DRG PAYMENT

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DRG PAYMENT

• Dr Htin Zaw
  Soe
• MBBS, DFT, MMedSc (P TM), PhD
• Lecturer, Department of
  Biostatistics,
• University of Public Health,
  Yangon

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• (1) What is DRG ?
• (2) What is DRG Payment?
• (3) Historical Background
• (4) Impact of DRG
• (5) Types of DRG
• (6) DRG Implementation
• (7) Cost Estimation Methods
• (8) Opportunities and Challenges
• (9) Countries Using DRG
• (10) DRG and Myanmar
• (11) References

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• (1) What is DRG?
• Diagnosis Related Group
• A classification system that groups
  patients according to principal diagnosis,
  presence of a surgical procedure, age, presence
  or absence of significant co-morbidities or
  complications, and other relevant criteria (DRGs
  and the Medicare Program, 1983)
• OR
• A classification of hospital case types
  into groups that are clinically similar and are
  expected to have similar hospital resource use.
  The groupings are based on diagnoses, and may
  also be based on procedures, age, sex, and the
  presence of complications or co-morbidities (JC
  Langenbrunner et al, 2009)
• OR
• Grouping system of hospital admissions
  (Budi Hidayat, 2011)

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• (2) What is DRG Payment?
• Any per-case hospital payment method in
  which differences in case-mix are taken into
  account using DRGs to classify case types
• (DRGs and the Medicare Program, 1983)
• DRGs - used in any hospital payment methods
  including retrospective cost-based reimbursement,
  but their importance use is as part of
  prospective per-case payment system
• (Per-case payment system Any prospective
  hospital payment system with fixed rates of
  payment based on the hospital admission, not on
  the number and type of services or number of days
  of care provided)

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• (3) Historical Background
• - 1950s- Not everyone in US had health insurance
• - 1960s -Medicare and Medicaid was created
• - Late 1960s Design and development of DRG at
  Yale University by
• Prof Robert Fetter (Founder of DRG) as an
  information management tool, and a devise for
  adjusting hospital performance for patients
  characteristics
• - Early 1970s First operational set of DRG at
  Yale University
• - 1970s - A lot of distrust for the US government
  including lack of confidence in the American
  medical system
• - President Nixon created Managed Care
  Organizations (MCOs) ? companies to provide
  health insurance for their employees

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• - Late 1970s - First large scale application of
  DRG in New Jersey
• - 1980s - Inpatient health care reimbursed.
  Health care costs were out of control. No
  incentive to streamline costs
• 1983- US Congress amended the Social Security
  Act
• - A National DRG-based Payment System
  used by Medicare to move reimbursement from
  retrospective (cost per service) to
  prospective (tariff per-case) to cut costs for
  its beneficiaries
• Eventually migrated to other payers in the
  US, and to most healthcare systems in affluent
  countries (Social insurance and NHS-based
  systems)

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• (4) Impact of DRG
• - Mainly for cost-containment create incentives
  for hospitals to control/reduce the costs, to
  reduce the LOS of patients and to increase number
  of inpatient admissions, ? increase efficiency
• Evidence (controversial Pauly 2001) impact in
  the US
• Reduction in Length of Stay (up to 25)
• Lower rate of growth of hospital costs
• Decrease in hospital profit margins ( DRG
  tariff rational?)
• BUT
• No evidence of significant impact on quality
  outcome
• Other effects up-coding effects on out-patient
  care costs

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• (5) Types of DRGs
• 1. Medicare DRGs
• 2. Refined DRGs (R-DRGs) Differences in age,
  complications and morbidities
• 3. Severity DRGs (S/SR-DRGs) re-evaluate
  complications and morbidities
• 4. All Patient DRGs (AP-DRGs) not only Medicare,
  but add HIV and Pediatric cases
• 5. All Patient Refined DRGs (APR-DRGs) two
  groups (severity and risk of mortality)

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• (6) DRG Implementation
• A classification of hospital admissions
• Based on data normally collected (demographic
  and clinical based on the medical clinical
  record)
• Medically reasonable and administratively
  manageable
• Iso-resource (variance between cases in the
  same group kept at minimum)
• Typically to each group is associated a value
  (tariff) or a weight Grouping
• Value/weight attached to each group

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• (7) Cost Estimation Methods
• - Basic concept
• - DRG tariffs and costing
• - DRG payment formula
• - Costing methods

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• DRG tariffs and costing
• Various approaches to set tariffs (not only
  cost analysis)
• Hospital market characteristics
• General rules about healthcare funding (e.g.
  global budget)
• Policy objectives (e.g. to discourage specific
  interventions)
• Incentives (statically and dynamically)

