Use of diagnosis-related groups by non-Medicare payers - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Grace M. Carter, Peter D. Jacobson, Gerald F. Kominski, Mark J. Perry

INTRODUCTION

A variety of Medicaid programs and other third-party payers use DRGs to pay for hospital care. These payment systems are derived from Medicare's PPS, even though they differ from it in various ways. We have studied non-medicare payers who use DRG systems to learn about the extent to which PPS payment rules, regulatory procedures, and data sources have been modified to accommodate the needs of other payers. Non-Medicare payers who use DRGs have told us about the issues that they needed to address before using such a system in their environments and about how DRGs relate to their goals, constraints, and opportunities.

Prospective payment for hospitals has become much more common over the last decade. DRGs are just one of the ways that output can be measured within a PPS. Our study shows that different types of payers use DRGs in quite different ways within their PPSs. Government payers, namely Medicaid programs and CHAMPUS, have developed systems like Medicare's in that explicit rules are used to calculate payments. This causes all similar hospitals to be treated similarly. For payers that use a formula, we present detailed information about how the elements in the formula are calculated. Important elements of such systems, such as cost-based rate calculations and outlier payments, could also be used with non-DRG prospective payment systems.

Some private payers negotiate with hospitals about what the payment rate for each DRG will be. These payment systems are, of course, still DRG-based prospective payment systems. Calculation of the amount paid for a case by these private payers requires substantial details which are proprietary and which, we believe, are not of general interest. What appears to us to be of general interest is the extent of negotiation and the negotiating procedures rather than the detail of the individual rates, and, therefore, this is what we present. Many elements of the negotiating strategy could also be used with non-DRG prospective payment systems, and the reader may find some of this information useful in other contexts.

METHODOLOGY

The purpose of this study is to provide information that could be used in developing an optional hospital payment system based on Medicare's hospital payment methodology and to evaluate the viability of a PPS-like system for third-party payers. We will describe various existing non-Medicare DRG systems and evaluate aspects of these programs that are relevant to judgments of the viability of DRG systems and to design decisions concerning PPS-like payment systems for non-Medicare populations.

Our approach to this project was to obtain payment system information for each of the following categories of payers: State Medicaid programs, workers' compensation programs, Blue Cross/Blue Shield plans, managed-care organizations, commercial insurers, self-insured employers, and other Federal Government organizations. In several categories, we enlisted the help of agencies that are very familiar with the environment of each payer category and that are well respected by the payer community.

Medicaid

Data on State Medicaid and workers' compensation programs were gathered by the Intergovernmental Health Policy Project (IHPP). The States that use DRGs for their programs were identified through HCFA's State Profile Data System, using data for plans defined as of March 1992. This file identified 21 States that paid for hospital care using DRGs as a unit of payment. During May 1993, current hospital payment regulations and all other available documentation were requested from each of these 21 States. This documentation was used to determine how each of the payment elements discussed for the Medicare program are designed in each State. Telephone inquiries were made to clarify points of fact, as necessary. To further ensure accuracy, the State summaries were sent to each State for review. We received information on the programs of all 21 States that use DRGs.

Workers' Compensation

Our subcontractor, IHPP, determined that DRGs were currently used by workers' compensation funds in only three States. The details of these uses of DRGs were obtained primarily through abstraction of State regulations but also by using telephone followups, as required.

Blue Cross/Blue Shield Plans

Blue Cross/Blue Shield plans represent a major portion of the market covered by private insurers, accounting for over $50 billion in health insurance claims in 1989 (Prospective Payment Assessment Commission [ProPAC], March 1992). The BCBSA surveys member plans and affiliates annually. The survey contains a substantial amount of detail about hospital payment systems, including whether DRGs are used. BCBSA agreed to work with us to expand their survey with a special supplement for DRG users which would provide the additional detail required for this study.

BCBSA has 69 member plans, of which 65 sell hospital insurance in the United States. Each plan may sell a variety of insurance products such as a traditional indemnity plan (sometimes known as comprehensive major medical plan) and managed-care products including preferred provider organizations (PPOs), health maintenance organizations (HMOs), and point-of-service (POS) plans. Many plans also have one or more independent HMOs affiliated with them. There are 160 such affiliated HMOs. BCBSA received responses to its main survey from 55 member plans (80 percent) and an additional 15 affiliated HMOs. We received useful responses to the supplemental survey from 36 plans and 7 affiliated HMOs. Only one plan and one affiliated HMO indicated DRG use in the main survey and did not respond to the supplemental survey. Thus 67 percent (37 of 55) of the responding BCBSA member plans use DRGs for at least one of their insurance products. Although the low overall response rate for HMO affiliates makes inference to the population unreliable, about one-half (8 of 15) of the responding HMO affiliates also use DRGs.