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Impact of diagnosis-related group-based reimbursement for treatment of rheumatic diseases in a teaching hospital.

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846
IMPACT OF DIAGNOSIS-RELATED GROUP-BASED
REIMBURSEMENT FOR TREATMENT OF
RHEUMATIC DISEASES IN A TEACHING HOSPITAL
ROBERT M. HARTLEY, MATTHEW H. LIANG, and KAREN E. CULLEN
The impact of Medicare’s diagnosis-related
group (DRGbbased reimbursement system was examined for care given to 734 rheumatic disease patients
discharged from a teaching hospital during a 2-year
period. The analysis accounted for length of stay “outliers” as defined by Medicare and distinguished costs
from charges. Excluding outliers, DRG reimbursement
would result in net revenues to the hospital of $1,126 per
DRG 240 patient and $1,794 per DRG 241 patient. The
difference between DRGs in cost per patient was significant, indicating that DRGs clearly identify 2 groups of
rheumatic disease patients. After excluding outliers, the
coefficients of variation in costs for DRGs 240 and 241
were 72% and 80%, respectively, which although high,
were average for DRGs at our institution. Mean total
charge per patient was different for groups defined by
their primary rheumatologic diagnosis in DRG 240 but
not DRG 241. For rheumatoid arthritis and systemic
lupus erythematosus patients, the total charge per patient did not differ, but the types of services did. The
cost of treating outliers would create an average loss per
outlier of $18,400 and $16,500, respectively, in DRGs
240 and 241. Outliers accounted for 34.5% and 21.8%
-
_
_
~
From the Departments of Medicine, Rheumatology/Immunology, and Orthopedic Surgery and the Robert B. Brigham Multipurpose Arthritis Center, Brigham and Women’s Hospital, Harvard
Medical School, and Harvard School of Public Health, Boston,
Massachusetts.
Supported by the Blue Cross MHA Fund for Cooperative
Innovation project no. 69-84 and by NIH grants no. AM-20580 and
RR-05669.
Robert M. Hartley, MD, MSc: Milbank Memorial Fund
Scholar; Matthew H. Liang, MD, MPH; Karen E. Cullen, MEd.
Address reprint requests to Robert M. Hartley, MD, Department of Medicine, Brigham and Women’s Hospital, 75 Francis
Street, Boston, MA 02115.
Submitted for publication October 15, 1984; accepted in
revised form February 8, 1985.
Arthritis and Rheumatism, Vol. 28, No. 8 (August 1985)
of the 2 DRGs’ total costs, respectively, but only 6.4%
and 3.6% of the total number of patients. Under current
DRG reimbursement rates, the cost of care for rheumatology patients would be adequately reimbursed in our
hospital: losses from outliers would be offset by net
revenues from inliers as long as current Medicare
adjustments for capital and medical education costs
were continued.
A system using diagnosis-related groups
(DRGs) is currently being implemented by Medicare to
determine levels of hospital reimbursement for inpatient care. It replaces a method in which hospitals
were paid for the “cost” of patient care, but the
amount of services and thus the total cost of a
patient’s care were not regulated. That system provided little incentive for economy either in patient care or
hospital management and thereby contributed to the
rapid rise in health care costs.
The DRG-based method pays a fixed amount
for a period of hospitalization regardless of its duration
or intensity of care. The reimbursement for a specific
patient is determined by the average cost for the
particular disorder (DRG) and, except for unusual
cases, is unaffected by the costs actually incurred in
treating the patient. As the system is phased in,
allowances are being made for local variations in labor
and other costs and for the cost of medical education
in teaching hospitals (1,2).
