Page 2 I. Introduction The rising cost of medical care in the United States has been a concern for quite some time. Beginning in the 1960's with the advent of Medicare, a system has been needed that will balance cost with services provided within acceptable parameters. In 1982, the US Congress placed a cap on operating expenses for each Medicare case treated in a hospital, as a protective measure to insure adequate payment within reasonable limits. A prospective payment system (PPS) was initiated as a result of the cap, whereby hospitals receive a flat rate for each admission based on a calculation of rates determined by the diagnosis (Kahn, et al, 1990). A system whereby the diagnosis is grouped according to services, estimated length of stay and type of technology required for treatment was developed by Robert B. Fetter and John D. Thompson in the early 1980's (Burke, 1992). The diagnostic related groups (DRGs) form the basis for the payment system.

This system was originally set up for use with Medicare but has been refined and expanded to include non-Medicare situations in the United States and abroad. Some form of DRGs has been adopted in more than 20 countries, including the United Kingdom, France, Finland, Norway, Taiwan, Spain, Australia and Ireland (Burke, 1992). While the prospective payment system has reduced the rate of cost increase, the concern has been that it also encourages hospitals to send patients home prematurely and to deliver lower-cost care to them (Kahn, et al, 1990). 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 (Edwards, et al, 1994, Page 3 pp. 45). II.

Historical Overview I the prospective payment system the basic units of payment are the standardized amounts and the relative weights assigned to the DRG. The Diagnostic Related Groups are determined by resource consumption and clinical patterns, and also incorporate other pertinent factors, such as: the principal diagnosis; up to eight additional (secondary) diagnoses; up to six procedures performed during the stay; and the age, gender, and discharge status of the patient. A weight is calculated for each DRG which represents the average resources necessary to care for cases in that DRG relative to the average resources used to treat all cases in all other DRGs. Services provided to the patient during the course of treatment are not addressed specifically, but are included in the total charges, which are used as the measure of resource consumption. Each year, the relative weights assigned to DRGs are recalibrated based on the latest available discharge data for Medicare discharges (Edwards, et al, 1994, pp. 45). Since the cost is based on the standardized amount multiplied by the weight of the DRG and not on each individual episode, resource expenditure or procedure; in some cases the cost will be less than the expenditure, while, in other cases, it will exceed the amount billed.

Through the averaging process, and given the normal distribution, cost will be balanced, over time, with expenditures. The initial set of DRG weights was published in the September 1, 1983 Federal Register (Besdine, 1998). The weights have since been updated in response to legislation mandating periodic recalibration. They were first recalibrated in 1986 as a result of Public Law 98-21, which required the weighting factors to be adjusted for discharges occurring in fiscal year Page 4 1986 and at least every 4 years thereafter. Subsequently, Public Law 99-509 was passed, requiring the DRG weights to be adjusted annually beginning with fiscal year 1988 (Rogowski and Byrne, 1990, pp. 87). The recalibration in 1986 included the change from calculating weights from operating costs to the use of actual hospital charges.

This resulted in a simpler computation and extinguished the need to update the calibration as the cost of resources increased. Data from patient bills is available for payment computation in a more timely manner (Rogowski and Byrne, 1990). Charge based weights have a bias in that the weights are reflective of the pricing strategies of hospitals, and may not be consistent across the DRG. A study done in 1986 compared cost based data with charge based and found that they did not differ significantly (Cotterill and Connerton, 1986).. Current Overview The use of DRG in computing reimbursement within the prospective payment system is meant to provide incentives to the hospitals to control costs.

One major consequence is the reduction in the average length of stay per individual, however, the system may actually increase the number of hospital admissions in some cases and shift some types of care to outpatient settings, at a savings to the hospital but no cost benefit to the patient. It also sets the hospital at a disadvantage when treating acutely ill patients with limited resources and inadvertently encouraging the avoidance of treating those individuals. The PPS also has an adverse effect on technological innovation in that the hospital is more likely to adopt cost-saving technologies of questionable value. A major issue in the use of DRGs is the balance of cost and expenditure for Page 5 severely ill patients. The DRG, as originally constructed, does not incorporate severity of illnesses among patients within a given DRG. The effect is to penalize hospitals for treating more complex and severely ill cases.

