Medicare inpatient physician charges: an ecometric analysis - Hospital Payment: Beyond the Prospective Payment System

Health Care Financing Review, Winter, 1993 by Mark E. Miller, W. Pete Welch

The analyses presented above suggest that any medical-staff policy (whether based on payment levels or growth rates) would have to use case-mix adjustment. In addition to the obvious PPS precedent, we find that case mix is the single most important determinant of physician-service variations. It is encouraging to find that using DRGs as the basis of the case-mix measure produces a coefficient close to 1.00, suggesting that it is a reasonable measure of case mix.

The standardized regression results indicate that, in addition to case mix, bed size, teaching activity, and urban or rural location are the most important determinants of physician services. Obviously, bed size would not serve as a direct adjustor but should probably be included as a control variable in any regression analysis undertaken to establish official payment-adjustor levels for other factors. Although an important determinant, one reason not to make an urban or rural adjustment is that PPS has moved away from the urban or rural distinction. Finally, the teaching coefficient is an important determinant, and there is a clear PPS precedent for making such an adjustment. The difficult policy issue here is the direction of the adjustment: Unless GME costs are counted as physician costs, the adjustment is negative for major teaching staffs.

The findings for the medical-staff variables are also noteworthy. Staffs that involve more physicians in the admission or are more specialized have higher physician volume and intensity per admission. This suggests that the size and specialization of the staff present opportunities to obtain greater efficiency. We would also take the medical-staff variable results as an additional indication that using the medical staff as a risk pool is a reasonable approach.

We wish to close with a caveat and some considerations for future research. The caveat derives from Medicare's reform of physician payment. Whereas in the past Medicare payments to physicians were based on reasonable charges, Medicare now uses a fee schedule incorporating relative value units (RVUs). The fee schedule increases payment for evaluation and management services relative to procedural services, which would increase the relative weights for medical DRGs and decrease them for surgical DRGs. Plausibly, using deflated charges still reflects those historical distortions. Thus, the regressions estimated above should be re-estimated, using RVUs as the basis of the case-mix index and as the dependent variable. Such re-estimation could have important implications for our findings, particularly with respect to the hospital-type adjustors.

Whereas our analysis has pertained to mean service volume and intensity by hospital type, also of relevance is the amount of variance within a hospital type. For instance, the higher the variance, the greater the impact of a single payment rate for all hospitals within a category. As noted in the introduction, mean services are best analyzed with a national sample of beneficiaries--in effect, a 100-percent sample of hospitals. However, because the 5-percent sample overestimates the variance, variance is best analyzed with a 100-percent sample of admissions in certain States (Mitchell and Ellis, 1992).