Design of a prospective payment patient classification system for ambulatory care - Medicare and Medicaid Managed Care: Issues and Evidence

Health Care Financing Review, Fall, 1993 by Richard F. Averill, Norbert I. Goldfield, Mark E. Wynn, Thomas E. McGuire, Roert L. Mullin, Laurence W. Gregg, Judith A. Bender

INTRODUCTION

In the early 1980s, the Federal Government enacted into law several major initiatives to control the rapidly rising cost of health services. The implementation of the Medicare inpatient PPS utilizing diagnosis-related groups (DRGs) represents one of these major efforts. Numerous researchers have documented that the Medicare inpatient PPS has reduced Medicare hospital inpatient expenditures while having no measurable impact on the quality of care delivered (Russell, 1989; Coulam and Gaumer, 1991; Kahn et al., 1990). Although inpatient length of stay has declined, outpatient utilization has grown rapidly because of technological advances that make outpatient care possible for many of those who were previously seen solely as inpatients and because of the preferences of both patients and physicians for the convenience of ambulatory care. As a consequence, total payments for hospital-based outpatient care have rapidly risen. In 1980, Medicare disbursements to hospital outpatient departments were 1.8 billion dollars and represented 5.3 percent of Medicare expenditures (Health Care Financing Administration, 1990a). From 1986 to 1989, Medicare disbursements to hospital outpatient departments increased annually by an average of 17 percent. As a result, in 1989, Medicare disbursements to hospital outpatient departments had increased to 7.3 billion dollars and comprised 7.6 percent of all Medicare disbursements (Health Care Financing Administration, 1990b). In addition to this growth in hospital outpatient department utilization, there has also been dramatic growth in the use of freestanding ambulatory surgery and radiology facilities throughout the United States (Helbing, Latta, and Keene, 1987; Latta, 1987; Prospective Payment Assessment Commission, 1989).

With this in mind, Congress, in the Omnibus Budget Reconciliation Act (OBRA) of 1986 (Public Law 99-509), directed the U.S. Department of Health and Human Services to develop a PPS for the facility cost of hospital-based outpatient care. OBRA 1986 called for the design and modeling of a PPS for all hospital outpatient services (e.g., same-day surgery units, emergency rooms, outpatient clinics, etc.). The facility cost refers to the hospital cost for providing care (e.g., room charges, medical and surgical supplies, etc.), and excludes the physician's professional service.

PATIENT CLASSIFICATION SYSTEM CHARACTERISTICS

Fundamental to the design of any PPS for ambulatory care is the selection of the basic unit of payment. The Medicare inpatient PPS uses the hospital admission as the basic unit of payment. The basic unit for ambulatory care is the visit, which represents a contact between the patient and a health care professional. The visit could be for a procedure, a medical evaluation, or an ancillary service such as a chest X-ray. For each type of visit, a prospective price could be established that includes all routine services (e.g., blood tests, chest X-rays, etc.) associated with the visit. If the cost of the routine services rendered during a visit were included in the payment for the visit, hospitals would have the financial incentive to control the amount of services rendered.

An ambulatory patient classification system serves the same function as DRGs in the inpatient PPS. The patient classification system provides the basic product definition for the ambulatory setting and will have important secondary effects. For example, DRGs have brought about fundamental changes in management, communications, cost accounting, and planning within hospitals. These changes have resulted in improved efficiency in the delivery of inpatient care. The benefits to hospital management that resulted from the adoption of DRGs would also be expected to occur in the ambulatory setting. Thus, the selection of an appropriate patient classification system is critical to the success of an ambulatory PPS and the achievement of the associated secondary benefits. An ambulatory patient classification system should have the following characteristics.

Comprehensiveness

The patient classification system must be able to describe every type of patient seen in an ambulatory setting. This includes medical patients, patients undergoing a procedure, and patients who receive ancillary services only.

Administrative Simplicity

The patient classification system should be administratively straightforward to implement. The number of patient classes should be kept to a reasonable number. A patient classification system containing relatively few patient classes (e.g., fewer than the number of DRGs) will be more easily understood by providers and will ease the administrative burden on both facilities and payers. In addition, the data used to define the patient classes should be compatible with existing billing, data collection, coding, storage, and processing practices. Such compatibility will decrease implementation costs, data errors, and other administrative problems.

Homogeneous Resource Use

The amount and type of resources (e.g., operating room time, medical surgical supplies, etc.) used to treat patients in each patient class should be homogeneous. If resources used vary widely within a patient class, it would be difficult to develop equitable payment rates. If a facility treated a disproportionate share of either the expensive or inexpensive cases within a patient class, then the aggregate payments to that facility might not be appropriate. Further, the facility might be encouraged to treat only the less costly patients within the patient class, causing a potential access problem for the complex cases. Thus, a homogeneous pattern of resource use is a critical characteristic of any patient classification system used in PPS.