Good quality care increases hospital profits under prospective payment

Health Care Financing Review, Spring, 1992 by David C. Hsia, Cathaleen A. Ahern

Background

Since October 1, 1983, Medicare has used a prospective payment system (PPS) to pay hospitals for inpatient care, as required by the Social Security Amendments of 1983. Each discharge's diagnoses and procedures "group" it to one of 477 diagnosis-related groups (DRGs). The Health Care Financing Administration (HCFA) pays the hospital a fixed amount representing the average cost for that DRG's discharges (Code of Federal Regulations, 1988). The hospital retains surpluses from discharges that cost it less than the DRG payment, and suffers losses on discharges that cost it more. The prospective payment system gives hospitals a financial incentive to reduce the unnecessary services associated with cost-based, retrospective payment.

Congress and other observers fear that prospective payment could induce hospitals to reduce necessary services (or access) (Newhouse, 1989), in addition to unnecessary services (U.S. House of Representatives, 1985; U.S. Senate, 1985; U.S. Senate, 1986b; U.S. House of Representatives, 1986a; U.S. House of Representatives, 1986b; U.S. Senate, 1986a; Prospective Payment Assessment Commission, 1990). The hospital's need to generate financial surpluses may pressure its attending physicians to omit medically indicated tests and therapies. The institution reduces costs, while continuing to receive a DRG payment intended to cover all necessary services. This "skimping" on the quality of care may place the patient's health at risk. If undertreatment causes the patient subsequently to need readmission, the poor quality confers a second payment upon the hospital (assuming no peer review organization intervention) (Munoz et al., 1990). This article tests the validity of the commonly held belief that prospective payment rewards such skimping.

At discharge, the attending physician writes each Medicare inpatient's diagnoses and procedures on a federally required attestation statement. The hospital's medical records department translates these narrative diagnoses and procedures into the International Classification of Diseases 9th Revision, Clinical Modification (ICD-9-CM) numeric codes (Public Health Service and Health Care Financing Administration, 1980). The fiscal intermediary groups the ICD-9-CM codes to the proper DRG, converts the corresponding relative weight to a dollar amount (with certain minor adjustments for hospital-specific factors), and pays the hospital (Averill et al., 1986).

Omission of medically indicated procedures could cause diagnostic uncertainty and may therefore produce vague ICD-9-CM codes (e.g., the classic weak, tired, and dizzy). For some discharges, good quality care (which includes an adequate workup) increases diagnostic specificity and changes the DRG assignment. When more complete workup reassigns the discharge to a DRG paid at a higher rate (adjusted for the cost of additional services and the possibility of the workup ruling out the suspected pathology), PPS rewards the hospital for good quality care. Omission of some therapeutic services also changes the DRG and therefore payment. However, omission of other services causes no change in payment, creating an economic disincentive to their delivery.

The following examples illustrate how PPS rewards (or fails to reward) quality care in the form of an adequate diagnostic workup. Suppose an elderly patient presents with sudden onset of severe chest pain, a non-specific symptom that groups to DRG 143. During Federal fiscal year 1985, PPS would have paid an urban hospital $2,013 for this admission (Federal Register, 1984). If the patient then receives an electrocardiogram that establishes ischemia, the discharge would group to DRG 140. Its $2,230 payment for angina exceeds the DRG 143 payment by $217. For 1985, Medicare Part B pays $28 for an electrocardiogram, an estimate of its average cost. Subtracting this service's cost, the hospital still would gain $189 "at the margin" (Samuelson, 1985). The hospital therefore has a financial incentive not to skimp on quality by omitting this medically indicated service (Table 1).

Further suppose that upon confirmation of angina, the attending physician orders a routine cardiac screen of three serial electrocardiograms ($28 each in 1985) and three sets of cardiac enzymes ($19 each). These tests confirm a myocardial infarction, grouping the hospital stay to DRG 122 (Lee, 1986). Its $4,032 payment would confer $1,802 more revenue than DRG 140. Deducting [TABULAR DATA OMITTED] the Part B payment of $141, and approximation of procedure costs, still would leave the hospital with an increased profit.

Finally, a major cardiac workup including stress test ($109), nuclear scan ($169), echocardiography ($128), catheterization ($518), and bypass ($3,897) could push the discharge into DRG 109. The $10,917 payment for a major cardiac procedure exceeds the DRG 122 payment by $6,885. After deducting the cost of these procedures and the additional length of stay, the hospital should still profit more than for DRG 122.