On March 10, Karen Heller, Executive Director, The Health Economics and Outcomes Research Institute (THEORI) at GNYHA, is scheduled to brief the American Psychiatric Association's (APA) Board of Trustees about research conducted by THEORI and the APA on developing a Medicare psychiatric inpatient prospective payment system (Psych PPS). The Balanced Budget Refinement Act of 1999 mandated that the Secretary of the U.S. Department of Health and Human Services develop a Psych PPS with a per diem unit of payment, which would incorporate an "adequate" patient classification system and would be budget-neutral to current payments. The new PPS would affect psychiatric hospitals and units with general hospitals that are exempt from the general hospital PPS; these facilities are currently reimbursed under a cost-based formula established under a 1982 law. Led by Joseph T. English, M.D., past APA President, the APA was largely responsible for the psychiatric exemption, due to its sponsorship of research demonstrating that the general hospital PPS would not adequately match payments with the cost of inpatient psychiatric services. In 2000, Dr. English, who is Chairman of the GNYHA Mental Health Committee, engaged THEORI on the APA's behalf to answer three questions: 1) What was the value of the psychiatric exemption from the general hospital PPS? 2) Can an adequate Psych PPS be developed using only administrative data, which would spare hospitals from having to complete a new patient assessment instrument? and 3) What is the most robust payment model that can be developed from administrative data? THEORI's research assessed the annual value of the exemption at about $200 million a year; it demonstrated that administrative data are adequate to develop a per diem Psych PPS; and it is finding that a decision-tree patient classification system incorporated into a regression model can explain more than 20% of per diem cost variation. The Centers for Medicare & Medicaid Services (CMS) and the Medicare Payment Advisory Commission favorably cited THEORI's research in separate reports to Congress. CMS is expected to issue its proposed rule for the Psych PPS at the end of March; implementation is expected to take effect on Jan. 1, 2004. The APA and GNYHA will use THEORI's research as the basis for their comments on the proposed rule.