Observation Deck: Reversal of Fortune

By the time you read this, the comment period for proposed changes to the diagnosis-related group (DRG) system should be just about closed. God knows, there was enough to comment on. The proposed rule from the Centers for Medicare and Medicaid Services (CMS), published April 25 in the Federal Register, is 1,192 pages long! (If you don’t believe me, go to http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/cms1488p.pdf. It might be much simpler to read the CMS press release, which synopsizes everything in a page or two. Go to http://www.cms.hhs.gov/apps/media/press/release.asp?Counter=1833.)

The proposed rule – which is open for public comment – could change the way you and your hospital do business. Simply put, it attempts to tilt the playing field away from hospitals that perform many high-acuity procedures, and toward those that provide more basic medical care.

DRGs were implemented in 1983 to stem the rise in Medicare spending. Instead of paying hospitals after the fact (which included hospital cost plus markup), the government decided to pay them prospectively. Hospitals that could deliver care for less money than the DRG amount could keep the difference; those that couldn’t, ate it.

But there were loopholes. One was the way the 500+ DRGs were calculated. The other was the outlier. Hospitals whose costs for specific cases far exceed the DRG reimbursement amount can get paid 80 percent of the difference.

Under the current system, high-acuity procedures are more profitable for hospitals. The proposed changes signal a potential reversal of fortune for facilities that focus on such procedures. CMS has proposed not only changing the way DRGs are calculated (basing the “relative weight” on hospital costs, not charges), but expanding the number of DRGs to 861 (to more accurately reflect the severity of the patients being treated).

According to Goldman Sachs, the proposed changes, if adopted, could result in an estimated 5.7 percent reduction in case-mix for surgical cases and a 6 percent increase in medical cases. Goldman Sachs analyst Chris McFadden predicts that large acute-care hospitals that treat a broad range of cases won’t see significant changes. On the other hand, CMS itself estimates that specialty hospitals that focus on high-acuity, complex surgical cases could see 11 percent reduction in profit margins.

Soon after CMS announced its proposed changes, AdvaMed, the Washington, D.C.-based association for medical products manufacturers, voiced concern that hospitals that use newer, more advanced medical technology would be penalized. “New technologies help reduce hospital time and get patients back to their lives quicker, so it’s important that the system talk about innovation,” says Ann-Marie Lynch, executive VP for payment and healthcare delivery.

Coming from the other side, the American Hospital Association (which has been loud and clear in its opposition to physician-owned specialty hospitals) believes the proposed changes don’t go far enough in leveling the playing field. “Payment changes alone won’t solve [the specialty hospital] problem,” says Don May, VP of policy. “You still have a conflict of interest, in that physicians who own these hospitals are referring certain patients to them, but not all. The payment changes, while they would have an impact, wouldn’t get rid of this problem.”

The chances of this proposal running the gauntlet of special interests unscathed are unlikely. Still, it’s the current of thought that’s worth noting. “Over the last several years, physicians who practice in the surgical specialties, such as orthopedics, neurology and cardiology, have been the darlings of hospital administration,” notes McFadden. “The traditional medical-based specialists – ENTs, internists – frankly didn’t get near as much attention. You could see a reversal of that. You could see the hospital administrator turn around and say, ‘My good friend, the internist, is an important part of my economic formula.’”

Downward pressure on reimbursement for high-acuity procedures – which tend to use physician-preference items, such as orthopedic or cardiac implants – could mean you’ll be under the gun to reduce costs in those areas.

About the Author

Mark Thill
Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.
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