The current Medicare DRGs were formulated
by grouping diagnoses in the International Classification of Diseases (9th revision: Clinical Modification)
(ICD9) (3) into 23 Major Diagnostic Categories. Using
a computerized algorithm based on age and whether
surgery was performed, existence of comorbid condi-
847
DRG-BASED REIMBURSEMENT
Table 1. Selected diagnosis-related groups (DRGs) of interest to
rheumatologists
DRG
Criteria
209
240
Major Joint Procedures
Connective Tissue Disorders,
Age >69 andlor Complicating
Condition or Comorbidity
Connective Tissue Disorders,
Age <70 and No Complicating
Condition or Comorbidity
Septic Arthritis
Medical Back Problems
Bone Diseases and Septic Arthropathy,
Age >69 and/or Complicating
Condition or Comorbidity
Bone Diseases and Septic Arthropathy,
Age <70 and No Complicating
Condition or Comorbidity
Nonspecific Arthropathies
Signs and Symptoms of Musculoskeletal
System and Connective Tissue
Tendinitis, Myositis, Bursitis
Other Diagnoses of Musculoskeletal
System and Connective Tissue
241
242
243
244
245
246
247
248
256
No.
patients at
our
institution*
1,135
346
388
27
442
66
32
15
43
35
58
* Over a 2-year period, including outliers.
tions, or presence of complications, these 23 categories were repeatedly partitioned until the resulting
groups were statistically no more homogeneous with
regard to length of stay than their predecessors. The
final groups were then reviewed and edited by physicians for clinical sensibility, resulting in 467 DRGs
(1,2,4,5).
A major goal of the DRG system is to control
for the effects of case mix differences. Such control is
critical to the success of DRG-based reimbursement
since failure to adjust for such differences may have
several adverse consequences. One is that hospitals
may be motivated to identify patients with less than
average costs and to avoid admitting patients whose
conditions are more expensive to treat. Also, hospitals-particularly teaching and other referral institutions-that tend to treat more severely ill patients may
not be adequately reimbursed with a method based on
the costs of treating the “average patient.”
The DRGs of primary interest to rheumatologists are presented in Table 1. Rheumatic conditions
that involve hospitalization without surgery largely fall
into DRG 240 (Connective Tissue Disorder, Age
Greater Than 69 and/or Complicating Condition or Comorbidity) or DRG 241 (Connective Tissue Disorder,
Age Less Than 70 and No Complicating Condition or
Comorbidity). These 2 DRGs differ only by patient age
and whether 1 or more of a specified group of complications or comorbidities is present; they are comprised
of the same diseases.
The use of DRGs for reimbursement presumes
that there are no substantial differences in the costs of
care among any of the diseases within the DRGs.
Believing the connective tissue diseases grouped into
DRGs 240 and 241 vary greatly in cost, we studied the
clinical and fiscal experience of an active rheumatology division of a major teaching hospital. In our
analysis, we have used cost-as opposed to chargeinformation whenever possible. Also, we have separately analyzed patients reimbursed by the “routine”
Medicare DRG formula (inliers) from those who, because of excessive lengths of stay, are reimbursed by a
separate formula which includes a per diem reimbursement (outliers). Because of the different reimbursement mechanisms, it is important to differentiate inliers from outliers in weighing the fiscal implications of
Medicare’s DRG system.
PATIENTS AND METHODS
All patients discharged from the Robert B. Brigham
Division of Brigham and Women’s Hospital during fiscal
years 1982 and 1983 and assigned to DRG 240 or 241 were
studied. The Robert B. Brigham Division is a 96-bed unit
devoted to the comprehensive care of patients with arthritis
and musculoskeletal disorders. Approximately 25% of the
beds are occupied by patients with rheumatic conditions not
being treated surgically, and the remainder are occupied by
patients undergoing surgery for arthritis. There are 23 and 13
members of the active medical and orthopedic staffs, respectively. About 2,800 patients are admitted annually.
Table 1 presents the number of patients in DRGs 240,
241, and other DRGs of interest to rheumatologists; patients
in DRGs other than 240 and 241 were not analyzed either
because of lack of diagnostic specificity or because they
were hospitalized for surgery. Costs were estimated from
ratios of costs to charges developed for each of 60 cost
centers at Brigham and Women’s Hospital. They include
direct and indirect expenses and adjustments for medical
education costs and capital expenses. The Medicare definition (6) was used to define length of stay (LOS) outliers in
our sample; they were excluded from further analysis unless
otherwise specified. Outliers as defined by Medicare’s cost
criteria who were not also LOS outliers could not be
identified in our sample.
