A comparison of the resource intensity of inpatients in urban and rural nonteaching hospitals

PL 98-21 mandated a prospective payment system based on diagnosis related groups (DRGs) for all Medicare inpatients. The predetermined payment for each DRG is intended to reflect the resources used to treat patients within the DRG. Eventually, the system will allow for one payment level for each DRG in rural hospitals and a higher payment level for the same DRG in urban hospitals. This represents an equitable approach, provided there is not a predominance of high severity cases in rural hospitals and that higher costs in urban hospitals are reflective of higher priced exogenous factors beyond the control of the hospital. Equitability also requires that DRGs capture the resource intensity of treatment for a given classification of patients, equally for urban and rural patients. This work compares the pediatric population of urban hospitals without a pediatric residency program with that of rural hospitals in terms of major diagnostic category, DRG, disease severity, length of stay, and charges. It also compares the capacity of DRGs to explain the variation in resource consumption in urban and rural hospitals. A sample of 116,721 discharges from 130 urban hospitals and a sample of 54,073 discharges from 97 rural hospitals are used in this work. The results indicate that there is no difference in the patient populations of these two hospital groups. The results also indicate that DRGs explain only 50 percent of the variance in the resource variables, but this obtains equally for both populations.     

Rural Medicare Beneficiaries'Use of Rural and Urban Hospitals

This report examines the use of rural and urban hospitals by rural Medicare beneficiaries. Many rural Medicare beneficiaries are treated in urban hospitals, primarily for specialized care that is not available locally. This study examines Medicare inpatient hospital discharge data for rural beneficiaries from fiscal year 1990 to fiscal year 1998. Utilization patterns by diagnosis-related group (DRG) are examined for fiscal year (FY) 1997. The percentage of rural beneficiaries treated in urban hospitals ranged from 30 percent to 36 percent during the study period. For the most frequently occurring DRGs among rural beneficiaries, which were those for routine conditions, treatment occurred predominantly in rural hospitals. The conditions most often responsible for rural beneficiaries' use of urban hospitals during this period reflected the need for coronary and other specialized surgical care. The stability of volume and case-mix throughout the study period underscores the viability of rural hospitals during a period of substantial change in the organization of health care provision.     

The variance of length of stay and the optimal DRG outlier payments

Prospective payment schemes in health care often include supply-side insurance for cost outliers. In hospital reimbursement, prospective payments for patient discharges, based on their classification into diagnosis related group (DRGs), are complemented by outlier payments for long stay patients. The outlier scheme fixes the length of stay (LOS) threshold, constraining the profit risk of the hospitals. In most DRG systems, this threshold increases with the standard deviation of the LOS distribution. The present paper addresses the adequacy of this DRG outlier threshold rule for risk-averse hospitals with preferences depending on the expected value and the variance of profits. It first shows that the optimal threshold solves the hospital’s tradeoff between higher profit risk and lower premium loading payments. It then demonstrates for normally distributed truncated LOS that the optimal outlier threshold indeed decreases with an increase in the standard deviation.      

Expansion of Medicare's definition of post-acute care transfers

In October 1998, the definition of a transfer in Medicare's hospital prospective payment system was expanded to include several post-acute care (PAC) providers in 10 high-volume PAC diagnosis-related groups (DRGs). In this methodological article, the authors respond to a congressional mandate to consider more DRGs in the definition. Empirical results support expansion to many more DRGs that are split in ways that understate total PAC volumes, including 25 DRG pairs (with/without complications) and DRG bundles (e.g., infections) that together exhibit high PAC volumes. By contrast, some DRGs (e.g., craniotomy) are questionable PAC candidates because of their heterogenous procedure mix.     

The impact of DRGs on community-based service providers: implications for the elderly.

We investigated changes in community-based agencies following the implementation of the Medicare prospective payment system for hospitals utilizing DRGs (diagnosis-related groups). Data were collected in 1986 and 1987 from 771 community service providers. There were five major findings: 1) hospital discharge planners, nursing homes, and home health agencies experienced DRG effects before other types of community providers studies; 2) the "reach" of DRG impact is widespread; 3) providers report a change in clientele toward a heavier-care client; 4) the impact of DRGs affects the types of services agencies provide; and 5) community providers have experienced a decrease in their ability to refer their clients both to hospitals and to each other.     

Severity of illness within DRGs: impact on prospective payment.

