Hospital employment under revised medicare payment schedules - Diagnosis Related Groups-based medicare payments' effects on employment

Monthly Labor Review, August, 1986 by Eileen Appelbaum, Cherlyn Skromme Granrose

Hospital employment under revised medicare payment schedules In the face of declining employment in manufactfuring, service sector industries such as health services are expected to offer expanded employment opportunities in the future. More than 900,000 jobs have been added in the health services industry since 1975, making it one of the largest industries in the U.S. economy. Moreover, the number of Americans over 65, who make the greatest use of health care services, is currently approaching 29 million and continues to grow.

Recently, however, the Federal Government has attempted to limit the rise in health care costs by instituting a prospective payment system based on Diagnosis Related Groups, or DRG's. Under the former system, reimbursement for hospital treatment covered by medicare at an acute care hospital was based on the prevailing rates for hospital and physician care in the locality. Hospitals typically recovered the full cost of care for each patient.

Under the new system, payment is based on the average cost of patient care, with hospitals recovering more than the actual cost in some cases, and less in others. Reimbursements are made according to a free schedule that mandates specific payments for each of 467 Diagnosis Related Groups. Payment to hospitals for inpatient care is assigned according to four criteria: a patient's principal diagnosis or surgical procedure, whether there is an important secondary diagnosis, the patient's age, and whether or not the patient was alive upon discharge. (An example of a Diagnosis Related Group is DRG 122: Circulatory disorders with acute myocardial infarction; without cardiovascular complications; patient discharged alive.) Each hospital's payment is adjusted for local wage levels.

The payment is expected to cover all costs except those related to staff education and capital expenditures. All direct medical education costs as well as indirect costs are reimbursed separately, as are capital expenses. Moreover, services provided on an outpatient basis or outside an acute care facility are currently exempted from DRG coverage. The DRG schedule is applied to inpatient services rendered to medicare beneficiaries. Therefore, the importance of medicare as a source of hospital revenue varies according to the size and complexity of the medicare caseload. This payment system provides an incentive to reduce costs within acute care hospitals because hospitals receiving medicare payments are permitted to retain any savings but must also absorb any expenses exceeding the scheduled payment rates.

These attempts to limit the growth of health care costs have begun to affect employment opportunities in several important ways, including the number of jobs, hours of work, skill levels, and mix of occupations. This article is a preliminary report on the way in which human resource use in the hospital sector of the health service industry is responding to current efforts to contain expenditures. The following discussion briefly outlines the economic setting and related changes affecting hospitals, and then describes the strategies that have been adopted by certain Philadelphia hospitals to cope with this environment.

The changing environment

The cost of health care in the United States has risen steadily over the last few decades, increasing from 4.4 percent of gross national product in 1950 to 10 percent in 1984. Payments to hospitals have been the largest component of such expenditures, increasing from about 28 percent of the total in 1950 to just over 40 percent in 1980. Payments from medicare, a Federal program established in 1965 to meet the costs of hospital care for elderly or disabled patients, currently amount to 38 percent of all hospital revenues.

In an effect to slow the growth of medical costs and hold down public expenditures for health care, Congress passed legislation in October 1983 that established a medicare payment system based on DRG's. DRG's were phased in over a 3-year period beginning the following year. Between January and August 1984, 70 percent of community hospitals came under this pricing system.

Uncertain about the eventual effects of DRG's on revenues and anticipating a need to reduce costs across the board, hospitals with large medicare caseloads attempted to reduce admissions of less acutely ill patients and shorten hospital stays before the new system was implemented. As a result, the patient census declined sharply at some hospitals, but then recovered somewhat as hospitals became more familiar with the system. In addition, as described below, DRG's and changes in private insurance approaches to health care have encouraged the establishment of nonhospital treatment facilities. Younger or healthier patients may prefer these outpatient alternatives.

The effect of these developments on hospital utlitization is reflected in aggregate data. Total admissions, which had already leveled off in 1982 and 1973 for reasons largely unreleated to DRG's, fell sharply--by 4 percent--in 1984. The average length of a hospital stay declined by 2 percent in 1983 and 5.1 percent in 1984. For medicare patients, it declined by about 20 percent between 1983 and 1984, from 9.6 to 7.4 days.