A clinically detailed risk information system for cost.

The authors discuss a system that describes the resources needed to treat different subgroups of the population under age 65, based on burden of disease. It is based on 173 conditions, each with up to 3 severity levels, and contains models that combine prospective diagnoses with retrospectively determined elements. We used data from four different payers and standardized the cost of most services. Analyses showed that the models are replicable, are reasonably accurate, explain costs across payers, and reduce rewards for biased selection. A prospective model with additional payments for birth episodes and for serious problems in newborns would be an effective risk adjuster for Medicaid programs.

Where is the financial safety net for managed care physicians?

OBJECTIVE: Empiric research on mechanisms by which managed care physicians attempt to mitigate financial risk is lacking. We assumed the perspective of a managed care plan in investigating the relationship between risk sharing and the match between a physician's capitation payments and costs of care. DESIGN: The study design was a family of payment simulations using 2 years of managed care claims data. METHODS: Claims from a cohort of 82,525 managed care patients were used, with year 1 data determining a capitation rate for year 2 primary care services. The net provider payment in year 2 was examined under scenarios that might modify financial outcomes, including stop-loss insurance, age- and gender-adjustment of capitation, and risk pooling within independent practice associations. RESULTS: The size of a provider's patient panel was positively correlated with net per capita payment (r = 0.22; P < 0.0001 without risk modification strategies). The variance of the ratio of net to total revenue was utilized as a proxy for the degree of risk assumed in caring for a panel of capitated enrollees. Risk modification strategies reduced this variance measure, with risk pooling producing the largest effect, especially for providers of panels of fewer than 135 patients. In contrast, age- and gender-adjustment of capitation payments had little effect on reimbursement outcomes. CONCLUSIONS: Short of increasing the pool of capitated patients, risk modification strategies appear limited in their ability to produce more equitable reimbursement to providers with small patient panels. With many providers assuming substantial risk in pursuing managed care contracts, these dynamics may favor organizational forms of medical practice that facilitate large patient panels within a single plan.

Variations in cataract extraction rates in Medicare prepaid and fee-for-service settings.

OBJECTIVE: To compare rates of cataract extraction in 2 prepaid health settings and in traditional fee-for-service (FFS) settings. DESIGN: A cross-sectional analysis using 1993 health maintenance organization (HMO) Medicare claims and encounter files, the Health Care Financing Administration (HCFA) 5% Medicare Part B provider/supplier file, and the HCFA October 1992 100% Medicare population file. SETTING: Southern California Medicare FFS settings and the staff-model and independent practice association (IPA) plans of a large California HMO. PATIENTS: 1993 Medicare beneficiaries aged 65 years and older. The study included 43387 staff-model HMO enrollees, 19050 IPA enrollees, and 47 150 FFS beneficiaries (a 5% sample of all Southern California FFS beneficiaries). MAIN OUTCOME MEASURE: Age and risk-factor adjusted rates of cataract extraction per 1000 beneficiary-years. RESULTS: After controlling for age, sex, and diabetes mellitus status, FFS beneficiaries were twice as likely to undergo cataract extraction as were prepaid beneficiaries (P<.01). Female FFS beneficiaries were nearly twice as likely to undergo the procedure as were male FFS beneficiaries (P<.001); there were no extraction rate differences by sex in the prepaid settings. CONCLUSION: Because of the potential implications for vision care in the elderly, the significantly different rates of cataract extraction in FFS and prepaid settings warrant further clinical investigation to determine whether there is overuse in FFS vs underuse in prepaid settings. Such investigations must assess the appropriateness of cataract surgery by evaluating its use relative to clinical need.

Modified capitation and treatment incentives for end stage renal disease.

This study developed a modified capitation payment method for the Medicare end stage renal disease (ESRD) program designed to support appropriate treatment choices and protect health plans from undue financial risk. The payment method consists of risk-adjusted monthly capitated payments for individuals on dialysis or with functioning kidney grafts, lump sum event payments for expected incremental costs of kidney transplantations or graft failures, and outlier payments for expensive patients. The methodology explained 25 percent of variation in annual payments per patient. Risk adjustment captured substantial variations across patient groups. Outlier payments reduced health plan risk by up to 15 percent.