Mean charges, costs, and LOS per patient were
calculated for DRGs 240 and 241, as were their coefficients
of variation (CoV: standard deviatiodmean). The CoV is a
useful measure of the amount of variation in a group; the
larger the CoV, the greater the heterogeneity within the
group (7). CoVs of charges of all DRGs with more than 100
admissions to our hospital during the 2-year period were also
calculated for comparison. Estimates of DRG reimbursement used 100% national rates. To these estimates were
HARTLEY ET AL
848
Table 2. Components of diagnostic groupings: International Classification of Diseases (9th revision)
RA
714.0
714.1
714.2
710
714.30
714.32
710.1
710.3
710.4
446
447.6
099.3
696.0
720.0
277.3
279.4
390
443.0
446.2
SLE
JRA
Scleroderma
DWPM
Arteritis
AS and variants
Miscellaneous
446.5
446.6
710.2
710.8
710.9
725
Rheumatoid arthritis
Felty’s syndrome
Systemic rheumatoid arthritis NEC*
Systemic lupus erythematosus
Juvenile rheumatoid arthritis NOSt
Pauciarticularjuvenile rheumatoid arthritis
Scleroderma
Dermatomyositis
Polymyositis
Polyarteritis nodosa
Arteritis NOS
Reiter’s syndrome
Psoriatic arthropathy
Ankylosing spondylitis
Amyloidosis
Autoimmune disease NOS
Rheumatic fever without heart involvement
Raynaud’s syndrome
Hypersensitivity angiitis
Giant cell arteritis
Thrombotic thrombocytopenic purpura
Sicca syndrome
Diffuse diseases of connective tissue NEC
Diffuse diseases of connective tissue NOS
Polymyalgia rheumatica
* Not elsewhere classified.
t Not otherwise specified.
added medical education and capital expense adjustments
currently allowed by Medicare (1). Mean DRG reimbursement for outliers was calculated as:
0.60
X
B4
x LOSTRIM
+ inlier
DLOS
where f84 = the 1984 national DRG-specific reimbursement
rate, DLOS = the DRG-specific geometric mean length of
stay, LOSTRIM = the mean length of stay beyond the DRG
length of stay cutoff, and inlier = the DRG reimbursement
for inliers as calculated above (1).
The ICD9 principal diagnoses that are included in
each DRG were grouped by clinical similarity (Table 2).
Patients in the 2 DRGs were analyzed separately. In order to
examine whether the resulting ICD9 groups were different in
resource use, the mean and standard deviation of the charges
and LOS were calculated after the exclusion of outliers. To
test the hypothesis that the use of individual diagnoses
created more homogeneous subgroups within each DRG,
one-way analysis of variance of total charges and LOS was
used.
The components of care for the 2 largest ICD9
groups, rheumatoid arthritis (RA) and systemic lupus erythematosus (SLE), were compared by aggregating costs into
room charges, diagnostic procedures, therapeutic procedures and intensive care, and a miscellaneous category. The
therapeutic category was further divided into costs for
occupational therapy, physical therapy, and orthopedic
technician services; pharmacy; blood bank; anesthesia, operating room, and recovery room; intensive care; and a
miscellaneous category.
RESULTS
Three hundred forty-six and 388 patients were
assigned to DRGs 240 and 241, respectively, constituting about 1.3% of the total admissions to the 711-bed
Brigham and Women’s Hospital during the 2-year
study period. Twenty-two and 14 outliers were included in DRGs 240 and 241, respectively.
Mean charges and costs per inlier patient were
significantly greater in DRG 240 than in DRG 241
(Table 3). With allowances for medical education costs
included in the reimbursement, care for the average
inlier patient in each of the 2 DRGs would result in net
revenues to the hospital.
Outliers accounted for 34.5% and 21.8% of the
total costs for patients in DRGs 240 and 241, respectively (Table 4). The hospital would lose about $18,400
for each outlier in DRG 240 and about $16,500 for each
outlier in DRG 241. Care for all DRG 240 outliers
would have produced about $200,000 per year in
losses, while losses for DRG 241 would have been
about $1 10,000 per year. Combining inliers and outliers, the hospital would have lost $116 per patient in
DRG 240 and netted $1,133 per patient in DRG 241.
