Transcript Slide 1

3M Global Information Technology
APR DRG Based
Prospective Payment System
Design
Florida Hospital Association
3M Health Information Systems
July 13, 2012
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State and Federal Payers
 Are being directed to reduce payments for Medical Care while increasing
their own roll of insured
 Are chasing cost efficiencies obtained from primary care and outpatient
interventions with the expectation that inpatient hospitalization costs will
shrink
 Are targeting weak payment methodologies that can be described as offering
poor incentives to control costs.
 Identifying the need to reform payment and enforce cost containment opens
the door to budget cuts or hospital rationalization (closure).
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Payment Continuum
Provider
Minimal Risk
Provider
Insurance Risk
Provider
Performance Risk
Financial Risk
Payer
Payment Method
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Payment System Objective
 “The ultimate objective of PPS is to set a reasonable
price for a known product.
 "A strong link between payment and diagnosis, along
with the ability for hospitals to retain any amounts
below the prospective rate, will invite more active
medical participation in the financial and operating
routines of hospitals.“
 HHS Report to Congress, 1982
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Objectives for a Payment System Reform
 Additional payments for special Cases – Outliers and Transfers
 Maintain or improve access to care
 Protect hospitals so that quality is maintained
 Extend protection against extraordinary case costs to a greater number of
cases by directing the same level of payments more efficiently
 In effect, this is stop loss insurance which protects hospitals – and
maintains access and quality
 Improve payment accuracy
 Give providers incentives to become more efficient
 Reward efficient hospitals
 Give inefficient hospitals tools which facilitate communication between
hospital administration and physicians
 Use the payment systems to create a foundation which supports continuous
quality improvement
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Separation of the Classification System and the
Establishment of Prices
 The clinical model reflects the type of patients
 The payment weights reflect the treatment processes and
methods
 Allows stable clinical categories to be maintained while payments
are adjusted to reflect more accurate and complete data
 Facilitates fine-tuning payments to accommodate other factors
not taken into account by the classification system
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MS-DRGs are not applicable to
non Medicare Population
 MS-DRGs are fundamentally flawed for non Medicare populations,
failing to adequately account for: newborn birth weight, many
pediatric illnesses ( sickle cell anemia, cystic fibrosis, hemophilia,
lead poisoning, nutritional disorders, congenital anomalies), high risk
pregnancies, HIV-related co-morbidities.
 These limitations are so extensive that a fair and equitable payment
system for a non Medicare population can not be achieved using the
MS-DRGs.
 For example, hospital admissions for a typical Medicaid population
are composed of roughly 16% newborns, 20% pediatric and 25%
obstetric patients.
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The All Patient Refined DRGs
 Need a set of categories that were capable of capturing
differences in the case mix and severity of the patient mix
at various types of participating hospitals
 APR-DRGs



Developed for all patients
Sophisticated severity adjustment – Accurate payment and
supports communication
Captures differences in expected cost across all participating
hospitals – maintaining access and facilitating the measurement
of efficient practice patterns
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All Patient Refined DRGs (APR DRGs)
 APR DRGs are an extension of DRGs to account for SOI and
ROM

314 base APR DRGs

Four severity of illness subclasses

Four risk of mortality subclasses
 Assignment to a “Base” APR-DRG based on:

Principal Diagnosis, for Medical patients, or

Most Important Surgical Procedure (performed in an O.R.)
 Assignment of SOI and ROM

Take into account the interaction among principal & secondary diagnoses, age, and,
in some cases, procedures
 Both admission APR DRG & discharge APR DRG are computed
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Admission APR DRG requires the secondary diagnoses present on admission
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indicator

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All Patient Refined DRGs (APR DRGs)
 APR DRGs were developed by 3M HIS in conjunction with
the National Association of Children’s Hospitals (NACHRI)
and encompass patients of all ages.
 APR DRGs are assigned using standard administrative data.

