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The impact of DRGs after year 2: consolidating the changes.

The impact of DRGs after year 2: Consolidating the changes

According to the theory of evolution, species must adapt to changing environments or risk extinction. Today's new breed of clinical laboratory manager would make Darwin proud.

It has been just two years since a Congressional mandate went into effect and turned the economics of health care upside-down. Overnight, hospitals had to make the philosophical and operational switch from blank-check Medicare reimbursement to stringent per-case payments. The laboratory turned from a profit maker, generating revenue in proportion to volume, to a cost center--and a potential source of red ink on the hospital ledger. Only physicians were left largely untouched by this startling new set of incentives, leaving the laboratory to cope with a deluge of conflicting demands from administrators, medical staff, third-party payers, and patients.

Last year, we surveyed the members of our Professional Advisory Panel, all laboratorians at the supervisory level or higher, to see how the changes had affected them (MLO, December 1984.) For many, it was too soon to discern the long-term impact of DRGs, but the survey did reveal some striking trends--or, more accurately, a broad pattern of changes in the delivery of health care as reflected in clinical lab practice.

This year, we sent our panel an identical survey for a second-year checkup. The results still show widespread uncertainty, but they also show a deepening and accelerating shift in styles of diagnosis and treatment. The direction of the shift? In almost all areas, it leads away from traditional hospital inpatient care.

Almost three-quarters of our 148 respondents work at hospitals functioning under the DRG system. The remainder manage or supervise labs in non-DRG hospitals, clinics, or independent facilities. Of those working under DRGs, some 70 per cent went on the system in 1984. About a quarter did so in 1983, the first year of the planned three-year phase-in for DRG rates; the remaining 6 per cent began prospective payment only this year.

As we pointed out last year, the extent of prospective payment's impact varies with several factors. It is especially influenced by the predominance of Medicare patients in a hospital's caseload--an average of 42 per cent in the surveyed hospitals. Medicare patients constituted between 30 and 69 per cent of the caseload for more than three-quarters of these institutions.

When the DRG system was introduced, it was widely anticipated that other health insurers would soon jump on the Federal Government's bandwagon and switch to DRG-based payment systems. However, only 23 per cent of the survey respondents report that other government or private payers in their area have adopted the system, virtually the same percentage that was recorded last year. Among these payers are some state Medicaid and Blue Cross or Blue Shield organizations, the Veterans Administration hospital system, and a number of private insurers.

How is prospective payment affecting hospitals? The clearest trend--and one with widespread repercussions throughout the entire health-care industry--is the rising proportion of empty hospital beds (Figure I). Average occupancy rates at panelists' institutions fell from 76 per cent in 1983 to 71 per cent last year; in 1985 to date, they tumbled further to an estimated 66 per cent.

Smaller hospitals--those with less than 300 beds--were the hardest hit by the new drive to avoid or minimize hospitalization. In the two years since prospective payment took effect, their average occupancy dropped from 72 per cent to 61 per cent. At hospitals with 300 or more beds, the average occupancy dropped from 82 per cent to 73 per cent.

The average length of a patient's stay, another key indicator of hospital utilization, also shrank. In 1982, according to last year's survey, the average length of stay was 7.5 days; for 1985 to date, it was down to just 6 days. Large hospitals continue to keep patients longer than small hospitals, but they too have cut the average inpatient visit by almost 2 full days since the pre-DRG era, from about 9 days in 1982 to about 7 days this year. Small hospitals shaved the average stay from 6.4 days in 1982 to just 5.5 days in 1985 to date.

The hospitals' bottom line took more of a battering this year than last, the panel reported. While 81 per cent of the surveyed institutions had a positive financial operating margin in the 1984 survey group, only 77 per cent did this year (Figure II). Large hospitals fared worst; only 69 per cent were in the black, compared to 78 per cent of small hospitals.

As for the effect of DRG payment on actual laboratory operations, various trends detected in our first survey have continued. Some of these trends accelerated, while others slowed.

