Prospective payment for Medicare inpatient psychiatric care: assessing the alternatives

Health Care Financing Review, Fall, 2004 by Philip G. Cotterill, Frederick G. Thomas

INTRODUCTION

When the Medicare inpatient hospital prospective payment system (PPS) was implemented in 1983, psychiatric care provided in specialty psychiatric hospitals and certified psychiatric units (CPUs) of general hospitals was exempted because of concerns that the diagnosis-related groups (DRGs) were not adequate for psychiatric cases. The research subsequently undertaken did not support per case (per discharge) prospective payment because it failed to develop a patient classification system sufficiently successful in explaining variation in the cost of psychiatric cases. Twenty years later, Medicare still pays for psychiatric care in the DRG-exempt facilities under the largely cost-based system created in the 1982 Tax Equity and Fiscal Responsibility Act (TEFRA).

A recent article by Lave (2000) cites 2 key reasons for the limited success of the research that has attempted to identify patient characteristics that explain psychiatric cost differences. First, most systems have relied on diagnosis as the primary classification variable because it is available in administrative data, and diagnosis has less to do with the cost of psychiatric care than factors unavailable in administrative data. Second, it is difficult to measure treatment costs of individual patients because routine cost (largely nursing and other common services furnished on a hospital unit) is a large proportion of total psychiatric costs. Under Medicare cost reporting conventions, all patients within the same facility are assigned the same routine per day cost. As a result, patient characteristics will only explain cost variation to the extent that facilities with different cost levels treat different proportions of patients with identifiable characteristics, such as age and sex.

Although difficulties have been encountered in developing an inpatient psychiatric PPS based on patient characteristics, there are valid reasons for emphasizing patient characteristics. A basic principle of Medicare prospective payment has been that payment incentives should not influence the setting in which care is provided. Hence patient, rather than facility, cost differences should be the basis for differentiating payments. Paying higher rates to CPUs within general hospitals, whose costs are generally higher than those of freestanding psychiatric hospitals, would violate this principle. Other facility characteristics are inappropriate payment variables because they would inhibit incentives for efficient care delivery. For example, adjusting per diem payments for differences in the occupancy rate would mean paying higher rates to facilities with lower occupancy.

As early as 1986, it was proposed to deal with the limitations of per case PPS by paying prospectively determined per diem rates (rather than per case rates) that decline across blocks of higher lengths of stay (LOS) (Frank and Lave, 1986). The most recent mandate to develop a PPS for inpatient psychiatric care in the 1999 Balanced Budget Refinement Act (BBRA) effectively acknowledges the lack of success of the prior research efforts to develop a per case system and adopt a per diem approach. In principle, it should be easier to account for case level variation in resource use with a per diem system. Whereas a per case system must account for differences in both LOS and per diem resource intensity, a per diem system automatically adjusts for differences in LOS and only needs to account for variation in per diem resource intensity.

Renewed research on payment for inpatient psychiatric care is particularly timely for several reasons. Most evident is the need to develop a per diem system to respond to the BBRA mandate. However, it is also useful to re-examine the feasibility of a per case system, because many changes have occurred in the delivery of this care because most of the research on per case systems was conducted in the 1980s. The introduction of new medications, which dramatically expanded the use of medications, have facilitated community placement for persons with serious and persistent mental illness. LOS in inpatient psychiatric care has declined substantially in all types of psychiatric facilities. During the 1990s, managed care accelerated these trends resulting in the closure of many psychiatric hospitals. Managed care directly affected patients covered by private insurance and Medicaid. Managed care's impact on Medicare beneficiaries occurred primarily by inducing changes in practice patterns.

The BBRA mandate was the stimulus for three recent studies: CMS contracted with RTI International, to develop measures of patient-specific per diem cost that improve on previously available cost measures using a patient sample from 40 psychiatric facilities (Cromwell et al., 2003). RTI also collected individual patient characteristics information beyond what is available in current administrative records. Under a second study funded by CMS, Fries developed a survey instrument that CMS could use to collect supplemental patient data (Federal Register, 2003). The American Psychiatric Association engaged The Health Economics and Outcomes Research Institute (THEORI) of the Greater New York Hospital Association to test the feasibility of using available administrative information to develop a per diem payment system (Heller and Vaz, 2001).