Pre-enrollment reimbursement patterns of Medicare beneficiaries enrolled in "at-risk" HMOs.

The Health Care Financing Administration (HCFA) has initiated several demonstration projects to encourage HMOs to participate in the Medicare program under a risk mechanism. These demonstrations are designed to test innovative marketing techniques, benefit packages, and reimbursement levels. HCFA's current method for prospective payments to HMOs is based on the Adjusted Average Per Capita Cost (AAPCC). An important issue in prospective reimbursement is the extent to which the AAPCC adequately reflects the risk factors which arise out of the selection process of Medicare beneficiaries into HMOs. This study examines the pre-enrollment reimbursement experience of Medicare beneficiaries who enrolled in the demonstration HMOs to determine whether or not a non-random selection process took place. The results of this study suggest that the AAPCC may not be an adequate mechanism for setting prospective reimbursement rates. The Marshfield results further suggest that the type of HMO may have an influence on the selection process among Medicare beneficiaries. If Medicare beneficiaries do not have to change providers to join an HMO, as in an IPA model or a staff model which includes most of the providers in an area, the selection process may be more likely to result in an unbiased risk group.

Incentives in case-mix measures for long-term care.

Several States now use patient-based payments for skilled nursing facilities and intermediate care facilities; others are in the process of developing case-mix systems. The Health Care Financing Administration is working under congressional mandate to develop a prospective case-mix system for Medicare payments to skilled nursing facilities. If new payment methods follow the existing pattern, they will be based not on the patient's clinical characteristics but rather on a mixture of clinical characteristics and services delivered. As a result, innate incentives are contained in data collection systems which are cost-increasing at best and dangerous at worst. A preferable approach would be to develop payment schemes based on the patient's degree of dependence.

Comparison of alternative relative weights for diagnosis-related groups.

During this study, we investigated the extent to which diagnosis-related group (DRG) relative weights based exclusively on charge data differ from DRG weights constructed according to the methodology used in deriving the original relative weights for the Medicare prospective payment system (PPS). The PPS operating cost weights were based on a combination of cost and adjusted charge information (Pettengill and Vertrees, 1982). The results of this study reveal only minor differences between the two sets of weights. Interhospital differences in cost-to-charge ratios do not produce large, arbitrary differences between charge-based and operating cost weights. Whether the data are standardized for differences in capital and medical education costs also appears to make little difference.

Methodological limitations in case mix hospital reimbursement, with a proposal for change.

We have found five methodological limitations in the creation and implementation of the diagnosis related group (DRG) patient classification system, which is used to define a hospital's case mix. There are four methodological limitations in the system that Klastorin and Watts have proposed to identify hospital peer groups. We conclude that the effects of these limitations should be sought, and we propose studies to measure their extent. We also propose that these two approaches can be combined to create an improved hospital reimbursement program that accurately measures differences between hospitals caused by case mix and peer group characteristics.

Recent evidence on case-based systems for setting hospital rates.

Medicare's adoption of the Prospective Payment System (PPS) was the culmination of years of research and demonstrations to establish case-based systems for setting hospital rates. This paper examines the procedures and findings of the early programs in New Jersey and Maryland, as well as the Medicare case-based system that was established pursuant to the experience in these two states. This is followed by an examination of the recently established Medicaid case-based systems in Utah, Pennsylvania, Ohio, Michigan, and Washington and the case-based systems established by some Blue Cross and Blue Shield Plans. The strengths and weaknesses of these systems are discussed, and suggestions are made for improving the evaluations of these systems.

On the feasibility and usefulness of physician DRGs.

In response to pressure to curb increases in Medicare physician fees, Congress authorized the Department of Health and Human Services to undertake research on the advisability and feasibility of paying physicians based on diagnosis related groups (DRGs). This report is a summary of the findings of two reports that examined DRG-based physician payment arrangements along with other methods of packaging physician services for payment. The reports imply that a DRG physician payment system could unfairly redistribute payments from physicians with genuinely more complex and costly practices to physicians with less complex and costly practices. We conclude that a physician DRG methodology might nonetheless provide a useful tool for monitoring physician practice styles.

Hospital cost and efficiency under per service and per case payment in Maryland: a tale of the carrot and the stick.