The volume of laboratory testing once again presented a mixed picture, shown in Figure III, as labs explored the costs and benefits of increasing or cutting in-house testing. In 1984, volume increased over the previous year in 45 per cent of the panelists' labs, by an average of 13 per cent. However, another 36 per cent report that volume dropped--by an average of 9 per cent--and almost 20 per cent saw no change in volume. At small hospitals, test volume was more likely to drop than at large ones.

These figures, compared to last year's survey responses for 1983, indicate that prospective payment may be permanently pulling in the reins on needless test ordering. A quarter of the survey group last year reported that 1983 test volume had gone down, while more than 60 per cent reported that volume had risen. The overall pattern in the first two years of DRGs is this: Fewer laboratories are seeing growth in test volume, and more laboratories are seeing business dwindle.

Panelists' comments bear this out. "DRG payments have affected hospital lab test volume in more than one way,' said the director of biochemistry at a midsize Connecticut hospital, where lab volume dropped by about 25 per cent last year and is expected to drop another 15 per cent this year. "Physicians are admitting only sick patients, which has led to a decline in hospital census. They aren't ordering irrelevant tests, and they're not ordering profiles ahead of time as they used to do. Hospitals have lost much of their outpatient test load to doctors' office labs, group practice labs, and reference labs.'

And it's not just the volume, but the type of testing that is in flux. Many panelists remarked that outpatient volume has risen briskly while inpatient volume has plummeted. "Our volume has remained constant due to our implementation of a preadmission testing program and the increase in our same-day surgery cases,' the laboratory manager of a small community hospital in New Jersey reported.

In some cases, this pattern has bolstered overall financial stability, as the increased testing for outpatients and ambulatory surgeries helps offset losses in inpatient testing. Elsewhere, growing outpatient volume just swells the workload of already overburdened staffs that have been cut in accordance with hospitals' lowered census.

About half the panel expects 1985 test volume to rise beyond last year's level, while only a quarter expects volume to drop. By comparison, only 32 per cent of last year's panel expected 1984 volume to increase--a possible reflection of early uncertainty over the extent of per-case spending restraints.

It's important to note that prospective payment is not directly responsible for all these fluctuations. While 43 per cent of the panelists attribute shifting volume to DRGs, the remainder either don't know why their volume is changing or attribute the change to other factors.

DRGs have influenced the variety of tests offered by laboratories as well as their cost and volume, as Figure IV shows. In-house test menus increased at 45 per cent of the surveyed laboratories and decreased at 17 per cent. Only 25 per cent of last year's panel had mentioned an expansion of in-house test offerings.

Growth in this area indicates that many hospital-based laboratories are consolidating and expanding services, rather than preparing for a virtual shutdown as some industry pessimists had predicted. Hospital laboratories are also actively marketing their outpatient testing services, a topic that is covered in detail in Part II of this report.

In a related development, 41 per cent of the surveyed laboratories decreased the use of reference lab service this year, whereas only 25 per cent cut send-outs the year before. Both years, a fifth of the panel increased the number of send-outs.

How is the lab budget faring in the second year of the DRG phase-in? Well, almost a third of our respondents faced budget cuts, roughly the same percentage as last year (Figure V). The average reported budget reduction was about 12 per cent. But lab budgets rose for 46 per cent of the panel-- 10 per cent more than reported a budget increase last year. Those with rising budgets enjoyed an average boost of 9 per cent. For the remaining 23 per cent of the panel, the 1985 budget stayed frozen at 1984 levels.

Many laboratories also felt the pinch in their capital equipment budgets. Nearly 40 per cent of the panel reported that their labs had been turned down for a capital expenditure request, as did a similar percentage last year. Large hospital laboratories were the most likely to lose out in a bid for capital funding.

The flip side of this dilemma is that makers of laboratory instruments must fight harder for customers, yielding choice bargains for those who do manage to get the green light on acquisitions. In fact, an overwhelming 82 per cent of those surveyed said that manufacturers had offered them more attractive sales offers since DRGs began.

