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Toward better care and improved payment.

Current medical-business literature often suggests that the rule for hospitals' economic survival under Medicare's prospective pricing system (PPS) is delivery of minimally acceptable care. Extensive investigation of, or care for, illness not related to the primary cause of admission may erode margins or even generate losses. in at least some diagnostic groupings, however, more rather than less investigation can be not only beneficial to the patient but also fiscally advantageous to the hospital.

Since Medicare began to phase in PPS in 1983 for Part A, hospitals have attempted to shift services to Medicare's Part B. This is because Part B still makes payment on a per-line-item-of-service basis, and generally Part B services are excluded from the fixed payment per episode of illness under Part A. Hospital utilization review committees have become more active, encouraging physicians to investigate only the inpatient's principal diagnosis and to avoid unnecessary testing during the patient's hospital stay. Attending physicians have also responded to demands for shortened lengths of stay.1

Although utilization changes have arguably led to improved payment-to-cost ratios for hospitals, concerns remain that because patients are being discharged earlier, they are "sicker" (i.e., at an earlier stage of convalescence) at discharge and perhaps payment-to-outcome ratios are less improved. While evidence on this point is primarily anecdotal one can clearly hypothesize that without investigations of all complaints, a patient might be improperly diagnosed and treated, leading to premature readmission with a resultant Medicare rejection of subsequent billings.2 A delicate balance exists, therefore, between the necessary and the unnecessary investigation and subsequent treatment of illness under PPS.

Both medical and economic forces demand a focused approach to the Medicare patient. The physician is bound to "primium non nocere" while illuminating the patient's problems and initiating a treatment plan. The manager monitoring expenses linked to the care for the Medicare patient must demand uniformly proper care, while questioning consistently early readmissions (i.e., premature discharges) and excessive lengths of stay.

It is important to recall that the principal diagnosis under the Medicare prospective pricing system is "the diagnosis established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care."3 The diagnosed condition must have received significant treatment while the patient was hospitalized, and, in the instance of a Medicare chart audit, objective evidence must be present in the medical record to substantiate:

The primary diagnosis.

A severity of illness warranting admission, or necessity of services unavailable without admission.

In some cases, evidence of outpatient treatment failures.4

Retrospective gaming of PPS is common practice in many hospitals. As an example, for patients in some DRG categories that have often been viewed by hospitals as economic losers, the primary diagnosis is sometimes interchanged with the secondary diagnosis to convert the case to another higher paying DRG. Legitimate primary diagnosis conversion, however, can be achieved prospectively with the aid of carefully managed medical investigations. Furthermore, such investigations are usually beneficial to the patient and cost effective for the provider.

Consider, for example, three DRGS that often account for significant contractual adjustments in many hospitals providing general medical care. For medium-sized hospitals (about 100 beds), bronchitis with coexisting complications (coded within DRG 96), pneumonia without organism specified but with comorbidity (included under DRG 89), and congestive heart failure (billed under DRG 127) can represent an annual gap between actual Medicare payments and corresponding billed charges of as much as one-half million dollars.5 (This gap is the amount of payment forgone by caring for Medicare patients compared to payment expected for identical care delivered to private-pay patients. See table 1, page 30, for average Medicare per-case payments for these and two related DRGs.)

Medically, these diagnoses represent some of the most difficult patients to treat. Early intervention, aggressive care, minimizing unnecessary testing, and early discharge to "convalescent facilities" have been emphasized in many medical centers to reduce the payment gap, generally on the dubious theory that the gap correlates with accounting or economic loss.* For some of these patients, however, additional diagnostic investigation that allows more specific treatment is indicated, both medically and financially.

Patients with bronchitis and an underlying complication such as emphysema or chronic hypoxia fall under DRG 96. Medicare payment for these patients may fall below the long-run average total cost (including allocation of overhead and multiperiod direct fixed costs) of the care provided in most hospitals. Simple and minimal risk investigations can frequently shift patients' discharge diagnoses into other, higher paying DRGS without incurring offsetting additional costs.

