Good quality care increases hospital profits under prospective payment

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

Revised diagnosis-related groups

Selection of revised diagnoses introduces relatively little error. The classifiers have high inter-rater agreement. This finding parallels anecdotal observations that hospital-based peer review committees have little difficulty deciding what diagnoses their colleagues should have worked up in a particular clinical situation. The sensitivity analysis identifies this variable as having a low [beta]. It can change Medicare profitability only slightly.

Payment

Change in payment naturally has a much greater effect on the results. However, determining payment offers little opportunity for error. The computerized grouper automatically converts the ICD-9-CM codes into a payment. Except for data entry errors, input of a given combination of ICD-9-CM codes always produces the same payment as its output. This variable's high reproducibility therefore limits any misclassification effects from its high [beta].

Test cost

Part B payment serves only as a crude approximation of actual test costs. Medicare receives some criticism for its payments being low in comparison with those of private insurers (Firshein, 1986). Physicians and providers assert that for selected services the Federal compensation barely covers their costs. HCFA in turn vigorously defends its methodology for setting payments (Price, 1989). Practically, beneficiaries can obtain virtually all Part B services at the Medicare price in essentially all geographic areas (Garrison, 1986). Either the payment covers costs or the provider behaves non-economically, e.g., out of a sense of professional duty to a long-time patient (Goodwin and Dolan, 1985). In any event, the sensitivity analysis demonstrates that procedure costs can have little compact on the profitability of good quality care.

Positive tests

The proportion of positive results necessarily varies from test to test. In addition, populations differ in their prevalences (e.g., cardiac screening of asymptomatics at a college versus a nursing home), and physicians differ in the clinical thresholds that trigger particular workups (e.g., computerized tomography scan for headache at an underutilized community hospital versus an overloaded public hospital) (Thompson and Krushat, 1989). This article uses secondary sources for its estimates of the proportion of tests having positive results. Had these sources used different study populations or selection methodologies, they could have reported higher or lower test yields. Fortunately, the sensitivity analysis indicates that this variable has a lesser effect on profits than do other variables. Substitution of ranges from the previous literature confirms the [beta].

The foregoing results refute the commonly held belief that prospective payment encourages skimping on the quality of care. Economic theory states that where revenue remains fixed, the firm should cut costs to maximize profits. In actuality, the DRG system does not necessarily fix payment. Many of its "major diagnostic categories" contain sequences of DRGs, whose diagnosis and treatment entail increasing levels of service, balanced by rising payment. Overall, not skimping on quality produces significantly higher profits despite the addition of test costs and allowance for negative tests. Accordingly, conventional wisdom is wrong in this instance.