The demands of prospective payment continue to shape certain operational changes in the clinical laboratory. Our panelists report a sharper focus on optimum test utilization, streamlined diagnostic techniques, shorter length of stay, and avoidance of unnecessary hospitalization. Management strategies reflect this perspective.

Increasingly, speed is of the essence --and laboratories are indeed working faster. Last year, only 16 per cent of all responding laboratories had managed to cut average test turnaround time. This year, almost a third reported having done so. Large hospital labs seemed especially concerned with speeding results to clinicians: 42 per cent of them cut turnaround time, compared with only 23 per cent of the smaller labs.

As one panelist pointed out, prompt results don't necessarily lead to faster diagnosis and treatment. "There's too much emphasis on turnaround time within the lab without comparable emphasis on better ordering patterns and information transmission,' said Charles E. White, assistant lab director at the Mercy Division of Mercy-Memorial Medical Center, Benton Harbor, Mich. "If the doctors write their orders in the morning and don't look at them until late afternoon, it's a case of "hurry up and wait.' Total patient management is the bottom line. If tests were only ordered Stat when necessary, we could process all of them more efficiently.'

The issue of diminishing quality control has been a recurrent worry for those working under financial constraints, but a reassuring 70 per cent of the panel reports that quality control hasn't changed. (Last year, 80 per cent said that QC went untouched by DRGs.) Quality control had actually increased for 16 per cent, and only 14 per cent cut QC measures.

We asked panelists to tell us, in their own words, how they felt DRGs had affected the quality of lab service so far. The majority said they had observed no significant change. Some panelists even believed that DRGs had improved quality.

"Prospective payment has made lab service streamlined, and possibly more efficient,' said the blood bank supervisor of a medium size Pittsburgh hospital that has been on DRGs since July 1984. The chairman of pathology at a large Tennessee medical center agreed:

"If anything, quality has increased. We have suffered a 10 per cent reduction in staff and a significant reorganization of our time and talents. In the process, we have closely re-examined our entire operation and probably improved our QC, service, and turn-around.'

Thanks to DRGs, the laboratory director of a small Virginia hospital said, "we've automated more, enabling us to offer a bigger test menu while using fewer personnel and turning out a higher volume. This has also led to faster results for our emergency room and wards.'

Other panelists, however, blamed prospective payment for sagging staff morale and increased stress, with an attendant drop in accuracy of test performance. "Quality has decreased,' was the anonymous comment from a microbiology supervisor at one large hospital. "Fewer qualified, registered med techs are being hired, and more poorly trained aides are being used instead.'

Another lab section head reported: "The staff has been cut 10 per cent by uninformed administrators. Because the hospital is not sure of DRG effects, it is "shot-gunning' its cuts--and service is affected adversely.'

Such complaints are hardly surprising; staffing and productivity have been among the most strained areas of laboratory practice. And staff size seems unquestionably to be the most painful casualty of cost cuts.

Almost 60 per cent of the surveyed laboratories have experienced staff cuts since going on the system--make that 70 per cent for large hospitals--with staff size shrinking by a hefty 12 per cent on the average. Staff size remained stable in a third of the labs, and increased at a meager 9 per cent. Last year's survey group, by the way, reported a pattern of staffing changes very similar to that shown in Figure VI.

These figures have serious implications for the future lab job market. In fact, nonhiring is more prevalent than firing as a staff-trimming tactic. In labs where staff size shrank, 81 per cent of the panel cited normal attrition as a cause. Twenty-six per cent mentioned selective layoffs by job category, and only 6 per cent pointed to across-the-board layoffs.

When staffing is cut to the bone, some managers believe that quality of service will eventually erode, if it hasn't done so already. Certainly, quality is increasingly challenging to maintain. At the Mount Sinai Division of Albert Einstein Medical Center, a 203-bed hospital in Philadelphia, 4.5 lab FTEs have been dropped since August 1984, according to laboratory manager Lorraine Rossi.

