The Ins and Outs of Inpatient Psychiatric Facility Perspective Payment System 

The Ins and Outs of Inpatient Psychiatric Facility Perspective Payment System 

Account for DRG and comorbidity adjustments and ensure all active medical treatments and diagnoses are documented.

Part of our responsibility as healthcare business professionals is to understand the financial realities of healthcare delivery and reimbursement. For those of us working in mental health, this means learning the “ins and outs” of the Inpatient Psychiatric Facility Perspective Payment System (IPF PPS).

IPF PPS Background

In section 124 of the Balanced Budget Refinement Act (BBRA) mandated the secretary of the U.S. Department of Health & Human Services (HHS) to develop a per diem PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units. The PPS had to:

  • Include an adequate patient classification system to reflect the differences in patient resource use and costs among psychiatric hospitals and psychiatric units;
  • Maintain budget neutrality; and
  • Permit the HHS secretary to require psychiatric hospitals and psychiatric units to submit information necessary for developing the PPS.

The HHS secretary was required to report to congress describing the development of the PPS.

The new system applies to Medicare patients, and the Centers for Medicare & Medicaid Services (CMS) decided to use the current PPS for consistency; however, instead of using a diagnosis related group (DRG) payment, the facilities would be paid per diem, using adjustments to a federal per diem base amount. The adjustments were derived using regression analysis to determine relevant factors to predict patient resources. The payment adjustors include both facility-specific and patient-specific adjustments.

The final IPF PPS was developed using regression analysis data obtained from the 2002 cost report file and 2002 Medicare Provider Analysis and Review (MEDPAR) data for IPF stays. The effective date for implementing IPF PPS was for cost reporting periods beginning on or after January 1, 2005. The PPS was based on the final federal per diem rate for Medicare patients and is updated yearly.

Formulating  Base and Adjustment Rates 

Each year, the base rate is set and then adjusted using several factors to formulate the calculated base rate for an individual facility. For 2016, the federal per diem rate is $745.19. Providers who fail to report quality data for fiscal year (FY) 2016 will receive a proposed FY 2016 per diem rate of $730.56 (a 2 percent reduction).

The IPF PPS is based on a federal per diem base rate that includes both inpatient operating and capital-related costs (including routine and ancillary services), and excludes certain pass-through costs (i.e., bad debt and direct medical education). The base rate also provides patient-level and facility-level adjustments including wage index, teaching adjustments, and an add-on for rural facilities.

The payment for an individual patient is further adjusted for factors such as the DRG classification, age, length of stay, and the presence of specified comorbidities. Additional payments are provided for cost outlier cases, and qualifying emergency department (ED) electroconvulsive therapy (ECT) treatments. The IPFs affected by the PPS are freestanding psychiatric facilities, distinct part psychiatric units of acute care hospitals, and distinct part units of critical access hospitals

Several factors may adjust the payment: The federal wage index adjustment, which is applied to the labor portion of the service, an add-on of 17 percent for facilities in rural areas, and an adjustment made for qualified teaching facilities of 0.515 percent.

In Alaska and Hawaii, there are varying cost of living adjustment factors. Alaska ranges from 1.23 to 1.25 percentage points, and Hawaii ranges from 1.119 to 1.25 percentage points.

Another adjustment of 1.31 for first day is given if the facility has a qualified emergency room (ER). To qualify, the ER department must be licensed, advertised, and staffed, and 33 percent of patients sought urgent treatment for ER conditions. Finally, if the patient receives an ECT, there is an adjustment of $320.19.

There are also patient-specific adjustment factors. Patients under 45 years of age receive an adjustment factor of 1.00. This increases by 0.01 every five years after age 45, until age 64. For ages 65-69, the adjustment factor is 1.10; for ages 70-74, the adjustment is 1.13; for ages 75-79, the adjustment is 1.15; and for those who are 80 years old or older, the adjustment factor is 1.17.

There are 17 Medicare severity-diagnosis related group (MS-DRG) categories that receive adjustment factors. For example, DRG 885 receives an adjustment factor of 1.00 and DRG 881 receives 0.99, as shown in Table A.

