Recalibrating Medicare Payments for Inpatient Care
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《新英格兰医药杂志》
On August 1, 2006, the Centers for Medicare and Medicaid Services (CMS) took a small but important step toward improving the accuracy of Medicare payment rates for inpatient hospital care. Some media accounts downplayed the move, noting that the final changes to the payment rates were much more modest than those proposed in April. Nonetheless, the final rule starts a process that — if it is followed through in 2007 and 2008 — could lead to the most important modifications since Medicare instituted the inpatient prospective payment system more than 20 years ago. The changes are meant to better align relative payment rates for different services with the relative costs of providing them. This alignment would reduce incentives for hospitals to focus on more profitable services at the expense of less profitable ones that may have equal clinical value.
The changes attempt to address the differences in profitability to hospitals of different types of cases. Currently, surgical admissions are generally more profitable than medical admissions, and cardiovascular surgery cases are the most profitable of all. This pattern holds not only for Medicare patients, but for most insured patients.
Such differences do not reflect the intention of payers. In the case of Medicare, they reflect shortcomings in the methods used to establish the relative payment rates for different services and for different degrees of severity of illness. Medicare's calculations rely on hospital charges for services as indicators of relative costs, but there are large systematic differences in the ratio of charges to costs for different services. These differences derive in large part from the use of widely different markups for different services; these markups are often driven by market considerations. Markups increase most over time for services associated with new forms of technology because charges are not adjusted as costs fall.1 Because different mixes of services are used in different types of cases, the variability in markup results in profitability differences.
Such variation in profitability is probably not new. What is new is the extent to which providers are responding by specializing in the most profitable services and cases.2 Physician-owned heart, orthopedic, and surgical hospitals are springing up in many communities, and the threat of competitors that can skim the financial cream off the patient crop has alarmed community hospitals and academic medical centers. Now, many general hospitals are also shifting their capital-spending priorities toward the most profitable services, leading, in many locations, to a new "medical arms race."2
The spread of specialty hospitals has gained the attention of federal and state policymakers. In late 2003, Congress enacted an 18-month moratorium on Medicare payments to new specialty hospitals, but now the freeze has ended and CMS has begun accepting applications from new specialty hospitals. Even those who defend such hospitals as being innovators with the potential to improve efficiency and quality would probably agree that creating a level playing field through an accurate payment structure would better serve the public interest.
The Medicare Payment Advisory Commission (MedPAC), in a March 2005 report to Congress, documented the inadvertent variation in relative profitability among services and cases and recommended that CMS revamp inpatient payment rates to more accurately reflect costs.3 In the public policy domain, recommendations that something be done in a more refined manner are generally not given high priority, but the high visibility of specialty hospitals motivated CMS to initiate revisions.
In this year's rule, CMS has changed the way cost weights are calculated for each diagnosis-related group (DRG) and has launched a process that will eventually increase the number of DRGs to more accurately reflect the severity of illness and associated differences in resource needs (see table). CMS will use charge data to better approximate costs by multiplying, for each DRG, the national average amount charged by each of a hospital's 13 revenue centers (anesthesia, pharmacy, radiology, laboratory, and so on) by the corresponding national average cost-to-charge ratio. Although CMS had initially proposed implementing the full changes in cost weights in 2007, the final rule will phase in the change over 3 years. CMS did not go as far as MedPAC recommended, which would have entailed calculating relative weights on the basis of estimated costs for each DRG within each hospital and then averaging the relative values nationally. This calculation would have adjusted for a purported pattern in which the specialization in certain DRGs by higher-cost hospitals leads to overpayment for those DRGs.
Examples of Final Rule Changes for Diagnosis-Related Groups.
CMS had also proposed the use of a more refined system of DRGs, called All Patient Refined Diagnosis Related Groups (APR-DRGs), a proprietary system developed by 3M Health Information Systems that better reflects the severity of patients' conditions and the resources they require. This change would not have been implemented until 2008. In response to opposition, however, CMS limited the 2007 changes to the creation of 20 new DRGs and revisions to 32 existing DRGs. For example, it has separated patients undergoing major bladder procedures (new DRG code 573) from patients undergoing kidney and ureter procedures (DRG codes 303–305). CMS also specified a process for choosing among alternative systems for accounting for variations in severity and intends to implement the selected system in fiscal 2008.
There is no guarantee that CMS will follow through on the comprehensive DRG changes or continue to phase in the new cost weights; doing so will require a continued commitment to improving payment accuracy in the face of resistance from affected stakeholders. Although making these changes is entirely within the authority of the Secretary of Health and Human Services, members of Congress were heavily involved, representing interests of various constituencies rather than splitting along party lines. Although some, such as House Ways and Means Chairman Bill Thomas (R-CA), urged CMS to move faster, a letter from 53 senators and 189 members of the House urged both a delay in initiating the changes and a much longer phase-in period.
