In 2002, Medicare phased in the implementation of a prospective payment system (PPS) for inpatient rehabilitation facilities (IRFs) that included a way of addressing the added costs of treating patients with certain comorbidities. The payments for those comorbidities were determined by means of a system that ranked costly comorbidities in three cost tiers. Using data from the first year when almost all hospitals were fully paid under the PPS (FY 2003), the authors examined the relationship between comorbidities and marginal cost and the frequency with which individual comorbidities were assigned to IRF patients. They found problems with some of the tier comorbidities: Some conditions were no longer related to treatment costs; other conditions should be put in a different tier; some costly diagnoses were not part of the tier system. The authors conclude that the tier system remains an important means for matching payments to costs, although it will require a reasonable amount of revision in response to coding changes found during FY 2003. On balance, however, they judged the performance of the system to be acceptably stable, especially in the face of the large change in coding (or case mix).
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