No additional data collection required
 APR DRGs are designed to facilitate linking payment and
quality

Case mix/risk adjustment for both resource and quality
measures
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APR DRG 221 Major Small &
Large Bowel Procedures
Severity of Number of Percent of
Illness
Cases
Cases
1
912
23.0%
2
1,479
37.2%
3
1,050
26.4%
4
530
13.3%
Source: HCUP 2007 - Medicaid Discharges
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Average
Length
Average
of Stay
Charge
5.7 $34,381
7.9 $46,572
13.0 $81,354
26.4 $200,225
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PPS Components
 Relative Weights
 Base Rates
 Outlier and Transfer Policy
 Transfer Policy
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Relative Weights
 Relative Weights are Unitless Numbers that Express
the Relative Resource Use for a Visit in One
Category in Relation to the Average Visit
 Major Policy Decisions Include:

Based on Actual Costs or Charges

DRG Average vs Hospital Specific Relative Value

Geometric vs Arithmetic
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Top 10 APR DRGs by Total CM
Top 10
APR DRG
540
560
004
560
588
540
005
640
720
593
353,197
SOI
1
1
4
2
4
2
4
1
4
4
Relative Weight
0.79465
0.44592
30.00354
0.51331
33.88654
0.96069
22.14753
0.10582
4.16961
17.25955
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212,600
24.4%
Cases
Total CMI % Total CMI
54,628 43,410.14
5.0%
90,507 40,358.88
4.6%
875 26,253.10
3.0%
39,504 20,277.80
2.3%
562 19,044.24
2.2%
17,155 16,480.64
1.9%
704 15,591.86
1.8%
146,854 15,540.09
1.8%
1,980
8,255.83
0.9%
428
7,387.09
0.8%
descr
CESAREAN DELIVERY SOI 1
VAGINAL DELIVERY SOI 1
TRACHEOSTOMY W LONG TERM MV W EXTENSIVE PROC SOI 4
VAGINAL DELIVERY SOI 2
NEONATE BWT <1500G W MAJOR PROC SOI 4
CESAREAN DELIVERY SOI 2
TRACHEOSTOMY W LONG TERM MV W/O EXTENSIVE PROC SOI 4
NEONATE BRTWT >2499G, NORMAL NB OR NEONATE W OTH PRBLM SOI 1
SEPTICEMIA & DISSEMINATED INFECTIONS SOI 4
NEONATE BIRTHWT 750-999G W/O MAJOR PROC SOI 4
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Base Rates
 Base Rate and Adjustments

The base rate is an amount, that when multiplied by an APRDRG specific relative weight, will yield a price for each APR-DRG

Major Policy Decisions Include:
 What costs should be included or excluded in developing a
base rate
 The way that the base rate is inflated over time
 Amounts (if any) which are withheld from the initial base rate
to allow for improvements in coding after the system is
introduced
 What adjustments to the base rate are needed to account for
exogenous factors that influence hospital costs
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Base Rate Objectives
 Create fair base rates suitable for replication that can withstand review
 Base variation in base rates upon variation in “efficient” costs
 Efficient cost is a loose term but is treated here as the cost of production
after adjusting for those mission related factors beyond hospital control that
create systematic variation in the cost of providing care
 Which costs should be included or excluded in developing a base rate?
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Base Rate Adjustments
 Hospital Administrators subject to costs beyond their
control. DRG payment using averages without
recognition of legitimate cost differences can unfairly
penalize or reward different hospitals.
 Which factors influence hospital costs? And to what
magnitude? How should these factors be recognized?
 Hypothesize variables to measure efficient cost
variation and create base rate adjustments to account
for it
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Adjustments to Base DRG Budget
 Potential causes for adjustment

geographic location

local wage rates

direct and indirect health professions education

Hospital mission (e.g., children’s, teaching)

cost and length of stay outliers

inflation adjustments
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Methods for Adjustment
 Formula (e.g., Medicare teaching adjustment)
 Pass-through of actual costs (e.g., direct medical
education)
 Actual costs of base year trended forward
 Hospital specific rates
 Peer Grouping

location, size, teaching status
 Blending of hospital specific, peer group, regional
and/or national rates
 Standard allowance
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Variables Used to Measure “Efficient”
Cost Variation
Local/Regional Differentials:
 Regional variations in the cost of doing business exist for all industries. Multiple
factors can drive cost variation. The wage index produced by Medicare was used as a
proxy through which to group hospitals facing similar regional cost pressures.
Teaching Mission:
 Teaching hospitals bear hidden patient care costs through their roles in research,
training, providing new technologies and unmeasured severity within the patients they
treat. The resbed ratio published by CMS was used as a proxy for the costliness of
teaching to group hospitals
Indigent Burden:
 Disproportionate Share (DSH) has long been a necessary variable to test for as a
source of hospital cost variation. Once again the CMS variable was used to group
hospitals within similar ranges
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Variables Used to Measure “Efficient”
Cost Variation
Mission Related Binary Variables Considered:





Lavel 1 Trauma Center (1/0)
Level 2 Trauma Center (1/0)
Burns Center (1/0)
Pediatric Trauma Center (1/0)
Does the hospitals claims data constitute 2% (or greater) of all
pediatric claims and also 2% of the highest severity level (3 and 4)
pediatric claims. If so the hospital is designated an “Intense
Pediatric” provider
All of the above have been hypothesized as adding incrementally
greater cost to the provision of care not reflected in patient level
case mix variation.
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Outliers
 Additional payments for special Cases – Outliers and Transfers
 Maintain or improve access to care
 Protect hospitals so that quality is maintained
 Stop loss insurance which protects hospitals – and maintains access
and quality
 More accurately classifying cases as inlier cases, allows better
identification of the outlier cases that really need stop loss protection
 Allows payment policy to lower the outlier pool size (amount all
hospitals have to pay for the insurance) while still maintaining the
same level of risk (outlier threshold) thus increasing the amount paid
out in the base rate to all hospitals
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Prospective Payment and Budgeting - Long
Stay and Cost - Purpose
 Key objective - financial protection for provider
 Has quality dimension in that the pressure from a
catastrophic case is reduced by an appropriate outlier
policy
 It is critical that the outlier policy not encourage providers
to keep cases until outlier status is reached
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Prospective Payment and Budgeting –
Long Stay and Cost - Identification
 Limiting risk implies fixed threshold (RAND)
 Fixed threshold is often coupled with statistical threshold
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Transfers
 Not all hospitals have technologies to handle
complex cases. Reasonable option for a hospital to
stabilize and transfer a case that is beyond its
technical capabilities to another hospital. The
transferring hospital does not provide most of the
care for these cases, and should not receive the full
DRG rate.
 Transfer cases are really only a special kind of
short stay outlier
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 Identifying Transfer Cases is based on Discharge
Status
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Transition Strategies
 Issue: Transition strategy needed to

protect against unanticipated expenditures and to
protect hospitals' cash flow

minimize disruption of normal hospital operations to
allow hospitals to adjust to new system
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Transition Strategies
 Approaches

Immediate Financial Protection
 Risk Corridors
 Initial Payment Limits

Blended Rate Policies
 Allow Response to Incentives
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Benefits of a DRG
Resource Allocation and Payment System
 Provides a Rational and Scientific Method to Allocate
Scarce Resources to Providers
 Creates financial incentive for hospitals to provide
efficient care
 Provides a fair basis for allocating a limited budget to
hospitals
 Creates a language for communicating the financial
implications of clinical decisions
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 Focuses on the needs of patients
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Benefits of a DRG
Resource Allocation and Payment System
 Provides clinically meaningful information to
promote care management and quality
improvement
 Provides a means of identifying “reasonably
efficient” hospitals
 Is easily understood and administratively
straightforward

Not a burden for hospitals
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Summary
 Understanding a hospital’s case mix using APR-DRGs address
the serious problem of measuring differences in resources
needed to treat various types of inpatient cases
 Allows for a more equitable allocation of monetary resources
 The information produced using these kinds of severity-base
analysis for measuring hospitals’ output can be applied to
hospitals’ treatment of inpatient cases; facilitating planning,
utilization review, and quality assurance activities
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Summary
 Critical aspect of a DRG system is the extent to which it supports
communication between hospital administrators and the clinicians with
privileges at the hospital. And the key to successful communication with
physicians is that the DRG system recognizes severity of illness.
 APR-DRGs have sophisticated clinical logic which uses clinically
coherent patterns of secondary diagnoses in a consistent four level
severity framework to recognize the severity of each patient.
 APR-DRGs are an effective tool which facilitates communication
between hospital administration and physicians.
 Support efforts by both the Payer and the hospitals to improve both
efficiency and quality of care.
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Questions?
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