Chunliu Zhan, MD, PhD, Bernard Friedman, PhD, AHRQ Andrew Mosso, MS, SSS

1. How Much Does Medicare Pay Hospitals for Adverse Events?Building the Business Case for Investing in Patient Safety Improvement Chunliu Zhan, MD, PhD, Bernard Friedman, PhD, AHRQ Andrew Mosso, MS, SSS Peter Pronovost, MD, PhD, Johns Hopkins University June 6, 2005

2. Background • Cost of Adverse events (AEs) • preventable AEs cost $159 million in Utah and Colorado, and $17 billion in the United States annually (Thomas et al, Injury, 1999) • Preventable adverse drug events increased hospital costs from $2,262 to $4,700 per admission, amounting to $2.8 million annually for a 700-bed teaching hospital and about $2 billion for the nation (Bates et al, JAMA, 1997) • Who pay the costs? • Hospital charges more when AEs occur (Zhan & Miller, JAMA, 2003) • Payment based on services or patient types, not quality or safety • Everyone pays: government payers, health plans, employers, patients

3. Background • Who is paying what? • Marginal AE cost unknown • Marginal AE payment differs by different payers • Medicare Prospective Payment System (PPS) - a venue for calculating marginal payment for AEs • Pays inpatients services by Diagnosis-Related-Group (DRG), which is “supposedly” determined by the diagnoses at admission • Payment can be calculated based on claims using published Medicare payment formulas

4. Objectives • Establishing business cases for Medicare in patient safety • How much Medicare pays for AEs under PPS? • Inferring business cases for hospitals in patient safety • How much hospitals absorb the AE costs uncompensated by Medicare under PPS? • Inform Medicare pay-for-performance (P4P) decisions • Medicare started P4P demo in 2003, quality measures only • MedPAC 2005 recommend 1% Medicare expenditure set-aside for P4P and a number of quality measures • Medicare P4P for include safety measures? the amount of set-aside?

5. Data • HCUP NIS 2002 • 7.8 million discharges from 995 hospitals across 35 states, approximating 20% sample of acute hospitals • 2.5 million Medicare claims for patients aged 65+ • Medicare payment calculation data from CMS website (details available from authors) • DRG relative weights • Area wage index, etc. • Medicare IMPACT file for payment adjustment

6. Method • Identify selected AEs using AHRQ Patient Safety Indicators (PSIs) • Decubitus ulcer • Iatrogenic pneumothorax • Postoperative hematoma or hemorrhage • Postoperative pulmonary embolism or deep vein thrombosis • Postoperative sepsis • Face validity, relative larger number of case

7. Method • Calculating Medicare PPS payment for claims • Basic operating payment • Basic capital payment • Indirect medical education payment • Allowance for treating disproportionate share of low income beneficiaries • Payment adjustment for cases with unusually high costs • Other adjustments at hospital level – not included

8. Method • A separate document detailing payment calculation available from authors> • Example: Basic operating payment:

9. Method • Calculating Medicare PPS payment for AEs: • Step 1: • Use 3M DRG Grouper to assign DRG • Calculate payment • Step 2: • Remove ICD-9-CM codes indicating AEs • Step 3: • Re-assign DRG • Re-calculate payment • Step 4: • Changes in DRGs • Changes in payment & payment components

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14. Limitation • Flaws of administrative data in patient safety assessment • Incompleteness • Coding errors – intentional omission, DRG creeping • clinical validity, reliability • Payment calculation not meant to be exact!

15. Conclusion & Implication • Clear business case for Medicare to improve patient safety: • Annual Medicare payment for the 5 types of AEs totals $314 million, accounting for 0.27% of total Medicare hospital spending of $117 billion in 2002 • Caveat: this estimates assume all Medicare 65+ patients were under PPS. Actually 15% were in Medicare managed care.

16. Conclusion & Implication • Clear business case for hospitals to improve patient safety: • Hospitals get no additional payment under PPS in 48% (postoperative sepsis) to 80% (decubitus ulcer) of the cases when adverse events occur • Based on the payment estimates, excess charges estimated by Zhan and Miller (JAMA, 2003), and average cost-to-charge ratio (0.45 in 2002), hospitals absorb 85%, 82%, 76%, 74%, and 66% respectively of the extra costs for the five types of AEs.

17. Conclusion & Implication • Clear business case for hospitals to improve patient safety: • for an average hospital with 40% of discharges of Medicare patients aged 65 or over in 2002 • If the hospital reduces its number of decubitus ulcer from the 75th percentile of 46 cases to the 25th percentile of 4 cases, it would save $205,800 a year in uncompensated costs in treating decubitus ulcer and also save Medicare $30,870 in payment

18. Conclusion & Implication • Inform Medicare payment policies: • Support MedPAC recommendation to require identifying whether a diagnosis present at admission • Current P4P include selected quality measures. How about safety measures too? • MedPAC suggest 1% set-aside. How about $59 million or portion of it set-aside for reducing post-operative sepsis, for example?