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20 Clearinghouse Rev. 434 (1986-1987)
How to Appeal Medicare Hospital Coverage Denials under the DRG System

handle is hein.journals/clear20 and id is 440 raw text is: How to Appeal Medicare Hospital
Coverage Denials
Under the DRG System
by Sally Hart Wilson

I. Introduction
Medicare, the federal health insurance program for the
aged and disabled, is the primary source of payment for health
care services for persons 65 and older.' Among such services,
the big ticket item for both elderly individuals and the
Medicare program as a whole is inpatient hospital services.2
Not only is the portion of the Medicare budget consumed by
payments for hospital services quite large, but between 1967
and 1980 it 'increased from 52.7 percent to 66.4 percent of all
Medicare reimbursements.3 As the portion of overall Medicare
program expenditures devoted to hospital services increased,
the annual cost of the Hospital Insurance Program, known as
Medicare Part A, increased geometrically. Between 1970 and
1982, Hospital Insurance fund disbursements rose from $5.3
billion to $36.1 billion.4
In attempting to identify the cause of this expansion of
hospital care costs, health economists point to incentives built
into the old hospital reimbursement system. As originally con-
stituted, the Medicare program reimbursed individual hospitals
for their costs retroactively, so that increased expenditures, even
capital expenditures for a new wing, for example, would yield a
higher reimbursement rate. Furthermore, the amount of
reimbursement was directly proportionate to the number and
Sally Hart Wilson is a staff attorney at the National Senior Citizens Law
Center, 1052 W. 6th St., Los Angeles, CA 90017, (213) 482-3550.
I. Social Security Act, Title XVIII, 42 U.S.C. §§ 1395-97f.
2. In FY 1981, nearly all Medicare Health Insurance reimbursements
and 68 percent of all Medicare program reimbursements were spent
for inpatient hospital services. HEALTH CARE FIN. ADMIN.,
DATA BOOK, 1983, HCFA pub. 03156 at 46, 50, table 3.6 (Dec.
3. Id. at 25, figure 2.3.
BD. OF TRUSTEES 6, table 2 (June 1983).

kind of services rendered, so that more expensive services,
provided more frequently, yielded larger profits. In 1983, Con-
gress responded by initiating the most significant change in the
Medicare program since its enactment in 1965. This article
describes the changes effected by that legislation, as well as the
appeal rights of persons denied Medicare coverage for hospital
treatment under the new system.
II. The Prospective Payment System for
Reimbursement Based on DRGs
Under the action taken by Congress, a new Prospective
Payment System (PPS) was initiated, which employs a
prospectively determined flat rate for each patient's entire
course of treatment to serve as an incentive for more efficient
provision of services. The system utilizes a method of classifying
each patient according to condition and treatment in Diagnostic-
Related Groups (DRGs), each of which has an assigned payment
amount based on the average cost of treating a patient in that
DRG.5 The system employs more than 460 DRGs, one of
which is assigned to every Medicare patient upon discharge.6
The original legislation provided for a phase-in of the DRG
reimbursement system in 25-percent increments over four years,
culminating in full implementation by FY 1987.7 However, the
Consolidated Omnibus Budget Reconciliation Act of 1986
5. Social Security Act § 1886, 42 U.S.C. § 1395ww.
6. It is claimed that the DRG classification system is sufficiently
complex to account for all possible variations in patients' conditions
and needs. If a particular patient is sufficiently atypical that
significantly more treatment than the average is needed, provision
is made for outlier payments not to exceed 6 percent of the total
DRG payments. Hospitals dispute the claim that the system is able
to adequately account for differences in patients' needs, and they
contend that they are significantly underreimbursed for the treatment
of difficult cases under PPS.
7. Social Security Act, § 1886(d)(l)(C), 42 U.S.C. § 1395ww(d)(I)(C).



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