Reclassifying a DRG 96 patient with old abnormalities on chest x-ray from a bronchitis diagnosis to a pneumonia diagnosis often requires repeating the x-ray after the patient's hydration and initial treatment. In this group of patients, however, the actual incidence of repeat x-rays is only about 50 percent.5 The gain from finding evidence of pneumonia is the difference between payment for DRG 96 and for DRG 89, simple pneumonia type unspecified) patients belonging in the latter grouping. (See table 2, page 31.) Although the absolute amounts paid for each DRG vary by region and facility, the average hospital stands to gain about 1,000 by finding a pneumonia. If we assume the variable cost of the additional x-ray plus the variable cost of additional therapy per discovered pneumonia averaged over all those receiving the additional x-ray is $10, one or more pneumonias confirmed in each 100 cases investigated would be economically beneficial to the hospital. It is assumed that the more specific diagnosis of pneumonia will allow the practitioner to provide more specific modalities of therapy (eg., postural drainage) and therefore be good for the patient as wen as the business office.

Now that the bronchitis patient has been shifted into a more appropriate diagnosis, what else can we do to improve patient care and payment? In some hospitals, less than 30 percent of pneumonia patients have an etiologic agent identified prior to discharge.5 The average hospital needlessly forgoes about $3,000 in Medicare payments for each of these patients (the difference between DRG 89 and DRG 79 payment levels). (See table 2.) The organism associated with adult pneumonia is normally identified via sputum and sometimes blood cultures. But sputum cultures are obtained in as little as 50 percent of pneumonia patients. When we subtract the "no growth" and "inadequate specimen" culture reports, we find that as little as 10 percent of pneumonia patients have appropriate sputums collected before antibiotic therapy is started.5

Assuming a sputum and a blood culture are utilized in every case and a variable cost of $25 for both, physicians caring for pneumonia patients can order both cultures for up to 120 patients and still benefit the hospital's economic picture by finding the etiologic agent for pneumonia in only one case. Unlike the prior example, the increased precision in this diagnosis should actually reduce the variable cost of therapy, because more expensive broad spectrum antibiotics can be replaced by less expensive and more specific antibiotics to complete a patient's treatment once the culture results are known. The lower risk of side effects from specific antibiotic therapy adds further to the benefits realized by the patient.

The addition of both the investigations just discussed to the management of all bronchitis patients could result for each patient shifted from DRG 96 to DRG 79 in a payment gain of about 4,000. (See table 2.) This benefit should in virtually all cases exceed the incremental diagnostic and therapeutic cost incurred. The cost of investigation is the hospital's cost to provide an x-ray and sputum and blood cultures, estimated here as totaling $35. This suggests that the hospital would benefit from performing sputum and blood cultures and repeat x-rays on aH of the next 114 complicated bronchitis patients admitted, even if only one patient can be advanced to the higher paying DRG. Of course, this scenario does not take into account the benefit of finding one or more additional bronchitis patients having signs of pneumonia and shifting their diagnoses to DRG 89.

A related diagnosis, from the clinian's standpoint, is the congestive heart failure (CHF) patient. These patients frequently have complications such as emphysema, asthma, or diabetes; their treatment is complex and expensive; and end points to their hospitalizations are difficult to identify. They are classified in DRG 127 and hence account for large payment gaps as a result of intensive care unit usage and extended general medical lengths of stay.

Some CHF patients have a precipitating event as the etiology of their disease. Not only is identification of the underlying cause associated with a better prognosis for the patient, but should that cause be an acute myocardial infarction (AMI), a reclassification of the patient to DRG 121 follows.6

The diagnosis of a recent AMI is usually based on the presence of a classic history, ECG changes, and/or enzyme evidence of myocardial damage.7 Without typical histories, CHF patients are infrequently evaluated for the diagnosis of a recent AMI as the cause of their disease, despite ECG abnormalities and elevated lactate dehydrogenase (LDH) enzymes on admission. In some institutions, fewer than 15 percent of patients with a tentative diagnosis of CHF on admission and an elevated LDH enzyme have isoenzymes of LDH performed to search for an AMI diagosis.5