This study compares the financial impact of a Diagnosis Related Group (DRG) prospective payment system with that of a Severity of Illness-adjusted DRG prospective payment system. The data base of about 106,000 discharges is from 15 hospitals, all of which had a Health Care Financing Administration (HCFA) DRG case mix index greater than 1. In order to pool the data over the 15 hospitals, all charges were converted to costs, normalized to Fiscal Year 1983, and adjusted for medical education and wage levels. The findings showed that, for the study population as a whole, DRGs explained 28 per cent of the variability in resource use per case while Severity of Illness-adjusted DRGs explained 61 per cent of the variability in resource use per case. When we simulated prospective payment systems based on DRGs and on Severity-adjusted DRGs, we found that the financial impact of the two systems differed by very little in some hospitals and by as much as 35 per cent of total operating costs in other hospitals. Thus, even with a data set that is relatively homogeneous (with respect to the HCFA DRG case mix index definition of hospitals), we found substantial inequities in payment when DRGs were not adjusted for Severity of Illness. These findings suggest that, with a more representative set of hospitals, the difference between unadjusted and Severity-adjusted DRG-based prospective payment could be greater than 35 per cent of a hospital's total operating costs.     

Has Medicare Been a ‘Bad Deal’ for Rural Hospitals?

Understanding the links between Medicare involvement and financial performance in rural hospitals is important for evaluating reimbursement policy under Medicare's prospective payment system (PPS). While simple comparisons between urban and rural hospitals suggest that the latter have lower PPS profit margins on average, there is little multivariate evidence on how Medicare involvement affects financial performance in rural hospitals and whether this relationship differs between rural and urban hospitals. Existing multivariate evidence suggests that Medicare involvement improves PPS profits in both rural and urban hospitals after controlling for other hospital- and market-specific factors. By contrast, the present analysis considers the relationship between Medicare involvement and broader measures of profitability than PPS profits. This provides insight into whether Medicare reimbursement is adequate relative to other forms of third-party payment. The results indicate that Medicare involvement has a markedly different effect on the profitability of rural versus urban hospitals. Greater Medicare involvement is associated with lower patient care profitability in rural hospitals but has a strong positive and significant effect on both patient care and overall (i.e., patient and nonpatient) profitability in urban ones. Medicare involvement is not significantly related to overall profitability in rural hospitals, however, suggesting that these hospitals may be able to mitigate patient care revenue shortfalls from greater Medicare involvement by increasing their nonpatient care revenue sources.     

Implementing swing-bed services in small rural hospitals.

Since 1983, twenty-six small rural hospitals in five states have been developing models of the "swing-bed" concept as part of a coordinated national demonstration project. Based on the experiences of these hospitals, swing-bed programs use excess hospital capacity to provide short-term, post-acute care in rural communities where there are nursing home shortages, and, thus, help avoid the need for new nursing home construction. The availability of swing-bed services in rural hospitals has allowed the elderly patient to receive a full-range of long-term care services within the community to avoid transfer to a nursing home outside the community. Introduction of services also has improved patient care for all hospitalized elderly. Finally, the revenue from the swing-bed services has helped to stabilize small, rural hospitals faced with declining utilization. The demonstration has provided evidence that the swing-bed program has the potential to deliver a needed service to the rural elderly while contributing to the preservation of the small, rural hospital as a valuable community resource.     

An evaluation of diagnosis-related group severity and complexity refinement

In 1988, an ambitious and extensive project was undertaken in New Jersey to evaluate severity class adjustment of the all-payer prospective payment system. Another project objective was to evaluate alternative strategies for refining diagnosis-related groups (DRGs). The evaluation presented here includes a comparison of DRG refinement using Computerized Severity Index classes and Yale University complexity classes. Statistical methods and payment simulations are used to assess the impact of DRG refinement and consequent revenue changes. When a high volume subset of DRGs is refined, simulated payment shifts between hospitals on the order of 5 percent of total hospital costs are indicated by this analysis.     

Impact of the Medicare Short Stay Transfer Policy on Patients undergoing Major Orthopedic Surgery

Objective. To examine the impact of the Short Stay Transfer Policy (SSTP) on practice patterns.
Data Sources. This study uses data from the Centers for Medicare and Medicaid Services Medicare Provider Analysis and Review (MEDPAR) file, Home Health Standard Analytical File, 1999 Provider of Service file, and data from the 2000 United States Census.
Study Design. An interrupted time-series analysis was used to examine the length of stay (LOS) and probability of "early" discharge to post acute care (PAC).
Data Collection. Separate 100percent samples of all fee-for-service Medicare recipients undergoing either elective joint replacement (JR) surgery or surgical management of hip fracture (FX) between January 1, 1996 and December 31, 2000 were selected.
Principal Findings. Prior to implementation of the SSTP. LOS had been falling by 0.37 and 0.30 days per year for JR and FX patients respectively. After implementation of the SSTP, there was an immediate increase in LOS by 0.20 and 0.17 days, respectively. Thereafter, LOS remained flat. The proportion of patients discharged "early" to PAC had been rising by 4.4 and 2.6 percentage points per year for JR and FX patients respectively, to a peak of 28.8percent and 20.4percent early PAC utilization in September 1998. Immediately after implementation of the SSTP, there was a 4.3 and 3.0 percentage point drop in utilization of "early" PAC. Thereafter utilization of early PAC increased at a much slower rate (for JR) or remained flat (for FX). There was significant regional variation in the magnitude of response to the policy.
Conclusion. Implementation of the SSTP reduced the financial incentive to discharge patients early to PAC. This was accomplished primarily through longer LOS without meaningful change in PAC utilization. With the recent expansion of the SSTP to 29 DRGs (representing 34percent of all discharges), these findings have important implications regarding patient care.     