Use of diagnosis-related groups by non-Medicare payers.

Medicare's prospective payment system (PPS) for hospital cases is based on diagnosis-related groups (DRGs). A wide variety of other third-party payers for hospital care have adapted elements of this system for their own use. The extent of DRG use varies considerably both by type of payer and by geographical area. Users include: 21 State Medicaid programs, 3 workers' compensation systems, the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), more than one-half of the Blue Cross and Blue Shield Association (BCBSA) member plans, several self-insured employers, and a few employer coalitions. We describe how each of these payers use DRGs. No single approach is dominant. Some payers negotiate specific prices for so many combinations of DRG and hospital that the paradigm that payment equals rate times weight does not apply. What has emerged appears to be a very flexible payment system in which the only constant is the use of DRGs as a measure of output.

Assessing the FY 1989 change in Medicare PPS outlier policy.

In fiscal year (FY) 1989, Medicare changed its rules for paying for extremely long or expensive hospital stays called "outliers." We compared outlier payments in FYs 1989 and 1988, after adjusting for other simultaneous policy changes. We found that the new policy succeeded in targeting more outlier payments to the most expensive cases and to the hospitals suffering larger prospective payment system (PPS) losses and in reducing hospital financial risk. Using time-series analyses, we show that the policy change had no measurable effect on the timing of discharges or on the concentration of expensive cases in urban government-owned hospitals.

How recalibration method, pricing, and coding affect DRG weights.

We compared diagnosis-related group (DRG) weights calculated using the hospital-specific relative-value (HSRV) methodology with those calculated using the standard methodology for each year from 1985 through 1989 and analyzed differences between the two methods in detail for 1989. We provide evidence suggesting that classification error and subsidies of higher weighted cases by lower weighted cases caused compression in the weights used for payment as late as the fifth year of the prospective payment system. However, later weights calculated by the standard method are not compressed because a statistical correlation between high markups and high case-mix indexes offsets the cross-subsidization. HSRV weights from the same files are compressed because this methodology is more sensitive to cross-subsidies. However, both sets of weights produce equally good estimates of hospital-level costs net of those expenses that are paid by outlier payments. The greater compression of the HSRV weights is counterbalanced by the fact that more high-weight cases qualify as outliers.

A longitudinal comparison of charge-based weights with cost-based weights.

The diagnosis-related group weights that determine prices for Medicare hospital stays are recalibrated annually using charge data. Using data from fiscal years 1985 through 1987, the authors show that differences between these charge-based weights and cost-based weights are increasing only slightly. Charge-based weights are available in a more timely manner and, based on temporal changes in the weights, we show that this is an important consideration. Charge-based weights provide higher payments than cost-based weights to hospitals with higher case-mix indexes, but have little effect on hospitals with low cost-to-charge ratios, high capital costs, or high teaching costs.

How much change in the case mix index is DRG creep?

We re-abstracted a nationally representative sample of 7,887 Medicare charts to determine how much of the change in Medicare's Case Mix Index between 1986 and 1987 was true change in the complexity of cases and how much was upcoding or 'DRG creep'. About two-thirds of the change is true. Most of the remaining third is attributable to a general change in the completeness of coding; some is attributable to changes in the Grouper program. Thus, most of the additional $1 billion paid to hospitals because of the Case Mix Index change appears justified by the additional complexity of patients hospitalized.

Insurance aspects of DRG outlier payments.

As part of the prospective payment system, the government pays 'outlier' payments for especially long or expensive cases. These payments can be viewed as insurance for the hospital against excessive losses. They mitigate problems of access and underprovision of care for the sickest patients, and provide additional payments to the hospitals that take care of them, thereby making payments to hospitals more equitable. This paper characterizes the outlier payment formulae that minimize risk for hospitals under any fixed constraints on the sum of outlier payments and minimum hospital coinsurance rate. We then simulate per-case payments for a policy that did not include any outlier payments, the current outlier policy, and several other policies that minimize risk subject to different coinsurance constraints. The current outlier policy achieves each of its goals to at least some extent, but more insurance could be provided without lessening attainment of the other goals. We also discuss some problems with the implementation of the current policy, such as its reliance on day outliers.