The hospital is likely to suffer a significant loss for each Medicare patient receiving nonsurgical intensive care and a slight profit if the patient did not require intensive care (Conrad and Omenn, 1985). Recalibration measures have been meant to overcome these negative components. The prospective payment system was designed to promote efficiency, but not at the cost of possibly under compensating hospitals with severely ill patients or to promote the avoidance of patients using high-level hospital resources (McMahon et al., 1992). In an attempt to ensure accuracy and equitable payment, annual revision of the DRC classification system has been instituted.

It includes updating the classifications to reflect new diagnosis and treatment procedures, as well as the effects of new technologies in cost. The Health Systems Management Group at Yale University, under a HCFA cooperative agreement, developed a system to assign cases to a DRG based on principal diagnosis, secondary diagnoses, and surgical procedures and the combination of previous classifications to form more relevant and inclusive classifications. The Yale Drgs also recognize two special groups of cases: medical cases involving early death (within 2 days of admission) and cases requiring tracheostomy procedures. It also expanded the number of categories to 1,263. (Edwards, et al, 1994). The DRG developed for use with Medicare has been altered for use with non-Medicare populations.

Page 6 IV. Case Examples In 1987, the State of New York enacted legislation mandating a PPS for all non-Medicare patients. The State Department of Health was required to assess the appropriateness of HCFA DRGs for a non-Medicare population, including a specific evaluation of the appropriateness for cases involving neonates and patients with the human immunodeficiency virus (HIV). When first implemented on January 1, 1988, the New York AP-DRGs expanded the Medicare DRG classification system to include newborn and neonate DRGs based on birth weight and ventilator dependence. In 1990, New York refined its DRG system by the addition of a severity measure. New York developed a list of secondary diagnoses that were considered to have a major effect on resource use when present in a case.

This list was based on the Yale secondary diagnoses, designated catastrophic for surgical cases and major for medical cases (Edwards, et al, 1994, pp. 48-49). The new system increased the number of classifications by 54. The limitations of the Yale system were addressed by a joint research effort between 3 M / Health Information Systems (HIS) and NA CHRI in an effort to overcome the inconsistencies brought about by the use of the Medicare system as a foundation for a non-Medicare population. The APR-DRGs expanded the pediatric modifications and relevant data to include: principal diagnosis, secondary diagnoses, operating room procedures, age, gender, and discharge disposition, as well as birth weight and days on a mechanical respirator for neonates. The 348 basic APR-DRGs, each with four complexity subclasses, combined with the 45 neonatal APR-DRGs, result in a total of 1,437 APR-DRGs and were first made available on January 1, 1993 (Edwards, et al, 1994). As with the Medicare DRGs, the Yale and APR DRGs will be reviewed and calibrated on an Page 7 annual basis. V. Analysis / Discussion The two most pressing alterations needed within the DRG classification system are the incorporation of severity and nursing resource indexes (Diers and Bozzo, 1997).

Payment arrangements and managed care information systems are built upon information embedded in case data and suggest that measurements of nursing resources need to fit with information system requirements. Acuity systems may be of use to nurses, but not to administration or finance (McManus & Pearson, 1993, p. 86). Weighting DRGs directly for nursing solves three problems. First is the issue of reliability of patient classification. Second, weighting directly for nurses does not increase the time factor for any participant. Finally, data can be entered immediately as nursing time associated with particular kinds of case types as DRGs into the management information system.

The existing payment system can be merged and / or incorporated with the nursing data and will no longer necessitate separate systems (Diers and Bozzo, 1997). VI. Summary / Conclusion The prospective payment system utilizing DRGs has undergone a great deal of scrutiny and adaptation in the years since it was implemented in 1983. It is a system that has proven its versatility and reliability through scores of studies and operation. The advantages in cost reduction are an ongoing process of balancing hospital resource expenditures with the evolving Page 8 classification of diagnosis. The most prevalent concern is that the quality of care be maintained throughout the process of cost reduction.

The move to Health Management Organizations has resulted in a decreasing reliance on the DRG system in non-Medicare cases. It is expected that the system will continue to evolve and have major impact on the health care system. Page 9 VII.


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