The coefficients of variation of mean inlier cost
were 72% for DRG 240 and 80% for DRG 241. These
were not substantially altered by the use of charge data
DRG-BASED REIMBURSEMENT
849
Table 3. Charges and costs, diagnosis-related groups (DRGs) 240
and 24 1 *
DRG
240
~
No. of patients (2-year period)
Actual charges
Mean
SD
Estimated costs
Mean
SD
Estimated DRG reimbursement
Total annual net revenue
*
**
DRG
24 1
m
~
3 24
374
$5,894
$4,682
$4,062
$3,063
$4,450
$3,202
$5,576
$182,412
$3,174
$2,540
$4,968
$335,478
15-
a
8 10w
1984 dollar estimates, outliers excluded.
5-
(79% and 75%). Figure 1 shows the CoVs of charge
data for all DRGs. As can be seen, DRGs 240 and 241
are average among the DRGs in the amount of residual
heterogeneity they contain. Including outliers increases the CoVs of charges for DRGs 240 and 241 to
144%and 159%, respectively. Coefficients of variation
for length of stay were 58% and 74%,respectively, and
with outliers included they increased to 173% and
109%, respectively.
The mean total costs for the ICD9 groupings
within each DRG are presented in Table 5 . The use of
ICD9 groupings did not further partition LOS variation
in either DRG, nor charge variation in DRG 241, but
did reduce charge variation in DRG 240 (F[7, 3161 =
3.24; P < 0.01). In neither DRG was there a significant
difference in total charge per patient or LOS per
patient for those with RA versus those with SLE, 2
diagnoses which together comprised about 80% of
each DRG's volume. If outliers were included, heterogeneity in charges in DRG 241, but not DRG 240, was
significantly reduced (F[7, 3801 = 5.44; P < O.oOl),
suggesting that outliers may have more impact on
some ICD9 groups than on others.
While the total costs per patient in DRG 241 did
not differ between patients with RA and those with
SLE, the relative contributions of various hospital
Table 4. Outlier costs, diagnosis-related groups (DRGs) 240 and
241 *
Table 5. Mean cost and length of stay (LOS; days) for diagnostic
groupings, diagnosis-related groups (DRGs) 240 and 241 *
DRG 240
~
~~
No. of patients
(2-year period)
Mean length of stay
(days)
Mean cost
Mean DRG
reimbursementt
Total cost
Total DRG
reimbursementt
Total annual net loss
~~
L
0
G9Eff/C/ENTW c/AR/A?7ON(%)
Figure 1. Coefficients of variation of mean charges for diagnosisrelated groups (DRGs) with more than 50 patients per year. * =
DRG 240; ** = DRG 241.
DRG 241
DRG 240
DRG 241
~
22
80.3
$343 15
14
48.9
$23,622
$16,100
$759,331 (34.5%)$
$7,100
$330,701 (21.8%)$
$354,200
$202,565
$99,400
$115,650
cost
cost
Diagnosis t
n
LOS
($)
n
LOS
($)
RA
SLE
JRA
Scleroderma
DM/PM
Arteritis
Asandvariants
Miscellaneous
227
39
3
10
3
12
14
16
10.48
9.08
10.33
10.30
10.33
12.92
8.86
8.88
3,969
4,437
3,744
4,563
4,276
7,440
3,163
5,190
267
29
29
3
4
8
27
7
1.93
1.10
9.00
11.67
5.50
5.15
7.93
7.14
2,951
2,741
3,632
4,885
2,147
2,471
2,786
3,932
* 1984 dollar estimates.
t Estimated (see Patients and Methods).
* Outliers excluded.
t RA = rheumatoid arthritis; SLE = systemic lupus erythematosus;
$ Number in parentheses represents outliers' share of total cost of
inliers and outliers combined.
JRA = juvenile rheumatoid arthritis; D M P M = dermatomyositis/
polymyositis; AS = ankylosing spondylitis.
