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

The distribution of DRG-level cost differences for Medicare, Medicaid, and HMO patients compared with commercially insured patients is shown in Figure 1. For 20 of the 81 DRGs studied, Medicare patients were at least 20 percent more costly than commercially insured patients. Medicare patients are not consistently more costly across all DRGs, however. Medicare patients were, in fact, less expensive than commercially insured patients in 18 of the 81 DRGs studied. The results for LOS and total charges show a similar distribution to Figure 1, and are available from the authors upon request.

Table 3 presents the 10 DRGs with at least 1,000 Medicare patients that showed the greatest cost differences between Medicare patients and commercially insured patients. In 1988, DRG 468 (unrelated operating room procedures) contained well-documented classification problems that have subsequently been addressed by creating three separate DRGs (Kominski and Schoenman, 1990). Thus, the cost difference for this DRG may have been reduced by recent refinements to this DRG's definition. For the remaining DRGs in Table 3, there are no obvious clinical reasons why Medicare patients should be more costly in some DRGs, while less costly in others.

[TABULAR DATA 3 OMITTED]

DISCUSSION

Hospitals

Our results suggest that a single rate per DRG for all payers would not be appropriate. Resource use varies within DRGs by payer, but not in a consistent manner across all DRGs. For example, Medicare patients are substantially more expensive (20 percent or higher) than commercially insured patients in many DRGs, but are less expensive in other DRGs. Our findings are consistent with those of an earlier study of discharges from New York hospitals (Thorpe, 1987), and suggest that a single set of relative weights for all payers may not be appropriate under a national all-payer system.

The results in Table 1 do not necessarily indicate that each major payer should have its own set of DRG relative weights. HMO patients, for example, use less resources on average than commercially insured patients. Under a national all-payer system, insurers might be permitted to negotiate fees lower than the all-payer rates as a mechanism for containing costs. Medicare patients may be more costly because of greater severity of illness that is not captured by the current Medicare DRG definitions.

Medicaid patients had LOSs and total charges that were quite similar to commercially insured patients, but costs that were substantially lower. This may occur because Medicaid patients are more likely to be treated in hospitals with a high portion of uncompensated care expenses, and thus low cost-to-charge ratios. Thus, the lower costs of Medicaid patients in this study may not be a reliable measure of relative resource use, and do not imply that Medicaid should have lower fees under an all-payer system.

One issue that would require further examination before developing all-payer rates is the stability of DRG-level differences in resource use over time. We used the entire population of hospital discharges from California hospitals in the 81 DRGs selected for this study, and most payer categories had more than 1,000 cases per DRG. Thus, we believe that we have highly stable findings for CY 1988, but are uncertain about how the DRG-level findings behave over time. This is clearly one area for further research.