Prospective payment for Medicare inpatient psychiatric care: assessing the alternatives

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

We evaluated the payment systems using two sets of measures. First, we regressed per case costs on per case payments to determine the degree of correspondence between per case payments and costs. Comparing Model 1 to Model 2 indicates the improvement associated with automatically adjusting for LOS differences (Frank and Lave, 1986). Comparing Model 2 to Model 3 shows the additional refinement associated with the addition of generally accepted payment variables to the per diem system. This comparison provides a measure of the benefits of a per diem system that can be achieved with currently available data. Finally, Models 3, 3a, and 4 tell us the relative improvements in matching payments and costs attributable to outlier payments, compared with the addition of generally unacceptable facility type payment variables such as size and occupancy. This comparison provides a barometer of the prognosis for future payoffs from attempts to further refine a per diem system.

As a second evaluation tool, we present payment to cost ratios for various groups of facilities under the different payment systems. This analysis complements the regression results by showing the types of facilities that face different degrees of correspondence between their payments and costs under the alternative systems.

Cost Data

We computed per case and per diem costs for each Medicare inpatient psychiatric admission, inclusive of routine operating, ancillary, and capital components using information from a 20-percent sample of 1999 MedPAR claims and matching 1999 Medicare cost reports. The method used is a standard accepted method commonly used to construct a Medicare cost per discharge for inpatient acute care (Newhouse, Cretin, and Witsberger, 1989). For each MedPAR inpatient psychiatric stay, routine costs were estimated by multiplying routine cost per day from the facility's Medicare cost report by the number of Medicare covered days on the MedPAR stay record. Ancillary costs were estimated by multiplying each departmental cost to charge ratio by the corresponding ancillary charges on the MedPAR stay record. Total cost per case was calculated by summing routine and ancillary costs for the stay. Total cost per day was calculated by dividing the total cost per case by the number of Medicare covered days in the stay. As noted earlier, the data are potentially limited for the purpose of determining the extent to which differences in patient characteristics influence per diem cost of inpatient psychiatric care.

The limitation results from Medicare cost accounting practice, under which routine per diem costs do not vary among patients within a facility. (1) That is, a patient requiring intensive staff attention is assigned the same routine cost as a patient requiring little staff attention. Although this limitation applies to routine costs for all types of Medicare inpatient care, it assumes heightened importance for psychiatric care because routine costs represent approximately 90 percent of total costs. As a result, our cost measure may fail to capture a major source of variation in routine cost attributable to differences in patient characteristics.