Prospective payment for Medicare inpatient psychiatric care: assessing the alternatives

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

This limitation does not apply to ancillary costs because they can be measured at the patient level using Medicare claims as reported in MedPAR. However, there are differences in charging practices between freestanding psychiatric hospitals and CPUs that affect our measurement of ancillary costs. For example, there are approximately 169 hospitals in our data that do not bill separately for ancillary charges; the majority of these all-inclusive rate providers are State psychiatric hospitals. Also, emergency room (ER) charges for a patient admitted to a CPU via the ER of a general hospital appear on the claim filed for the psychiatric unit. However, inpatient claims from a freestanding psychiatric hospital would contain no ER charges because these hospitals do not generally operate ERs.

COST REGRESSIONS

Cost regressions were run using a 20-percent sample of approximately 90,000 discharges from inpatient psychiatric facilities in 1999. Our dependent variables were the natural logarithms of per case and per diem costs. The cost variables were transformed to logarithms to correct for the right skewness of the cost distributions. This section gives a brief summary of the independent variables that were included in the regressions from which our hypothetical payment systems were constructed. As noted previously, our analysis is limited to variables available in Medicare administrative data. The complete regression results can be found in Table 2.

Patient Characteristics

Age is an important variable in both the per case and per diem regressions. Age was treated as a dichotomous variable--split at age 65, which primarily separates Medicare's disabled and elderly populations. Mental illness is the qualifying disabling condition for a large proportion of disabled Medicare beneficiaries treated in psychiatric facilities. There are differences in the distribution of principal diagnoses between these two groups. For example, dementia is more common among the elderly, whereas schizophrenia and alcohol/drug abuse are more common among the disabled. There are also differences in the types of facilities used. The elderly are more frequently treated in CPUs, possibly because they are more likely to have both medical and psychiatric conditions. The fact that the age coefficient is approximately three times greater in the per case than in the per diem regression clearly implies that age is an important factor in explaining LOS differences, as well as daily intensity differences.

A large number of diagnosis and comorbidity variables were included in the cost regressions. The principal diagnosis code listed on the claim was used to assign each case to 1 of 15 mental health DRGs. The largest positive payment adjustment is for DRG 424 (Surgical Procedure with Principal Diagnosis of Mental Illness) whose cases would be paid approximately 70 percent more than DRG 430 on a per case basis and 21 percent more than DRG 430 on a per day basis. (2) In general, the DRG regression coefficients tend to be larger in absolute value in the per case than in the per diem regressions. Most commonly, they identify DRGs with a shorter LOS than DRG 430.