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

Medicaid agencies in Utah, New York, South Carolina, and Washington also use mixed systems. Utah pays hospitals rates which are either hospital-specific or the same for all hospitals, using hospital-specific rates for particular DRGs with highly variable charges and/or high average charges and the single statewide rate for the remaining DRGs.

New York uses a rate which is a formula adjustment of peer group average operating costs to which a hospital-specific component is added. Because New York has an "all-payer-except-medicare system," the same system is used by BCBSA members and other insurers in the State.(9) In calculating non-Medicare average cost per admission in each peer group, New York subtracts subacute services furnished in the hospital setting (alternate level of care [ALC] costs), outlier costs, and transfer costs, and then standardizes for utility costs, a hospital-specific wage index, and the case-mix index. The peer group component of the payment rate is the group average standardized cost per admission times the hospital's wage index, power (utility) index, and indirect medical education cost factor (currently identical to Medicare's formula). To this peer group component is added a hospital-specific rate to cover operating costs associated with malpractice insurance, ambulance services, organ acquisition, schools of radiology, nursing, and/or laboratory technology.

South Carolina uses a hybrid PPS in which all cases are classified by DRG, but some DRGs are paid on a per diem basis and others on a per case basis. DRG categories that are frequent, relatively homogeneous, and considered by clinical experts not to be of a highly specialized nature are paid by DRG and the per diem method is used for the remaining DRGs.

Washington uses two kinds of DRG rates. Hospitals participating through a selective contract are paid a rate based on the price that the hospital bid. Hospitals outside of the contract areas, as well as non-contract hospitals within the contract areas that provide emergency hospitalizations, are paid using a hospital-specific, cost-based rate. The hospital-specific rates are capped, with different ceilings being used for non-teaching hospitals, teaching hospitals, and specialty hospitals.

Updating the Rates

In Table 6, information is presented on how States update inpatient hospital payments under PPS between rate rebasings. Six States indicate that they use the Medicare (i.e., Data Resources,. Inc./ McGraw-Hill [DRI]) market basket as an inflation adjustment in updating payments, 3 use Medicare update rates for either PPS or Tax Equity and Fiscal Responsibility Act-covered hospitals, while 10 others report the use of other inflation factors. This includes Minnesota where the elements of the DRI market basket are weighted using Minnesota data to produce a Minnesota-specific inflation rate.

[TABULAR DATA 6 OMITTED]

Cost Elements Included in Rates

Some plans follow the original Medicare practice of providing payments for some kinds of costs on a non-DRG basis and include different cost elements in their PPS rates. As shown in the first three rows of Table 7, Medicaid plans are much more likely than BCBSA members to provide separate payments for capital costs, teaching costs, and disproportionate share costs. However, most of the BCBSA plans include payments for these items within the DRG rate.