With an assumed variable cost of $16 for performing an isoenzyme determination, and the payment increase from finding an AMI in a CHF patient of about $2,400 (see table 2), 150 CHF patients could have an LDH isoenzyme test performed and the hospital would benefit if only one AMI patient were found. Similar to the situations previously discussed, the diagnosis of AMI presumably would allow more specific (and at least occasionally less) therapy for the patient than that given a misdiagnosed CHF patient, expediting a safe discharge while providing the hospital with improved payment.

The three diagnostic groups discussed represent some of the more difficult medical cases cared for under Medicare's prospective pricing system. Yet, economic results from such cases can be improved by a search for related diagnoses. The key decision parameters to be determined by each provider are the relevant variable costs and the frequency of improved diagnosis likely in the particular population served. If these parameters are favorable, added investigations win involve relatively little incremental cost and offer the probability of significant potential medical and economic benefits. This, coupled with the added investigations' low potential for harm to patients and congruency with current medical recommendations for patient care, should allow medical managers to have little difficulty in persuading both medical and fiscal staff to embrace such programs. Hospitals that find more specific diagnoses as the result of such investigations will benefit by improving their patients' medical outcomes and their own fiscal health.

It is important to remember that DRG rates were originally set on the basis of fully allocated total costs. Thus, almost all DRGS originally produced positive contributions for the provider. A positive contribution is defined as the DRG rate minus the average variable cost for that DRG. Variable cost refers to actual or best estimates of the marginal expense of incremental resources actually consumed in providing care to patients in this DRG, which resources would not be consumed if the patients were never admitted. Even though DRG rates have increased less rapidly than hospitals' costs since 1983, it is probable the DRGS discussed here still make, on average, positive contributions toward covering allocated costs.

Whether or not this is true, and whether or not the contributions, if positive, are sufficient to cover fully all fixed and allocated costs, achieving a higher DRG rate without a commensurate increase in variable costs is always desirable. Also keep in mind the distinction between individual cases that are economic losers and DRGS that are economic losers. (Every DRG is expected to contain individual case winners and losers that average against each other. See "Medicare Primer, Part 2: The Provider's View." Physician Executive 14(l):30-32, Jan.-Feb. 1998, for a more complete discussion of this latter point.)


1. Council on Long-range Planning and Development. The Environment of medicine. Chicago, Ill.: American Medical Association, 1989, p. 58.

2. Peer review organization Manual, Revision 6. Washington, D.C.: Health Care Financing Administration, April 1987, Section 3015, p. 3-7.

3. Uniform Hospital Discharge Data, Minimum Data Set. Chicago, Ill.: American Hospital Association, April 1980, p. 12.

4. Peer Review Organization Manual. Washington, D.C.: Health Care Financing Administration, 1985, Section IM 2001.1.

5. Unpublished data from private survey of southwestern and southern hospitals (RML).

6. "Clinical Manifestations of Heart Failure," in Heart Disease: A Textbook of Cardiovascular Medicine, Second Edition. Philadelphia, Pa.: W.B. Saunders Co., 1984, pp. 491-2.

7. Jaffe, A. "Coronary Heart Disease," in Manual of Medical Therapeutics, 24th Edition. Waltham, Mass.: Little, Brown, and Co., 1983, pp.66-7.


Hugh W. Long, Phd, is Associate Professor of Health Care Management, A.B. Freeman School of Business, Tulane University, New Orleans, La. Richard M. Lauve, MD, is an emergency physician with St Landry Emergency Room Associates, Opelousas, La., and an MBA student at Tulane University's A.B. Freeman School of Business.
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Title Annotation:hospitals and prospective pricing
Author:Lauve, Richard M.
Publication:Physician Executive
Article Type:column
Date:Jul 1, 1989
Previous Article:Locum tenens solve staffing problems.
Next Article:Quality control: the nexus goal of purchasers and providers.

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