Table A

Name of Specific DRG  DRG Adjust
Degenerative nervous system disorders with MCC 056 1.05
Degenerative nervous system disorders without MCC 057 1.05
Nontraumatic stupor and coma with MCC 080 1.07
Nontraumatic stupor and coma without MCC 081 1.07
Operating room procedure with principal diagnoses of mental illness 876 1.22
Acute adjustment reaction and psychosocial dysfunction 880 1.05
Depressive neuroses 881 0.99
Neuroses except depressive 882 1.02
Disorders of personality and impulse control 883 1.02
Organic disturbances and mental retardation 884 1.03
Psychoses 885 1.00
Behavioral and developmental disorders 886 0.99
Other mental disorder diagnoses 884 0.92
Alcohol/Drug abuse or dependence, left against medical advice 894 0.97
Alcohol/Drug abuse or dependence with rehabilitation therapy 895 1.02
Alcohol/Drug abuse or dependence without rehabilitation therapy with MCC 896 0.88
Alcohol/Drug abuse or dependence without rehabilitation therapy without MCC 897 0.88

How CCs and MCCs Change Payment

Many patients have comorbidities. For psychiatric facilities, some of these will add an adjustment factor, as shown in Table B. This is different from the Medicare hospital inpatient prospective payment system, where a complication or comorbidity (CC) or major complication or comorbidity (MCC) would change the DRG, thus changing the payment; rather, comorbid conditions that fall into a comorbidity category add another adjustment factor.

The IPF PPS has 17 comorbidity categories, each containing codes of comorbid conditions. Each comorbidity grouping will receive a grouping-specific adjustment. The facility can receive a single comorbidity adjustment per comorbidity category; however, it can also receive an adjustment for more than one comorbidity category per encounter.

Comorbidities are specific patient conditions that are secondary to the patient’s principal diagnosis and that require treatment during the stay. The diagnoses that relate to an earlier episode of care and have no bearing on the current hospital stay are excluded and must not be reported on the facility’s claim. According to the 2015 IPF PPS final rule, comorbid conditions must exist at the time of admission or develop subsequently, and must affect the treatment received, length of stay, or both.

The physician of record must connect any conditions the patient may have with the treatment during the encounter. These conditions, if treated, must be well documented throughout the chart. It’s not enough simply to list the name of a condition; there must be documentation to support the condition’s treatment or how the condition is affecting the mental condition’s therapeutic treatment.

Table B: The IPF PPS has 17 comorbidity categories, each with an adjustment factor.

Description of comorbidity Adjustment factor
Developmental disabilities 1.04
Coagulation factor deficits 1.13
Tracheostomy 1.06
Renal failure, acute 1.11
Renal failure, chronic 1.11
Oncology treatment 1.07
Uncontrolled diabetes-mellitus with or without complications 1.05
Severe protein calorie malnutrition 1.13
Eating and conduct disorders 1.12
Infectious disease 1.07
Drug and/or alcohol induced mental disorders 1.03
Cardiac conditions 1.11
Gangrene 1.10
Chronic obstructive pulmonary disease 1.12
Artificial openings — digestive and urinary 1.08
Severe musculoskeletal and connective tissue diseases 1.09
Poisoning 1.11

Comorbidity Adjustments

Another patient-specific adjustment factor relates to the length of stay. A variable per diem adjustment factor depends on several things. For example, day one depends on if your facility has a qualified ER. If it does, the adjustment factor is 1.31; if not, the adjustment factor is 1.19, as shown in Table C on the next page. The adjustments recognize the higher cost incurred in the early days of a stay.

Table C: Other adjustment factors include length of stay.

