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Diagnostic Related Group Inpatient Hospital Reimbursement

Diagnostic Related Group Inpatient Hospital Reimbursement. Annual Update Process Presented by: APS Healthcare August 1, 2008. Overview. DRG payment per discharge = DRG Weight x Peer Group Base Rate + Outlier Adjustment DRG Weight, Base Rate, and Outlier Adjustment are updated annually.

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Diagnostic Related Group Inpatient Hospital Reimbursement

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  1. Diagnostic Related Group Inpatient Hospital Reimbursement Annual Update Process Presented by: APS Healthcare August 1, 2008

  2. Overview • DRG payment per discharge = DRG Weight x Peer Group Base Rate + Outlier Adjustment • DRG Weight, Base Rate, and Outlier Adjustment are updated annually. 1

  3. DRG Classification System • DRG Groupers classify hospital discharges based on clinical characteristics and resource consumption • DRGs encompass all inpatient stays • Information for DRG assignment is available on uniform billing claim forms 2

  4. DRG Classification System • DRGs are assigned hierarchically: • High-cost procedures independent of Major Diagnostic Category (MDC) (e.g. transplants) • MDC (dependent upon diagnosis code) • Procedure within MDC • Other patient characteristics • Or, if no procedure, principle diagnosis within MDC • Other patient characteristics 3

  5. DRG Grouper Version is Updated Annually • CMS Grouper update available in August (Version 25, Aug. 2007) • Enhanced for Medicaid to expand neonate DRGs from 7 to 20 DRGs based on birthweight, discharge status, and operating room procedures 4

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  7. Grouper Data Collection • Three years of inpatient hospital discharges • Most recent 3 SFYs with 9-month claim lag • FFS claims and managed-care encounters • All acute care hospital inpatient discharges. • Excludes Indian Health Service, Children’s Medical Center (Bethany), JD McCarty, George Nigh rehabilitation and psychiatric hospitals. RTCs also excluded. 6

  8. DRG Payment Formula The formula for a DRG payment is: Payment = (DRG Relative Weight) x (Hospital Base Rate) + (Outlier Adjustment) 7

  9. DRG Relative Weight • Claim “charges” converted to “cost” using cost-to-charge ratios (computed from CMS cost reports for last 3 years) • DRG Relative Weight = Average Cost of Discharges per DRG ÷ Average Cost of All Discharges 8

  10. Hospital Base Rate • A different rate is computed for each cost-related peer group • Peer groups are chosen to minimize cost variation within groups and maximize variation between groups • Peer group classification is updated each year based on current hospital characteristics and average costs 9

  11. Hospital Classification Data Obtained from CMS H ealthcare C ost R eport I nformation S ystem 10

  12. Five Classification VariablesObtained from HCRIS • Critical Access Hospital/Not C.A. • Large/Small Hospital < 300 beds • Teaching/Non-teaching Hospital • Sole Community Hospital/Not S.C. • Urban/Rural Hospital (from HCRIS or PPS Impact File Geographic Reclassification) These variables and cost-to-charge ratios are updated and verified with letters to Administrators in August. 11

  13. Peer Grouping Procedure • The independent contribution to cost is estimated for each of the five variables using multiple regression to analyze average cost (net of DRG-related cost.) • 32 different types of hospital are created from all combinations of the five variables. • The regression equation is used to compute the predicted average cost for each type of hospital. • The cumulative percentage distribution of predicted cost is divided into five quintiles. 12

  14. 32 Hospital Types and 5 Hospital Cost Groups 1 2 3 4 5 The 32 types are arranged from lowest to highest average cost, and grouped into five quintiles by cumulative percent of cost. 13

  15. Peer-Group Base Rate Calculation Procedure • Use the observed distribution of discharges across the 32 hospital types to compute the weighted-average predicted cost for each peer group. • The relative base rate is the ratio of the peer group average to the over-all average. • The absolute base rate is determined by iterative proportional fitting: DRG payments for all discharges are computed and the base rates are incremented proportionally until the sum of DRG payments equals the total approved budget. 14

  16. Hospital Base-Rate Peer Groups (2008) Peer Relative Absolute Group Hospitals Base Rate Base Rate 1 1 95.30% $3,957 2 107 97.33% $4,042 3 138 98.58% $4,094 4 88 102.58% $4,260 5 176 106.21% $4,411 15

  17. Outlier Adjustment • Hospitals receive an additional payment if cost remaining after DRG payment is greater than $27,000. • Payment is equal to 70% of remaining cost after the $27,000 threshold is met • Payment is modeled after CMS Medicare adjustment 16

  18. About APS Health Intelligence • DRG Annual Weight Setting • Program Evaluation Design and Implementation • Performance Measurement and Quality Assurance Services • Survey Development and Administration • Fraud and Abuse Detection • Health Policy Analysis • APS Has Been Working with OHCA since 2001 18

  19. Contact Information • APS contacts (608) 258-3350: • Spencer Anthony, MA • SAnthony@APShealthcare.com • Karyn Kriz, MPA • KKriz@APShealthcare.com • Don Libby, Ph.D. • DLibby@APShealthcare.com 19

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