Should insurers pay the same fees under an all-payer system? - Medicare Payment Systems: Moving Toward the Future

Health Care Financing Review, Winter, 1994 by Gerald F. Kominski, Thomas Rice

Should Insurers Pay the Same Rate?

To ensure equity among patients of all payers, and to reduce the potential for cost shifting, all-payer rates should be calculated to reflect the estimated costs per case as closely as possible. There is still debate over the policy implications of cost shifting (Ginsburg and Thorpe, 1992), but we assume that cost shifting can occur, and that it distorts the supply of services to patients whose costs are high relative to the fees paid by their insurers. Hence, a single set of payment rates should be applied to all insurers only if the underlying costs of treatment are the same across payers.

Using economic theory, we assume that providers attempt to maximize a utility function that includes a profit margin,

[Mathematical Expression Omitted] where i = the service (i.e., current procedural terminology [CPT] code or DRG). j = the insurer. n = the volume of the service. F = the payment or fee for the service. C = the cost of the service.

One implication of such a model, as shown by McGuire and Pauly (1991) with regard to physicians, is that distortions across payers can occur depending on the relative margins and market shares of different insurers. Presumably these volume responses could be avoided if all providers were paid the same fee, i.e., if a single [F.sub.ij] could be used for all payers. Clearly, this will only be justified if [C.sub.ij] is (relatively) similar across all payers. If, in contrast, some payers tend to have higher costs than others, then all-payer rates should be adjusted to reflect this (i.e., the payers with more costly patients should be given a higher [F.sub.ij]).

For hospital inpatient services, cost differences across insurers could result in two payment options: payer-specific DRG-relative weights or payer-specific base payment amounts. Separate relative weights are warranted if the cost differences between payers vary considerably by DRG. Separate payment amounts--used with a single set of relative weights for all payers--are appropriate if the cost differences between payers are a relatively constant percentage across DRGs. Likewise, for physician services, differences in resource use could lead to separate relative value scales by payer, or separate conversion factors applied to a single relative value scale, depending on how differences in resource use by payer vary across CPT codes.

DATA AND METHODS

To address the issue of whether a single set of payment rates could be used for inpatient care as part of a national all-payer system, we conducted an analysis of calendar year (CY) 1988 discharges from 457 Califonia hospitals. (Because comparable all-payer data are not readily available for physician services, we discuss the issue of cost differences by payer for physician services later). We selected the 50 highest volume DRGs for all payers combined, and the 50 highest volume DRGs for Medicare. This produced 81 unique DRGs for analysis. These DRGs accounted for about 60 percent of total hospital discharges and 60 percent of Medicare discharges in California during 1988, and represented the most recently available data when we began this study. Although these DRGs are not necessarily representative of all DRGs, they account for a substantial portion of total hospital discharges. Thus, differences in resource use are more likely to be important in these DRGs because of their high volume.