Variable Per Diem Adjustments
Day 1— Facility without a qualifying emergency department
Day 1 — Facility with a qualifying emergency department
Day 2 1.12 Day 13 0.99
Day 3 1.08 Day 14 0.99
Day 4 1.05 Day 15 0.98
Day 5 1.04 Day 16 0.97
Day 6 1.02 Day 16 0.97
Day 7 1.01 Day 17 0.97
Day 8 1.01 Day 18 0.96
Day 9 1.00 Day 19 0.95
Day 10 1.00 Day 20 0.95
Day 11 0.99 Day 21 0.95
Day 12 0.99 After Day 21 0.92

Code First Rules

A significant concern arises when we have to follow the “Code First” rule. The Medicare Claims Processing Manual, chapter 3 – Inpatient Hospital Billing, section 190.5.2: Application of Code First (last updated October 30, 2015) has been pivotal in explaining the Code First rule. The manual explains how CMS handles this rule, and how to calculate your DRG adjustment factor when the patient’s condition results in a principal diagnosis that is the etiology of the manifestation treated in the facility.

Diagnosis code F02.81 Dementia in other diseases classified elsewhere with behavioral disturbance is designated as “ NOT ALLOWED AS PRINCIPAL DX” code.

The three-digit code F02 Dementia in other diseases classified elsewhere is designated a Code First diagnosis, indicating that all diagnosis codes that fall under the F02 category (codes F02.80 Dementia in other diseases classified elsewhere without behavioral disturbance and F02.81) must follow the Code First rule. The code F02 appears in the ICD-10-CM, as follows:

Code first the underlying physiological condition, such as:

F02.80 Dementia in other diseases classified elsewhere without behavioral disturbance


F02.81 Dementia in other diseases classified elsewhere with behavioral disturbance


According to Code First requirements, the provider would code the appropriate physical condition first: for example, G20 Parkinson’s disease as the principal diagnosis code and F02.81 as a secondary diagnosis or comorbidity code on the patient claim.

The purpose of this example is to demonstrate proper coding for a Code First situation. In this case, the principal diagnosis groups to one of the 15 DRGs, or 17 MS-DRGs, for which CMS pays an adjustment. Had the diagnosis code grouped to a non-psychiatric DRG/MS-DRG, the Pricer would search the first of the other diagnosis codes for a psychiatric code listed in the Code First list to assign a DRG adjustment.

Final note: All diagnostic and non-diagnostic outpatient services (excluding ambulance) provided one day immediately preceding the date of the admission are considered to be inpatient services and are included on the inpatient claim, unless the patient does not have Medicare.

Documentation Is Key

As health information management or coding professionals, you should work to educate practitioners and clinicians on required documentation, so you can fully and accurately account for a patient’s DRG and comorbidity adjustments. You should ensure all active medical treatment and diagnoses are captured in the medical record documentation, and remind practitioners to connect clinical dots to substantiate treatment patients receive.

Abbreviations & Definitions

Adjustment factor (ADJ) – Payment for an individual patient is adjusted, due to certain factors.

Inlier – A time covered by the Medicare Severity-Diagnosis Related Group (MS-DRG) payment period of a claim that includes fully paid days, coinsurance days, or days after benefits have exhausted.

Outlier – An additional payment made by Medicare for high-dollar claims, intended to protect hospitals from large financial losses due to unusually expensive cases.

Comorbidity – The presence of one or more additional disorders (or diseases) co-occurring with a primary disease or disorder, or the effect of such additional disorders or diseases. The additional disorder may also be a behavioral or mental disorder.

Comorbidity ADJ – Adjustment factor reimbursement based on a comorbidity category.

Resources, Inpatient Psychiatric Facility PPS

Tools and Worksheets

IPF PPS Regulations and Notices

The Medicare Claims Processing Manual, chapter 3 – Inpatient Hospital Billing, section 190.5.2 Application of Code First


Heather Greene, MBA, RHIA, CPC, CPMA, is assistant vice president of compliance and process improvement for Haven Behavioral Healthcare, Inc. She has approximately 20 years of experience in a variety of health information management roles. Greene performs coding and documentation audits, physician education, and process improvement for the Haven Behavioral Health, Inc. psychiatric facilities. She is a member of the Florence, Ky., local chapter.


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