An analysis of the Prospective Payment System''s labor-nonlabor share by diagnosis-related group.

When Congress in 1983 legislated a new Prospective Payment System (PPS) for Medicare hospital payment, the payment algorithm was founded on a simplifying assumption of a constant 80-20 percentage share of labor and nonlabor costs across all diagnosis-related groups (DRGs). Using Medicare claims data and hospital cost reports, this study examines the accuracy of this assumption. While a few DRGs are found to vary significantly from the norm, a systematic cancelling out of high and low labor-intensive DRGs results in no material PPS payment bias at the hospital level. Indeed, rural hospitals, if anything, benefit by the assumption. A very small number of outlier DRGs and hospitals are troublesome, nonetheless, implying fine-tuning of the algorithm.     

Does severity explain differences in hospital length of stay for pneumonia patients?

OBJECTIVES: In the USA, the role of patient severity in determining hospital resource use has been questioned since Medicare adopted prospective hospital payment based on diagnosis-related groups (DRGs). Exactly how to measure severity, however, remains unclear. We examined whether assessments of severity-adjusted hospital lengths of stay (LOS) varied when different measures were used for severity adjustment. METHODS: The complete study sample included 18,016 patients receiving medical treatment for pneumonia at 105 acute care hospitals. We studied 11 severity measures, nine based on patient demographic and diagnosis and procedure code information and two derived from clinical findings from the medical record. For each severity measure, LOS was regressed on patient age, sex, DRG, and severity score. Analyses were performed on trimmed and untrimmed data. Trimming eliminated cases with LOS more than three standard deviations from the mean on a log scale. RESULTS: The trimmed data set contained 17,976 admissions with a mean (S.D.) LOS of 8.9 (6.1) days. Average LOS ranged from 5.0-11.8 days among the 105 hospitals. Using trimmed data, the 11 severity measures produced R-squared values ranging from 0.098-0.169 for explaining LOS for individual patients. Across all severity measures, predicted average hospital LOS varied much less than the observed LOS, with predicted mean hospital LOS ranging from about 8.4-9.8 days. DISCUSSION: No severity measure explained the two-fold differences among hospitals in average LOS. Other patient characteristics, practice patterns, or institutional factors may cause the wide differences across hospitals in LOS.     

Editorial: Hospital case payment systems in Europe

Since the introduction of the system of diagnosis related groups (DRGs) for USA Medicare patients in 1983, case payment mechanisms have gradually become the principal means of reimbursing hospitals in most developed countries. The use of case payments nevertheless poses severe technical and policy challenges, and there remain many unresolved issues in their implementation. This paper introduces a special issue of the journal that describes and compares experience with the use of case payments for reimbursing hospitals in nine European countries. The editorial sets the policy scene, and argues that DRG systems must be seen both as a technical reimbursement method and as a fundamental incentive mechanism within the health system.     

Vulnerability of rural hospitals to Medicare outpatient payment reform

Because the Balanced Budget Act (BBA) of 1997 requires implementation of a Medicare prospective payment system (PPS) for hospital outpatient services, the authors evaluated the potential impact of outpatient PPS on rural hospitals. Areas examined include: (1) How dependent are rural hospitals on outpatient revenue? (2) Are they more likely than urban hospitals to be vulnerable to payment reform? (3) What types of rural hospitals will be most vulnerable to reform? Using Medicare cost report data, the authors found that small size and government ownership are more common among rural than urban hospitals and are the most important determinants of vulnerability to payment reform.     

