960)

The IPF PPS includes a two percent outlier policy to promote access to IPFs for those patients who require expensive care and to limit the financial risk of IPFs treating unusually costly cases. Outlier payments will be made for discharges in which estimated costs exceed an adjusted threshold amount ($5700 multiplied by the facility’s adjustments) plus the total IPF adjusted payment amount for the stay. The outlier payments will be made on a per case basis rather than a per diem basis because it is the overall financial “gain” or “loss” of the case, and not of individual days, that determines an IPFs financial risk and, as a result, access for unusually costly cases. In addition, because patient level charges (from which costs are estimated) are typically aggregated for the entire IPF stay, they are not reported in a manner that would permit accurate accounting on a daily basis.

Interrupted Stays (69FR66962)

CMS included an interrupted stay policy in the IPF PPS because of their concern that IPFs could maximize inappropriate Medicare payment by prematurely discharging patients after they receive the higher variable per diem adjustments and then readmitting the patient. Under the interrupted stay policy, if a patient is discharged from an IPF and returns to the same or another IPF before midnight on the third consecutive day following the discharge from the original IPF stay, the case is considered to be continuous for applying the variable per diem adjustments and determining whether the case qualifies for outlier payments.

Annual PPS Update (69FR66966)

For updates to the PPS in the future, CMS will use a July 1 through June 30 annual update cycle. The IPF PPS will not be updated during the first year of implementation because there would be an insufficient amount of time under the IPF PPS to generate data useful in updating the system. The implementation period for the final IPF PPS is the 18-month period from January 1, 2005 through June 30, 2006. The first update will occur on July 1, 2006, and the PPS will be updated for each subsequent 12-month period thereafter.


The final rule regarding the PPS for inpatient psychiatric facilities can be found in the November 15, 2004 issue of the Federal Register located at: fedreg/a041115c.html.

AHIMA’s letter to CMS regarding the proposed rule for a PPS for inpatient psychiatric faclities, as well as the letter noting erroneous code assignments in the final rule, can be found on the Policy and Government Relations section of the AHIMA web site:

Source: AHIMA Policy and Government Relations (December 2004)