Cost-containment incentives in HMOs. What's known, what's not known.

HMOs use various incentives to control utilization of health care resources, and physicians who are thinking of joining these organizations should understand how these factors will influence their practice. Financial incentives include withheld funds, penalties against those at risk, and bonuses for physicians with good practice habits. Nonfinancial incentives include education concerning efficient use of health care resources, feedback mechanisms, participation in planning cost-containment programs, and administrative constraints. There are also less obvious, nonfinancial incentives; one involves inclusion of ancillary office personnel in bonus distribution, and these individuals may thus influence a physician's prescribing habits.

The next step: introducing competitive pricing into PPS.

PPS in its current form has achieved significant cost savings in three years. But to further reduce the costs of the Medicare program, competitive market forces should be introduced.

Medicare program; reasonable charge limitations--HCFA. Final rule with comment period.

This final rule implements section 9304(a) of the Consolidated Omnibus Budget Reconciliation Act of 1985 which enacted section 1842(b)(8) of the Social Security Act (Act). In accordance with section 1842(b)(8) of the Act, we specify the circumstances under which HCFA or its Medicare Part B carriers will consider establishing special reasonable charge payment limits for services (including supplies and equipment) reimbursed under Part B of the Medicare program. The rule describes the factors HCFA or a carrier will consider and the procedures it will follow in establishing them. The limits would be either an upper limit to correct a grossly excessive charge or a lower limit to correct a grossly deficient charge. In either case, the limit would be either a specific dollar amount, or a special method used in determining reasonable charges to be allowed for a particular service or category of service. The purpose of this rule is to establish a stronger framework for setting special reasonable charge limits for services when the standard reimbursement methodology results in payments that are grossly excessive or deficient. A related purpose is to protect the Medicare program from excessive outlays and to prevent any adverse effects on both Medicare beneficiaries and consumers in general that we believe would result from a lack of such limits. The rule also will protect suppliers from reimbursement that is grossly deficient.

An alternative to DRGs. A clinically meaningful and cost-reducing approach.

A statistical methodology based on the Cox proportional hazards model (a survival time analysis method), an alternative to the approach underlying DRGs, is presented. The method is used to obtain an estimate of the length-of-stay (LOS) distribution of a patient incorporating either patient-specific or hospital variables. A percentile of the distribution chosen to minimize prediction error serves as the assigned LOS. Absolute deviation is used as the loss function both to determine the choice of a predicted LOS and to examine how well the scheme works. Multiple assignment schemes may also be developed from this approach. The results of the method, tested on a national probability sample of 4,608 psychiatric patients treated in psychiatric units of general hospitals, suggest that with respect to average absolute deviation, the proposed methodology may provide a scheme that is superior to the present DRG scheme. For the sample, the average percent improvement obtained using the median of the estimated LOS distribution as the predicted LOS over the sample mean of the DRG group is 19%. A two assignment strategy results in average improvements over DRGs of 43%.

Potential responses to the Medicare pricing mechanism.

This article describes the Medicare pricing mechanism and explores potential responses to the reliance on the patient and related medical condition as the unit of payment. The analysis suggests that, although the provisions of PL 98-21 may benefit the Medicare program, the pricing system may jeopardize the financial viability of hospitals, increase inequities that emanate from differential pricing policies and, when viewed from the perspective of beneficiaries, reduce access to in-hospital care and the use of service once admitted.

A multivariate approach for classifying hospitals and computing blended payment rates.

Prospective payment for inpatient hospital care is based on the ideal that hospitals that produce similar outputs, as measured by the types of cases the hospital treats, should be paid similar prices. However, similar output is a multidimensional concept. Thus operationalization of this ideal will ultimately require a more complex framework for determining hospital payment rates than currently employed at either the federal or state level. This article illustrates a multidimensional approach to achieve this objective. This technique, called Grade of Membership, is used to generate a unique type of hospital group and to characterize individual hospitals in terms of their degree of similarity to these groups. In addition, a new concept of grouping is described, a variable set based on hospitals' internal cost structure is developed and used, and ordinary least squares regression is employed to compute prices for these groups. With the use of simulation analysis, these groups are compared with more conventional groups.

Prospective payment for hospital capital by Medicare: issues and options.

After this year, Medicare will no longer reimburse capital-related expenses. Instead, a new approach may be implemented. Should the new capital payment scheme be prospective? Should Medicare continue to recognize return on equity? What will be the relationship between Medicare payment and health care planning? These and other questions should be asked since the answers will directly affect the health care setting.