HARTLEY ET AL
850
services did (Tables 6 and 7). Diagnostic services
contributed less for RA patients, and the types of
therapeutic interventions for RA and SLE varied
substantially. Results for DRG 240 were similar,
though they did reflect the greater use of technologyintensive care that would be expected for these more
seriously ill patients.
DISCUSSION
Institution of the DRG system of hospital reimbursement is the most profound change in health
care financing since the introduction of Medicare and
Medicaid. This study presents the experience of one
teaching hospital over a 2-year period. Because our
analysis is based upon a large number of patients, we
believe it provides a realistic estimate of the impact of
DRG-based reimbursement on rheumatic disease care
in a teaching hospital.
In examining the implications of the use of
DRGs for reimbursement, several methodologic points
should be noted. First, hospital costs and charges are
clearly different, though this distinction is not always
made. Because conclusions may be misleading if
based upon examination of charges alone (8), our
analyses have used cost information whenever possible.
Second, Medicare’s DRG system clearly defines cost and length of stay outliers and excludes
them from routine reimbursement. Failure to distinguish outliers would prejudice against DRGs: comparison of the coefficients of variation before and after
exclusion of LOS outliers clearly demonstrates that
they account for much of the variation in these DRGs.
The fiscal impact of outliers also must not be ignored
since they incur a large proportion of costs.
Third, heterogeneity within a DRG may be due
to error in diagnostic coding, for which the DRG
Percentage of total costs for rheumatoid arthritis (RA) and
systemic lupus erythematosus (SLE) inpatients by type of service,
diagnosis-related groups (DRGs) 240 and 241*
Table 6.
DRG 240
Routine services
Diagnostic and
laboratory tests
Therapeutic procedures
and intensive care
Other services
* Outliers excluded.
DRG 241
RA
SLE
RA
SLE
62.1
45.5
63 .O
60.5
18.2
27.7
16.0
21.1
17.5
2.2
24.4
2.4
19.0
2.0
13.4
5.0
Table 7. Percentage of total costs of therapeutic services for
rheumatoid arthritis (RA) and systemic lupus erythematosus (SLE)
patients by type of service, diagnosis-related groups (DRGs) 240 and
241*
DRG 240
Pharmacy
Occupational and physical
therapy and plaster service
Blood bank
Anesthesia, operating room,
and recovery room
Intensive care
Other services
DRG 241
RA
SLE
RA
SLE
17.1
32.6
10.6
48.1
72.4
2.1
10.9
11.5
84.0
2.2
13.2
22.0
2.5
4.6
1.3
0.0
38.3
6.7
2.7
0.0
0.5
0.0
15.0
1.7
* Outliers excluded.
system cannot be held responsible. The accuracy of
routine diagnostic coding of hospital discharge abstracts, upon which DRG assignment depends, is
demonstrably poor (9,lO). One study has suggested
that such error would significantly reduce hospital
reimbursement (10). Others believe that the error is
probably random, with gains and losses offsetting one
another (1). Whatever the case, such error will certainly contribute to the variation found within a DRG.
Further work should be directed to quantifying this
contribution. Coding accuracy will no doubt improve
now that reimbursement is closely tied to the discharge abstract, and this may partly reduce the heterogeneity we have observed.
Several additional points merit comment. We
have included all adult patients, although DRGs, except in New Jersey, are currently used only for
reimbursement of costs for Medicare patients (1 1).
Inclusion of younger, and possibly healthier, patients
might result in a lower average cost per patient, but
this would probably be matched by a reduction in
DRG reimbursement. Second, we present the experience of one institution. While our observations are
based upon a large number of patients, the extent to
which they pertain to other institutions remains to be
determined. Third, our hospital is in a state that is
under waiver from DRG reimbursement, but we believe this does not distort our analysis. Massachusetts
has its own prospective reimbursement system that,
like the Medicare DRG system, is designed to reduce
inpatient costs (12). It took effect October 1, 1982, the
start of our hospital’s 1983 fiscal year, while Medicare’s DRG system did not begin until 1 year later.