Relationship between hospital structural level and length of stay outliers. Implications for hospital payment systems

BACKGROUND: Hospital structural level has been suggested as a factor that could explain part of the resource use variation left unexplained by diagnosis related groups (DRGs). However, the relationship between hospital structural level and the presence of cases of extreme resource use (outliers) is not known. Some prospective payment systems pay these cases separately. OBJECTIVES: To analyze the relationship between different hospital structural levels, defined according to hospital size, teaching activity and location, and the presence of length of stay (LOS) outliers. RESEARCH DESIGN: A logit model was used to analyze the patient discharge records of the acute care public hospitals' Minimum Data Set in Catalonia (Spain) in 1998. The final population contained 631,096 discharges grouped in 329 adjacent DRGs. MEASURES: LOS outliers were defined as cases with a LOS exceeding the geometric mean plus two standard deviations of all the stays in the same DRG. The 64 public hospitals of the Catalan health system were classified into large urban teaching hospitals, medium-sized teaching and community hospitals, and small community hospitals according to their structural complexity. The model also controlled for patient and health care process characteristics. RESULTS: Outliers accounted for 4.5% of total discharges distributed as follows: large urban teaching hospitals (5.6%), medium-sized teaching and community hospitals (4.6%), small community hospitals (3.6%). The probability of a patient being an outlier was higher in hospitals with greater structural complexity: large urban teaching hospitals (OR = 1.59), medium teaching and community hospitals (OR = 1.30) and small community hospitals (OR = 1). Adjustment through the control variables reduced differences among hospitals: large urban teaching hospitals (OR = 1.32), medium-sized teaching and community hospitals (OR = 1.22), and small community hospitals (OR = 1), but the differences remained significant (P < 0.01). CONCLUSIONS: Hospital structural level influences the presence of outliers even when controlling for patient and process characteristics. Thus, some outliers are due to hospital structural level and are not justified by patient characteristics.     

Refinement of the Medicare diagnosis-related groups to incorporate a measure of severity

This article presents a system under consideration by the Health Care Financing Administration (HCFA) for incorporating a measure of severity of illness into the Medicare diagnosis-related groups (DRGs). DRG assignment is one of the main factors in determining the payment made for hospital inpatient services furnished to Medicare beneficiaries. Specifically, the formula used to calculate payment for a single Medicare hospital inpatient case takes an average payment rate for a typical case and multiplies it by the relative weight of the DRG to which it is assigned. Thus, it is easy to see that the DRG relative weights have a large impact on the payment a hospital receives. In this article, we describe the Medicare DRG prospective payment system (PPS), evaluate the various classification elements available for assessing severity of illness, describe the analyses used in formulating this proposal, and present the proposed DRG severity system.     

Diagnosis related group coding accuracy of the peer review organizations

Congress created the peer review organizations (PROs), in part, to check the accuracy of diagnosis related groups (DRGs) billed to Medicare. This study determined the accuracy of the peer review organizations' abstraction of DRGs during federal fiscal year 1985. A two-stage cluster design sampled 7050 medical records from 239 hospitals stratified by size. Credentialed medical record professionals used blinded techniques with reliability checks to abstract the ICD-9-CM codes and select the correct DRGs. Physicians reviewed medical records whose abstracted DRG differed from the DRG paid by the fiscal intermediary. The peer review organizations reported abstracting 1715 of these discharges. The peer review organization selected the correct DRG in 75.6 percent of the 1715 abstractions, a significantly lower proportion than the 80.3 percent paid accurately by the fiscal intermediaries. Upcoding compounded the peer review organizations' errors.     

Regulation, retrenchment--the DRG experience: problems from changing reimbursement practice

A study of 227,771 discharge abstracts from one U.S. state's short-term, acute care hospitals compares changes in the inpatient market available to the oldest old Medicare patients (85 and older) with those less than 70 and those 70-84 between 1981, the last year when all hospitals were under cost-based reimbursement, and 1984, the first year in which all hospitals were under a prospective payment system based on diagnosis related groups (DRGs). All three populations experienced retrenchment in services as hospitals pursued practice changes to enhance revenue potential. An older, sicker client was admitted as hospitals implemented changes in admission patterns to avoid denial of reimbursement for an admission deemed inappropriate by the Peer Review Organization (PRO). Evidence demonstrates compression in service markets and retrenchment in services for less profitable DRGs and/or cohorts. Inpatient services were reduced the most for the oldest old population although this cohort was the sickest. Changes were observed in utilization of special care units, such as in coronary and intensive care units. Large increases in readmissions in all three cohorts suggests that DRG incentives to reduce length of hospital stay may have promoted premature discharge. Or, perhaps these readmissions resulted from 'unbundling', a practice of splitting patient problems into multiple admissions, as hospitals sought ways to enhance revenue instead of practicing cost-containment. Policy, perceived to be economically stringent, can affect hospital practice and produce undesired results with long-reaching untoward effects on certain segments of the population.