The simultaneous operation of per case and per service payment systems in Maryland, and the varying levels of stringency used in setting per case rates, allows a comparison of the effects of differing incentive structures on hospital costs. This paper presents such a comparison with 1977-1981 data. Regressions performed on cost-per-case and total cost data indicate that costs were lower only when per case payment limits were very stringent. Positive net revenue incentives appeared to be insufficient to induce a reduction in length of stay or ancillary services use. These changes in medical practice patterns thus appear more likely under the threat of financial losses--that is, under the threat of the stick rather than the inducement of the carrot.

Medicare program; reasonable charge limitations--HCFA. Final rule with comment period.

This final rule implements section 9304(a) of the Consolidated Omnibus Budget Reconciliation Act of 1985 which enacted section 1842(b)(8) of the Social Security Act (Act). In accordance with section 1842(b)(8) of the Act, we specify the circumstances under which HCFA or its Medicare Part B carriers will consider establishing special reasonable charge payment limits for services (including supplies and equipment) reimbursed under Part B of the Medicare program. The rule describes the factors HCFA or a carrier will consider and the procedures it will follow in establishing them. The limits would be either an upper limit to correct a grossly excessive charge or a lower limit to correct a grossly deficient charge. In either case, the limit would be either a specific dollar amount, or a special method used in determining reasonable charges to be allowed for a particular service or category of service. The purpose of this rule is to establish a stronger framework for setting special reasonable charge limits for services when the standard reimbursement methodology results in payments that are grossly excessive or deficient. A related purpose is to protect the Medicare program from excessive outlays and to prevent any adverse effects on both Medicare beneficiaries and consumers in general that we believe would result from a lack of such limits. The rule also will protect suppliers from reimbursement that is grossly deficient.

Unanswered questions facing DRG's.

When determining reimbursement rates for DRG's across regions, a number of cost components must be considered: size and sophistication of the hospitals, overhead costs, capital debt, staffing ratios, and patient mix. In addition, demographic data on hospital catchment populations, philosophy of treatment, severity of illness, and outcomes all must be weighed.

A capitation-based prospective reimbursement mechanism for linking academic medical centers with health maintenance organizations.

Recent changes in the medical marketplace have led to increased competition among health care delivery organizations. Despite this, the academic medical center (AMC) and the health maintenance organization (HMO), even with apparently divergent goals, can interact so that both parties benefit. By developing a risk-sharing prospective reimbursement contract, the HMO can better predict tertiary care expenses. Concomitantly, the AMC can broaden its market and increase its access to patients requiring its technologically sophisticated services. This article presents a mechanism for creating a prospective reimbursement contract with mutually beneficial incentives. Implications of the methodology are also discussed.

The next step: introducing competitive pricing into PPS.

PPS in its current form has achieved significant cost savings in three years. But to further reduce the costs of the Medicare program, competitive market forces should be introduced.

Cost-containment incentives in HMOs. What's known, what's not known.

HMOs use various incentives to control utilization of health care resources, and physicians who are thinking of joining these organizations should understand how these factors will influence their practice. Financial incentives include withheld funds, penalties against those at risk, and bonuses for physicians with good practice habits. Nonfinancial incentives include education concerning efficient use of health care resources, feedback mechanisms, participation in planning cost-containment programs, and administrative constraints. There are also less obvious, nonfinancial incentives; one involves inclusion of ancillary office personnel in bonus distribution, and these individuals may thus influence a physician's prescribing habits.

RUGs and "Medi-Cal" systems for classifying nursing home patients.

Medicare and most state Medicaid programs currently use indirect case-mix measures to determine reimbursement for nursing home care. In the future, however, they probably will incorporate more direct case-mix measures into their payment systems. Care must be exercised in designing a case-based prospective payment system to ensure that its financial incentives motivate providers to expedite recovery, prevent deterioration, and admit heavy-care patients. For example, although use of a services-rendered approach helps guarantee that care will be provided when needed, it also offers providers an incentive to furnish a service regardless of whether it is in the patient's best interest. Consideration must be given to the frequency with which patients are reassessed. The implications of the timing of reassessments for quality of care also must be studied. Ideally, quality would be measured on an outcome basis--that is, payment would depend on whether targeted goals for individual patients are reached--rather than on structural or process measures alone. Two recent classification systems--Resource Utilization Groups and Medi-Cal groups--may serve as models for case-based prospective payment systems. Each method classifies patients into distinct, meaningful categories based on activities of daily living and services received.