Good quality care increases hospital profits under prospective payment

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

However, PPS does not always reward good quality care's diagnostic specificity with higher payment. Where the physician suspects a stroke, the increasingly specific diagnoses of weakness (DRG 464), hemiplegia (DRG 12), and cerebrovascular accident (DRG 14) carry rising payments. However, computer tomography ($97) to distinguish between hemorrhagic and ischemic disease does not change the DRG. This test, commonly used to manage the cerebrovascular accident, would confer no additional payment on the hospital.

Indeed, provision of medically indicated services may even reduce payment in some cases. A patient with a history of colon carcinoma generally needs endoscopic followup at some point. However, in 1985, DRG 412 would have paid one-half as much for malignancy after care with endoscopy, as DRG 411's payment for aftercare without endoscopy (Brooks, 1984). Presumably, the population of patients grouping to DRG 411 still consumes more resources than the DRG 412 population (e.g., because of more advanced disease or more expensive treatment). Alternately, did the lower DRG 412 payment deter endoscopy, confusing cause and effect?

Returning to the first example, not all electrocardiograms confirm chest pain to be angina (Fisch, 1988). The proportion of positive electrocardiograms varies depending on different populations' health status and physicians' test-ordering patterns, but averages about 50 percent. In performing the service, the hospital would have a 0.5 probability of receiving $2,202 ($2,230 payment for DRG 140 minus $28 test costs) and a 0.5 probability of receiving $1,985 ($2,013 payment for DRG 143 minus $28 test costs). Statistically, the hospital has an expectation of $2,094. If it omits the study, it has a 1.0 probability of receiving $2,013 for DRG 143 and incurs no extra diagnostic costs. Based on these limited considerations, the economically rational hospital should perform electrocardiograms on patients presenting with appropriate chest pain symptoms because on average, it would retain net revenue of $81 after deducting the extra cost and discounting for negative tests. In this case, good quality care increases profits (Table 2).

Some of the other examples entail slightly more elaborate expectation calculations. About 29 percent of cardiac workups lead to bypass surgery, and a workup with surgery costs more than a workup without surgery. The hospital would therefore have a 0.29 probability of receiving $6,096 ($10,917 for DRG 109 minus $4,821 procedure costs) and a 0.71 probability of receiving $3,108 ($4,032 for DRG 122 minus $924 costs), for an expectation of $3,975. Not doing the medically indicated workup carries a 1.0 probability of $4,032. In this situation, providing proper care would penalize the hospital $57.

Finally, DRG 412 depends on performing endoscopy, rather than on the results of endoscopy. Since the physician largely controls the decision to do the endoscopy, it has a probability of 100 percent. That 6 percent of endoscopies yield positive findings has no bearing on the expectation calculation (Matek et al., 1985). This evaluation assumes that issues of diagnostic reliability (i.e., false positives and negatives) have little effect on payment in comparison to the other variables.