On the feasibility and usefulness of physician DRGs.

In response to pressure to curb increases in Medicare physician fees, Congress authorized the Department of Health and Human Services to undertake research on the advisability and feasibility of paying physicians based on diagnosis related groups (DRGs). This report is a summary of the findings of two reports that examined DRG-based physician payment arrangements along with other methods of packaging physician services for payment. The reports imply that a DRG physician payment system could unfairly redistribute payments from physicians with genuinely more complex and costly practices to physicians with less complex and costly practices. We conclude that a physician DRG methodology might nonetheless provide a useful tool for monitoring physician practice styles.

Hospital cost and efficiency under per service and per case payment in Maryland: a tale of the carrot and the stick.

The simultaneous operation of per case and per service payment systems in Maryland, and the varying levels of stringency used in setting per case rates, allows a comparison of the effects of differing incentive structures on hospital costs. This paper presents such a comparison with 1977-1981 data. Regressions performed on cost-per-case and total cost data indicate that costs were lower only when per case payment limits were very stringent. Positive net revenue incentives appeared to be insufficient to induce a reduction in length of stay or ancillary services use. These changes in medical practice patterns thus appear more likely under the threat of financial losses--that is, under the threat of the stick rather than the inducement of the carrot.

The impact of capital payment options under Medicare prospective payment. An ECRI technology management assessment.

In view of the upcoming legislative deadline for inclusion of capital costs within the Medicare prospective payment system, both public and private-sector entities have scrutinized various capital payment options and debated key issues relating to appropriate overall payments for capital costs, the nature of the mechanism for allocating payments to hospitals, and the method for transition from the present to the new capital payment system. The new capital payment policy will play an important role in future hospital capital decisions and technology levels. This report describes the nature and magnitude of hospital capital costs, examines alternative proposals for reflecting capital costs in the Medicare prospective payment system, and details each alternative's impact, incentives, and disincentives.

Medicare payment for new technologies. Can the process be improved despite conflicting goals? An ECRI technology management assessment.

Decisions about Medicare payment for new technologies are made by a multiagency process that became even more complex with the advent of DRG-based payments for inpatient care. Numerous problems with this decision-making process are widely acknowledged to exist but difficult to solve because of inherent conflicting goals. This report proposes consideration of basic improvements to the process, including: increased support for clinical and cost studies, particularly from manufacturers of new technologies; approval of provisional payments to providers who agree to collect effectiveness and cost data; additional research into technology assessment methods; clarification of decision-making criteria; opening of the coverage-decision process to greater public scrutiny; according more weight to recommendations of the Prospective Payment Assessment Commission; submission of additional data to the Food and Drug Administration; and increasing the flow of information among Medicare coverage-decision agencies and other third-party payers. Many of these modifications can be accomplished without congressional action, if the interested parties are willing to work together to improve the coverage-decision process.

Comparison of alternative relative weights for diagnosis-related groups.

During this study, we investigated the extent to which diagnosis-related group (DRG) relative weights based exclusively on charge data differ from DRG weights constructed according to the methodology used in deriving the original relative weights for the Medicare prospective payment system (PPS). The PPS operating cost weights were based on a combination of cost and adjusted charge information (Pettengill and Vertrees, 1982). The results of this study reveal only minor differences between the two sets of weights. Interhospital differences in cost-to-charge ratios do not produce large, arbitrary differences between charge-based and operating cost weights. Whether the data are standardized for differences in capital and medical education costs also appears to make little difference.

RUGs and "Medi-Cal" systems for classifying nursing home patients.

Medicare and most state Medicaid programs currently use indirect case-mix measures to determine reimbursement for nursing home care. In the future, however, they probably will incorporate more direct case-mix measures into their payment systems. Care must be exercised in designing a case-based prospective payment system to ensure that its financial incentives motivate providers to expedite recovery, prevent deterioration, and admit heavy-care patients. For example, although use of a services-rendered approach helps guarantee that care will be provided when needed, it also offers providers an incentive to furnish a service regardless of whether it is in the patient's best interest. Consideration must be given to the frequency with which patients are reassessed. The implications of the timing of reassessments for quality of care also must be studied. Ideally, quality would be measured on an outcome basis--that is, payment would depend on whether targeted goals for individual patients are reached--rather than on structural or process measures alone. Two recent classification systems--Resource Utilization Groups and Medi-Cal groups--may serve as models for case-based prospective payment systems. Each method classifies patients into distinct, meaningful categories based on activities of daily living and services received.