MEDICARE SEVERITY DIAGNOSTIC RELATED GROUPS IN THE UNITED STATES

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Eurohealth OBSERVER

Eurohealth incorporating Euro Observer — Vol.19 | No.2 | 2013 19

MEDICARE SEVERITY

DIAGNOSTIC RELATED GROUPS IN THE UNITED STATES

By: Teresa Bienkowska-Gibbs

Summary: Medicare Severity Diagnostic Related Groups (MS-DRGs) give hospitals a financial incentive to pursue clinical integration by adjusting DRG payments for comorbidities. The primary objective of DRGs is to improve quality of care while controlling costs, which may pose a significant challenge for the integration of care. A gap in the literature seems to exist regarding the effect of MS-DRGs on clinical integration as well as the potential role for DRGs to improve the integration of care more generally.

Keywords: Medicare Severity Diagnostic Related Groups (MS-DRGs), Integrated Care, USA

Teresa Bienkowska-Gibbs is an MSc student in International Health Policy at the London School of Economics and Political Science, UK. Email: T.J.Bienkowska-Gibbs@

lse.ac.uk

Background

The Centers for Medicare and Medicaid Services (CMS) adopted the Medicare Severity Diagnostic Related Groups (MS-DRGs) in 2007 – 2008. These 745 new Diagnosis-Related Groups (DRGs) replaced the existing 538 DRGs in Medicare’s Inpatient Prospective Payment System (IPPS) for acute care inpatient hospital stays with groups that were adjusted for severity of illness. Each DRG has a flat payment weight that is assigned to each inpatient stay using the principal diagnosis, up to eight secondary diagnoses, the main procedure performed, up to six additional procedures, as well as age, gender, and discharge status.¹ Hospitals use the International Statistical Classification of Diseases and Related Health Problems Clinical Modification 9 (ICD-9-CM) to code diagnoses and procedures. The MS-DRG system classifies DRGs according to the presence and severity of secondary

diagnoses. The highest level of severity for secondary diagnoses is Major Complication /Comorbidity (MCC), the next level of severity is Complication / Comorbidity (CC), and the lowest level of severity is the Non-Complication / Comorbidity (Non-CC). Table 1 illustrates how hospital inpatient Medicare national average payments differ according to the severity level of the condition.

However, individual hospitals are not reimbursed at the Medicare national average payment rate. The hospital’s reimbursement rate is determined by multiplying the hospital’s base rate, which reflects the input-price level in a particular region, by the MS-DRG weight.

In addition, the operating and capital payment rates are increased for hospitals that treat a disproportionate number of low-income patients or that run a resident training programme and are decreased for certain transfer cases. Lastly, additional outlier payments are added for unusually costly cases.¹

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As demonstrated in Table 1, MS-DRGs provide a financial incentive for hospitals to improve the clinical integration of health care by reimbursing providers at a higher rate for more severe cases. For example, the hospital inpatient Medicare national payment for disorders of the biliary tract without complications is US$ 4,067 (€3,108). This payment increases by US$ 1,946 / €1,487 (47.8%) if the patient presents a CC. If the patient presents MCC, the payment increases by US$ 4,990 / €3,813 (122.7%).

Objective of the scheme and link to performance indicators

DRGs were originally implemented in the US in 1983 to provide hospitals with incentives to control costs for services provided to hospital inpatients in the Medicare programme. Prior to the introduction of DRGs, hospitals providing treatment to Medicare patients employed a retrospective payment system.

As hospitals were reimbursed for the services that they provided, even if they were costly and inefficient, retrospective payment provided little incentive for hospitals to contain costs. As a result of these perverse incentives, Medicare introduced a new DRG-based system of prospective payment for hospitals whereby a fixed rate is set for reimbursement prior

to the patient’s admission to hospital.

Thus, a DRG payment system introduces competition into the hospital market and incentivises hospitals to contain costs.

However, it also gives providers a negative incentive to increase readmissions and to engage in risk selection.

The 2007 – 2008 changes to Medicare’s inpatient prospective payment system were enacted as part of the Deficit Reduction Acts of 2005.¹ These changes were designed to improve the efficiency and quality of care by linking payments to quality. By adjusting payment for severity of illness, the MS-DRGs should reduce the payments for the less severely ill and increase the payments for the more severely ill compared to payment under the previous DRG system. The net effect should be to improve the distribution of payments.³ In addition, the new IPPS is designed to reduce payment for conditions that were contracted during the hospital stay rather than as a result of deterioration of a particular condition after admission. For example, hospitals do not receive reimbursement for certain conditions if they were not recorded as present on admission.³ Therefore, the objectives of the MS-DRGs are primarily to improve quality and efficiency of care.

Improvement in clinical integration is

not a primary objective of MS-DRGs but rather a positive bi-product of adjusting DRGs for severity.

Potential success and evaluation of the incentive

An evaluation of the impact of the financial incentives created by MS-DRGs for the clinical integration of care does not seem to have been conducted. This may be because clinical integration is not the primary objective of the new DRGs.

