Developing payment refinements and reforms under Medicare for excluded hospitals

Health Care Financing Review, Spring, 1989 by John C. Langenbrunner, Patricia Willis, Stephen F. Jencks, Allen Dobson, Lisa Iezzoni

In effect, the global limit on inpatient operating costs under the initial TEFRA legislation established for each hospital a target inpatient operating cost per discharge-conceptually, a single DRG case-mix adjusted amount applicable to all cases. The legislation also established a target rate of increase (applied at the case level) for subsequent years and provided for incentive and penalty payment provisions to hospitals that achieved operating costs less than or equal to their target amounts. The incentive payment is the lesser of one-half of the difference between actual and target costs per discharge, or 5 percent of the target amount. For hospitals whose operating costs per discharge exceeded their targets, TEFRA provided for reimbursement of up to 25 percent of the allowable operating costs in excess of the target amount. This provision applied only to cost-reporting periods beginning before October 1, 1984. Since then, the target has been the maximum amount-a further efficiency of the initial TEFRA limit approach.

With the Social Security Amendments of 1983, the excluded hospitals and units continued under the TEFRA system of limits. The implication is that the present Medicare method for reimbursing inpatient hospital care to beneficiaries in these facilities can be termed a form of reasonable operating costs per discharge. The transition from per diem occupancy costs to total operating cost limits, coupled with the incentive payment provided to hospitals that contained costs under the prospectively determined limit, generated much greater incentives for providers to be efficient than did former Medicare limits on routine daily occupancy costs. And although the TEFRA limits have meant that excluded facilities do not participate in PPS, they still arguably function under a prospective limit-based system that uses economic incentives similar to those of PPS. Indeed, the target rate of increase has been a visible tie between excluded facilities and those under PPS; until Federal fiscal year 1988, Congress granted the same percent increase to both. Developing payment system reform

Any critical deliberation of the relative merits of payment reform for excluded facilities necessitates a framework and strategy for deciding what constitutes a satisfactory system. Changes in policy should promote a cost-effective system of accessible, appropriate, and high-quality care for Medicare beneficiaries, while maintaining a high degree of equity or fairness of Medicare payments across providers. Toward these goals, the methods and tasks for constructing and choosing the design features of payment system changes should include: * Analysis of existing delivery system. * Development of a classification system. * Design of a payment system. * An impact assessment of proposed system. Analysis of delivery system

The collection of data and other information to provide an analysis of the delivery system of the excluded facilities must be undertaken. The use of resources required for patient care must be related to variables describing the nature of patients and providers. Patient types