Comparison of basic data (e.g., volume, number of
outliers, and coefficients of variation of DRG charges)
from fiscal years 1982 and 1983 did not demonstrate
DRG-BASED REIMBURSEMENT
substantial changes, coincident with the initiation of
the Massachusetts law, that would particularly distort
our analysis.
Any diagnostic grouping scheme will produce
groups that have residual variation in cost within
them. The variation becomes important if it is correlated with identifiable patient characteristics. Such variation may allow identification of patients whose cost of
care is substantially different than the DRG reimbursement, thereby creating incentives to admit healthier
patients to generate revenues or refer more severely ill
ones to avoid losses (13,14). Finally, such variation
will tend to cause inadequate reimbursement to be
given to those hospitals-mainly referral centers and
teaching hospitals-that more frequently treat patients
who are indigent or severely ill (13,14). This last point
has been recognized and the higher costs of these
institutions are currently offset by the special allowance for medical education, but the future of this
allowance remains uncertain (1,14). If this adjustment
ceased, our hospital would lose a small sum for each
inlier patient in DRG 240 while retaining a marginal
profit on inliers in DRG 241; it would lose money on
both DRGs when outliers are included.
Contrary to prevailing judgment and our own
initial impression, rheumatic diseases appear to be
about as well-classified by the DRG system as other
diseases (15,16). DRGs 240 and 241 clearly identify 2
patient groups that are different in their resource use.
Nonetheless, substantial residual variation does remain within them. While the contribution of coding
error needs further evaluation, much of the residual
heterogeneity within DRGs 240 and 241 is probably
due to variation among patients in the severity of their
conditions. The Medicare DRG system acknowledges
this point by using LOS or total charges, surrogate
measures for severity, as a method of identifying a
more severely ill subgroup, the outliers, for separate
reimbursement. The results of the grouping by ICD9
diagnosis suggest that this variation in severity within
these DRGs is largely independent of the particular
rheumatologic diagnosis. Such grouping reduced
charge variation for inliers only in DRG 240, and even
then, there remained coefficients of variation within
the ICD9 groups that were reduced little, if any, from
that of the DRG as a whole. Total charges for RA and
SLE patients, who constitute about 80% of the patients in DRGs 240 and 241, were not different.
Several methods of adjusting for severity of
illness are under development, some of which could be
used with DRGs and perhaps lessen the need to handle
85 1
outliers separately (17-21). Though outliers constitute
a small proportion of patient volume, their treatment
comprises a large proportion of total patient costs. The
Medicare DRG system appears to cover their costs
inadequately, and because outliers are more severely
ill patients, this shortfall in coverage may disproportionately affect referral and teaching hospitals, where
such patients are most frequently treated. The development and implementation of severity of illness systems will be an important step toward more accurate
reimbursement.
Though aggregate costs and lengths of stay are
not different for SLE and RA patients, the kinds of
services they use do vary, which suggests possible
managerial strategies. One method of adapting to
increasingly stringent reimbursement would be to tailor the hospital setting and overhead more closely to
type of care required. Compared with that of SLE
patients, care for RA patients is less technologyintensive. Room charges reflect overhead, including
nursing costs, and constitute about 60% of the total
costs for patients in DRGs 240 and 241. The cost of
inpatient care for many RA patients might be substantially reduced if care could be given in less technologyintensive settings with lower overhead and personnel
costs.
DRG-based reimbursement is still in its infancy
and needs time for further refinement, Such improvement is unlikely to occur as a result of inspection or in
response to interest groups without data. Hospital
administrators must develop detailed information
about costs and case mix in order to argue for further
refinements, while physicians need to relate costs to
outcomes in order to maintain standards of quality,
access, and equity of rheumatologic care.
ACKNOWLEDGMENTS
We are particularly indebted to Miriam Markowitz
and Nancy Salvaggio of the Office of Management Systems,
and Emme Deland and Anne Williams-Ashman of the Center
for Cost-Effective Care, Brigham and Women’s Hospital, for
provision of hospital cost data. We are also indebted to Dr.
Anthony L. Komaroff for his assistance and Holly Fossel
and Joanne LaCreta for their excellent help in data analysis
and manuscript preparation.
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