"We were fortunate to lose them through attrition,' she said, "but the overall atmosphere in the lab is strained. Some section supervisors are under stress because they're devoting much of their time to benchwork--and must balance an ever more complex schedule in order to attend to management duties. Opportunities for outside continuing education have decreased. And when you ask the staff for involvement in lab activities beyond just performing tests, you realize that people here are under a lot of pressure to do it all.'

"The hospital has had to grant some overtime,' said Dawn Diestelkamp, coordinator of quality control and data management for 400-bed Valley Medical Center in Fresno, Calif. "For several years we've had a freeze on filling empty positions, and this year they actually cut those spots. More people now work as generalists than as specialists, overlapping a little more between areas to try to cover for those missing positions.'

There is still a marked effort to cut overtime, but not as dramatically as last year. Overtime decreased at 35 per cent of the surveyed labs, compared with more than half in 1984. In 53 per cent of the labs, overtime remained stable, and technologists worked more overtime in only 12 per cent. Hours of available laboratory service appear relatively unaffected, remaining the same for 81 per cent. Only 3 per cent actually cut lab hours back, and 16 per cent increased them.

The bad news may be that staffs are getting leaner; the good news is that productivity appears to be climbing, although sometimes at a considerable cost in stress. According to the vast majority of the panel, DRGs have not hurt productivity. Half of this year's respondents say that the laboratory has become more productive since DRGs, whereas only 42 per cent said so last year. Productivity was stable in 39 per cent of the laboratories and declined in only 10 per cent.

Despite the profound effects of DRGs on the work lives of technologists and other staff members, almost 40 per cent of the surveyed labs have taken no measures to inform personnel of changes in third-party payment systems. Other institutions continue using various methods to educate the staff about changes in Medicare and related developments. Meetings and presentations are used by 28 per cent; in-service programs, by 21 per cent; and articles, memos, newsletters, and other written material, by 11 per cent.

We asked panelists what they considered to be the biggest DRG-related management problem. The top-rated challenge? Staff cuts and resulting overwork, cited by a third of the panel--exactly the same response as last year. Next came budget cuts and cost containment, mentioned by 13 per cent. Twice as many panelists mentioned this problem last year, raising the question: Are cost pressures beginning to slacken, or are lab managers just starting to take them for granted?

The third-ranked dilemma was physician compliance with utilization guidelines, mentioned by 9 per cent, and quality and productivity, cited by 8 per cent. Compared with last year's results, it would appear that some aspects of the crunch are easing up; in 1984, a quarter of the panel rated both these factors a major problem. Rounding out the list of DRG woes were equipment budget cuts, for 7 per cent (again, that's half the percentage that cited this problem last year), and lower test volume and staff morale, each cited by 6 per cent.

The heart of the matter was summed up this way by one of the panelists: "My chief problem is to manage and improve productivity without sacrificing quality--and to do it with limited resources.'

In Part II of this report, which follows, we'll see how panelists evaluate various strategies for financial survival of the fittest, and how they are continuing to weather the evolution of American health care.

Table: Figure II The bottom line

Does your hospital anticipate a positive financial margin in 1985?

Table: Figure I Hospital census keeps declining . . .

. . . and so does length of stay

Table: Figure III How did test volume change in 1984?

How will '85 volume compare with '84?

Is this change directly due to DRGs?

Table: Figure IV In-house testing vs. send-outs

Table: Figure V How does the lab's 1985 budget compare with '84?

Since DRGs, has a capital request been rejected?

Have instrument manufacturers made better offers?

Table: Figure VI How staffing has changed since DRGs
COPYRIGHT 1985 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Special Report, part II
Author:Becker, Brenda L.
Publication:Medical Laboratory Observer
Date:Dec 1, 1985
Words:3091
Previous Article:Screening sites pushed pending AIDS therapy.
Next Article:The impact of DRGs after year 2: evaluating the tactics.
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