An important lesson from this policy process revolves around various stakeholders' perceptions of their own interests. With specialty hospitals clearly losing if these changes are made, one might have expected community-hospital trade groups such as the American Hospital Association and the Federation of American Hospitals to support the changes. But they advocated a delay — for two reasons. First, although their members might benefit in the aggregate, important members — those with major heart-surgery programs and some rural hospitals with a less severely ill patient mix, for example — would lose. And with specialty hospitals entering some markets but not others, not all community hospitals were motivated to face uncertainty about the effects of these changes on their bottom line.
The second reason for the hospital industry's coolness concerned adjustments for "DRG creep." With a more refined DRG system, hospitals would have incentives to code more thoroughly to ensure that patients with greater needs would in fact be classified in a higher-paying DRG. To maintain budget neutrality, CMS would project the magnitude of coding changes and reduce payment rates in advance. Hospitals were concerned that CMS, in its caution to avoid an unwarranted increase in spending, would make too large an adjustment.
Some CMS missteps no doubt also contributed to the decision to take smaller steps toward increased payment accuracy. Erroneous calculations of the new cost weights in the initial proposal led to overly large estimates of the positive and negative effects on certain hospitals. Although many experts were aware of these errors in the proposed rule and understood that CMS would correct them, opponents seized an opportunity to exaggerate the magnitude of disruptions from the changes. Some also objected to the adoption of the APR-DRG system on the grounds that it is a proprietary product and not in the public domain.
The increased attention being paid to payment accuracy is likely to extend beyond the realm of inpatient services. Hospitals are facing increased competition in profitable service areas as more types of care move to outpatient settings, including physicians' offices. This competition presents a broader challenge to the industry than that from specialty hospitals. The trend toward physicians' provision of more services that are particularly profitable also means that more medical spending is being influenced by incentives for self-referral.
Health care providers appear to be more responsive than ever to financial incentives, making the case for aligning payment rates with the quantity and quality of care more compelling. Without policies that ensure more accurate payment methods, providers will increasingly gravitate toward the medical problems and procedures that boost their bottom line, and the care we receive may not be the care we need.
Source Information
Dr. Ginsburg is the president of the Center for Studying Health System Change, Washington, DC.
References
Ginsburg PB, Grossman JM. When the price isn't right: how inadvertent payment incentives drive medical care. Health Affairs. August 9, 2005 (Web exclusive).
Berenson RA, Bodenheimer T, Pham HH. Specialty-service lines: salvos in the new medical arms race. Health Affairs. July 25, 2006 (Web exclusive).
Report to Congress: physician-owned specialty hospitals. Washington, DC: Medicare Payment Advisory Commission, March 2005.
Changes to the hospital inpatient prospective payment systems and fiscal year 2007 rates. Fed Regist 2006;71:47915-47916.(Paul B. Ginsburg, Ph.D.)
The changes attempt to address the differences in profitability to hospitals of different types of cases. Currently, surgical admissions are generally more profitable than medical admissions, and cardiovascular surgery cases are the most profitable of all. This pattern holds not only for Medicare patients, but for most insured patients.
Such differences do not reflect the intention of payers. In the case of Medicare, they reflect shortcomings in the methods used to establish the relative payment rates for different services and for different degrees of severity of illness. Medicare's calculations rely on hospital charges for services as indicators of relative costs, but there are large systematic differences in the ratio of charges to costs for different services. These differences derive in large part from the use of widely different markups for different services; these markups are often driven by market considerations. Markups increase most over time for services associated with new forms of technology because charges are not adjusted as costs fall.1 Because different mixes of services are used in different types of cases, the variability in markup results in profitability differences.
Such variation in profitability is probably not new. What is new is the extent to which providers are responding by specializing in the most profitable services and cases.2 Physician-owned heart, orthopedic, and surgical hospitals are springing up in many communities, and the threat of competitors that can skim the financial cream off the patient crop has alarmed community hospitals and academic medical centers. Now, many general hospitals are also shifting their capital-spending priorities toward the most profitable services, leading, in many locations, to a new "medical arms race."2
The spread of specialty hospitals has gained the attention of federal and state policymakers. In late 2003, Congress enacted an 18-month moratorium on Medicare payments to new specialty hospitals, but now the freeze has ended and CMS has begun accepting applications from new specialty hospitals. Even those who defend such hospitals as being innovators with the potential to improve efficiency and quality would probably agree that creating a level playing field through an accurate payment structure would better serve the public interest.
The Medicare Payment Advisory Commission (MedPAC), in a March 2005 report to Congress, documented the inadvertent variation in relative profitability among services and cases and recommended that CMS revamp inpatient payment rates to more accurately reflect costs.3 In the public policy domain, recommendations that something be done in a more refined manner are generally not given high priority, but the high visibility of specialty hospitals motivated CMS to initiate revisions.