Challenges

The cost-control incentives created by DRGs may present an obstacle for the integration of care. This conflicts with the objective of integrated care in so far as integration may increase input costs without increasing reimbursement under DRGs. For example, payment by DRGs does not directly provide incentives for health promotion and disease prevention that may form important components of integrated care models. Unless this is correctly accounted for in an integrated care model, hospitals will only have the incentive to work towards clinical integration, as described above, rather than integration of care more generally.

Similarly, MS-DRGs do not present an incentive for hospitals to collaborate with Table 1: An example of hospital inpatient Medicare payment

MS-DRG Description Hospital Inpatient Medicare

National Average Payment (US$)

435 Malignancy of hepatobiliary system or pancreas with MCC $10,108

436 Malignancy of hepatobiliary system or pancreas with CC $6,738

437 Malignancy of hepatobiliary system or pancreas without CC/MCC $5,242

438 Disorders of pancreas except malignancy with MCC $10,013

439 Disorders of pancreas except malignancy with CC $5,555

440 Disorders of pancreas except malignancy without CC /MCC $3,813

441 Disorders of liver except malignancy, cirrhosis, alcoholic hepatitis with MCC $10,628 442 Disorders of liver except malignancy, cirrhosis, alcoholic hepatitis with CC $5,404 443 Disorders of liver except malignancy, cirrhosis, alcoholic hepatitis without CC /MCC $3,684

444 Disorders of the biliary tract with MCC $9,057

445 Disorders of the biliary tract with CC $6,013

446 Disorders of the biliary tract with CC /MCC $4,067

Source: ²

Note: Major Complication / Comorbidity (MCC), Complication / Comorbidity (CC), Non-Complication / Comorbidity (Non-CC).

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physicians outside of the hospital, which may present a further challenge to the integration of care.

There seems to be a gap in the literature on integrated care regarding the scope for DRGs to improve health care integration.

DRGs do not seem to be an important payment mechanism for integrated care in general. This may stem from the negative incentives for DRGs to expand services beyond those that are specified under the prospective reimbursement system.

However, MS-DRGs in the US do provide some scope for the clinical integration of care. Moreover, there is potential for other recent innovations in payment mechanisms for integrated care, such as episode-based bundled payments and gain-sharing, to be more effective at increasing the level of integration in health care markets.

References

1 Centers for Medicare and Medicaid Services (CMS). Rules: Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2009 Rates. Federal Register, 2008.

Available at: https://www.federalregister.gov/

articles/2008/08/19/E8 – 17914/medicare-program- changes-to-the-hospital-inpatient-prospective- payment-systems-and-fiscal-year-2009

2 Boston Scientific. 2012 Procedural Reimbursement Guide For Select Endoscopy Procedures. Boston:

Boston Scientific Corporation, 2012:1 – 20.

3 McNutt R, Johnson T, Odwazny R, et al.

Change in MS-DRG Assignment and Hospital Reimbursement as a Result of Centers for Medicare and Medicaid Changes in Payment for Hospital- Acquired Conditions: Is it Coding or Quality?

Quality Management in Health Care 2010;19(1):1 – 8.

PERSONAL HEALTH BUDGETS IN THE

NETHERLANDS AND ENGLAND

By: Ghislaine Grasser, Ruth Young and Liana Rosenkrantz Woskie

Summary: The Netherlands and England have introduced personal budgets for long-term care as patient incentives with the general objective of providing more choice and flexibility to recipients. In the Netherlands, the number of personal budgets increased substantially from 2002 to 2010, prompting a drastic cut to reduce costs. In

England, personal budgets were implemented in 2005 as pilot projects in thirteen local authorities, and scaled up throughout the country in 2012. Currently, little evidence is available on the role of personal budgets in integrated care. However, in the Netherlands, personal budgets were shown to increase patient satisfaction, choice and influence over care. Different evaluations following the pilot programmes in England show that personal health budgets can be used as a vehicle to promote better integration.

Keywords: Personal Budgets, Direct Payments, Long-Term Care, the Netherlands, England

Ghislaine Grasser and Ruth Young are MSc students in Health Policy, Planning and Financing at the London School of Economics and Political Science (LSE) and the London School of Hygiene and Tropical Medicine (LSHTM), UK.

Liana Rosenkrantz Woskie was previously an MSc student at LSE and LSHTM and is now Program Manager in the Department of Health Policy and Management at the Harvard School of Public Health, USA.

Email: [email protected]

Background

Over the last twenty years the United States and several European countries, such as Austria, England, Finland, France, Germany, Ireland and the Netherlands, have introduced “personal health budget”

programmes (also known as “consumer- directed care”, “cash-for-care”, “service vouchers”, “home-care grants”, “direct payments” or “person-centred budgets”) in their long-term care systems for older people and for people living with disabilities. These programmes provide cash or vouchers that patients can use for

home-care, i.e. to assist with activities of daily living (ADL) and instrumental activities of daily living (IADL). Personal health budgets enable patients to choose what care is the most appropriate for themselves and avoid top-down situations where similar care and services are provided to all patients, irrespective of their personal context. Long-term care patients thus become “consumers” and have greater freedom to select services and providers.¹ Here we focus on the personal health budget programmes introduced in the Netherlands and England.