How recalibration method, pricing, and coding affect DRG weights - diagnosis-related group

Health Care Financing Review, Winter, 1992 by Grace M. Carter, Jeannette A. Rogowski

Another important criterion for comparing DRG weights is the extent to which the DRG weights improve the hospital-level correlation between payments and costs. This is not the same as the correlation between average cost per case and the CMI for two reasons: (1) outlier payments increase payment to specific DRGs over and above their share of DRG weight; and (2) the correlation between average cost per case and the CMI is usually measured via a regression of cost on CMI while controlling for teaching, disproportionate share, and input prices, and the value of these coefficients may differ from the amounts used for payment. For example, Congress currently mandates that teaching hospitals be paid for indirect medical education costs at a rate that exceeds estimates of these costs.

An additional criterion for comparing DRG weights is insensitivity to upcoding by a group of hospitals. Upcoding increases the national CMI and therefore increases payments to hospitals; upcoding by a subset of hospitals would introduce inequities in the payment rates. Yet another criterion is stability over time, which should allow hospitals additional information for planning, specialization, and/or investment decisions. The HSRV weights are not affected by changes in payment factors and thus perhaps may be more stable.

Previous research

The HSRV method was developed by Vertrees and Pettengill and is described in Lave et al. (1981). This method of calibration differs significantly from the method currently in use because it relies on each hospital's own charges to adjust for the hospital's relative costliness rather than relying on predetermined hospital characteristics. We will describe the method in more detail in the Methods section.

Rogowski and Byrne (1990) compared HSRV and standard charge-based weights on FY 1984 data. This study showed that the two sets of weights were quite similar at a DRG level: For 89.7 percent of DRGs and 95.2 percent of cases, the two types of weights differed by no more than 5 percent. The congruence of the methodology was substantially less at the hospital level. In 1984, a shift from standard charge-based weights to HSRV weights would have changed the CMI more than 2 percent for approximately one-half of all hospitals. These hospitals accounted for 30 percent of cases.

Longitudinal comparisons between weighting methodologies have focused on differences over time between cost and charge weights. Cost-based weights account for differences across hospitals and across departments in the same hospital in average markup of charges over costs. They do not account for differences among hospitals in costs or differences in the markup of individual services within the same department. Carter and Farley (1992) showed that the differences between cost and charge weights increased only slightly from 1985 to 1987. However, the study indicated that the degree of divergence was sensitive to details of the methods used to calculate each set of weights, and especially to the rules used to eliminate statistical outliers. The growth in the national CMI was somewhat higher from 1985 to 1987 because charge weights were used rather than cost weights. Thus, overall expenditures for Medicare rose slightly faster from the use of charge weights than they would have if cost weights had been used.