In this year's rule, CMS has changed the way cost weights are calculated for each diagnosis-related group (DRG) and has launched a process that will eventually increase the number of DRGs to more accurately reflect the severity of illness and associated differences in resource needs (see table). CMS will use charge data to better approximate costs by multiplying, for each DRG, the national average amount charged by each of a hospital's 13 revenue centers (anesthesia, pharmacy, radiology, laboratory, and so on) by the corresponding national average cost-to-charge ratio. Although CMS had initially proposed implementing the full changes in cost weights in 2007, the final rule will phase in the change over 3 years. CMS did not go as far as MedPAC recommended, which would have entailed calculating relative weights on the basis of estimated costs for each DRG within each hospital and then averaging the relative values nationally. This calculation would have adjusted for a purported pattern in which the specialization in certain DRGs by higher-cost hospitals leads to overpayment for those DRGs.
Examples of Final Rule Changes for Diagnosis-Related Groups.
CMS had also proposed the use of a more refined system of DRGs, called All Patient Refined Diagnosis Related Groups (APR-DRGs), a proprietary system developed by 3M Health Information Systems that better reflects the severity of patients' conditions and the resources they require. This change would not have been implemented until 2008. In response to opposition, however, CMS limited the 2007 changes to the creation of 20 new DRGs and revisions to 32 existing DRGs. For example, it has separated patients undergoing major bladder procedures (new DRG code 573) from patients undergoing kidney and ureter procedures (DRG codes 303–305). CMS also specified a process for choosing among alternative systems for accounting for variations in severity and intends to implement the selected system in fiscal 2008.
There is no guarantee that CMS will follow through on the comprehensive DRG changes or continue to phase in the new cost weights; doing so will require a continued commitment to improving payment accuracy in the face of resistance from affected stakeholders. Although making these changes is entirely within the authority of the Secretary of Health and Human Services, members of Congress were heavily involved, representing interests of various constituencies rather than splitting along party lines. Although some, such as House Ways and Means Chairman Bill Thomas (R-CA), urged CMS to move faster, a letter from 53 senators and 189 members of the House urged both a delay in initiating the changes and a much longer phase-in period.
An important lesson from this policy process revolves around various stakeholders' perceptions of their own interests. With specialty hospitals clearly losing if these changes are made, one might have expected community-hospital trade groups such as the American Hospital Association and the Federation of American Hospitals to support the changes. But they advocated a delay — for two reasons. First, although their members might benefit in the aggregate, important members — those with major heart-surgery programs and some rural hospitals with a less severely ill patient mix, for example — would lose. And with specialty hospitals entering some markets but not others, not all community hospitals were motivated to face uncertainty about the effects of these changes on their bottom line.
The second reason for the hospital industry's coolness concerned adjustments for "DRG creep." With a more refined DRG system, hospitals would have incentives to code more thoroughly to ensure that patients with greater needs would in fact be classified in a higher-paying DRG. To maintain budget neutrality, CMS would project the magnitude of coding changes and reduce payment rates in advance. Hospitals were concerned that CMS, in its caution to avoid an unwarranted increase in spending, would make too large an adjustment.
Some CMS missteps no doubt also contributed to the decision to take smaller steps toward increased payment accuracy. Erroneous calculations of the new cost weights in the initial proposal led to overly large estimates of the positive and negative effects on certain hospitals. Although many experts were aware of these errors in the proposed rule and understood that CMS would correct them, opponents seized an opportunity to exaggerate the magnitude of disruptions from the changes. Some also objected to the adoption of the APR-DRG system on the grounds that it is a proprietary product and not in the public domain.
The increased attention being paid to payment accuracy is likely to extend beyond the realm of inpatient services. Hospitals are facing increased competition in profitable service areas as more types of care move to outpatient settings, including physicians' offices. This competition presents a broader challenge to the industry than that from specialty hospitals. The trend toward physicians' provision of more services that are particularly profitable also means that more medical spending is being influenced by incentives for self-referral.
Health care providers appear to be more responsive than ever to financial incentives, making the case for aligning payment rates with the quantity and quality of care more compelling. Without policies that ensure more accurate payment methods, providers will increasingly gravitate toward the medical problems and procedures that boost their bottom line, and the care we receive may not be the care we need.
Source Information
Dr. Ginsburg is the president of the Center for Studying Health System Change, Washington, DC.
References
Ginsburg PB, Grossman JM. When the price isn't right: how inadvertent payment incentives drive medical care. Health Affairs. August 9, 2005 (Web exclusive).
Berenson RA, Bodenheimer T, Pham HH. Specialty-service lines: salvos in the new medical arms race. Health Affairs. July 25, 2006 (Web exclusive).
Report to Congress: physician-owned specialty hospitals. Washington, DC: Medicare Payment Advisory Commission, March 2005.
Changes to the hospital inpatient prospective payment systems and fiscal year 2007 rates. Fed Regist 2006;71:47915-47916.(Paul B. Ginsburg, Ph.D.)