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• European countries adopt various cost-analysis
  models and
• discretional choices on several relevant
  issues (allocation of
• overheads, direct/indirect attribution
  depending of the features of the information
  systems)
• How tariffs can/should relate to costs depend
  on the nature of the system (NHS versus
  insurance-based systems) and policy objectives
• Focus on direct costs cost directly
  attributable to the patient (case)

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• DRG payment formula
• DRG payment a b c
• a DRG relative weight
• b Hospital base rate
• c Outlier adjustment
• DRG weight, hospital base rate and outlier
  adjustment are updated annually. (Recalibration)
• (Budi Hidayat, 2011)

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• DRG relative weight vs. HBR
• . DRG relative weight
• - Claim charges converted to cost using
  cost-to-charge ratios
• - DRG relative weight Average cost of
  discharges per DRG Average cost of all
  discharges (eg. 1,200 1,000 1.2)
• . 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

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• Calculating DRG payment (in details)
• DRG payment (Standardized amount DRG weight)
  Add- ons
• Standardized amount (Labor component Wage
  index) Non-labor component
• Add-ons are (i) Disproportionate share payment
• (ii) Indirect medical
  education payment
• (iii) Outlier
• (iv) Capital
• (v) New technology
• (Office of Inspector General/OEI, 2001)
• (Ohio Hospital Association, 2011)

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• For example
• - Sara, a 72 year old widow fell off her front
  porch.
• - An ambulance transported her to Generic
  Hospital, a Medicare-certified hospital in San
  Francisco.
• - She is diagnosed with an open fracture of
  the left femur requiring surgical intervention.
• - In addition, physician determines from her
  medical history that she has NIDD with associated
  peripheral vascular disorder.

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• Step 1. Calculating the standardized amount
• Standardized amount Labor component Non-labor
  component US 2,809.18 US 1,141.85
• (San Francisco is a large urban category, so US
  1,141.85 is used for Non-labor component)
• Step 2. Adjusting for the wage index
• (Wage index for San Francisco is 1.4193)
• Standardized amount (Labor component Wage
  index) Non-labor component
• (US
  2,809.18 1.4193) US 1,141.8
• US
  5,128.92

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• Step 3. Adjusting for DRG weight
• (Relative weight for hip and femur procedure is
  1.8128)
• DRG payment Standardized amount DRG weight
• US 5,128.92
  1.8128
• US 9,297.71
• Step 4. Adjusting for disproportionate share
  payment
• (Generic hospital qualifies as a disproportionate
  share hospital. The rate is 0.1413.)
• Therefore DRG payment US 9,297.71 (1
  0.1413)
• US
  10,611.47

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• Step 5. Adjusting for indirect medical education
  payment
• (Adjustment factor for indirect medical education
  payment is 0.0744)
• DRG payment US 9,297.71 (1 0.1413
  0.0744)
• US 11, 303.23
• Therefore the hospital was paid US 11, 303.23
  by Medicare for Saras care.
• If necessary, payments for outlier, capital and
  new technology are to be added.

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• Costing methods
• What is the cost of a health care intervention?
• Cost of Health Care
• Outside of health, most items that we purchase
  daily have a readily observable cost
• But, not true with health care
• Insurance buffers patient from true cost
• Charges, payments may not equal cost

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• Micro- vs. Average-costing difference?
• Micro-costing
• Determine each input, find its price, then sum
  (quantityprice) across all inputs
• Gold standard, but resource intensive
• Researchers use this approach in some
  circumstances
• Average-costing
• Over a long period, divide total cost by total
  units of care provided
• Less precise than micro-costing

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• Method 1
• Direct Measurement
• Used to the find the cost of interventions
  care unique
• Method
• 1. Measure staff activity
• 2. Find labor cost
• 3. Find cost of supplies, capital, overhead

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• Finding Unit Cost
• Average cost
• Total program cost divided by number of units
• Assumes homogeneous products
• Relative Values needed for heterogeneous products
• Find Relative Value of each product
• Find cost per relative value unit (RVU)
• Use this to find cost of each product
• Staff Activity Analysis
• Methods of finding staff activities
• Track staff activity in a log
• Estimate activity
• Need not be comprehensive can sample activity
• Estimate labor cost

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• Direct vs. Indirect vs. Overhead
• 1. Direct costs costs that are tied to a
  particular encounter (e.g., staff time,
  medications)
• 2. Overhead costs that cannot be tied to
  particular procedures (e.g., police, maintenance,
  food service)
• 3. Indirect sometimes means overhead, and
  sometimes means non-salary benefits (e.g., health
  care, annual leave)

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• Method 2
• Pseudo-Bill
• What is a Pseudo Bill?
• . It is a method of assigning prices or costs to
  patient care encounters
• Typically applied to care provided by health care
  systems that do not normally bill patients for
  care. Examples HMOs, many foreign health care
  systems
• Is an attempt to duplicate the information
  normally found on a provider bill for care that
  does not have a bill.
• There are two-parts to a pseudo bill
• -What services were used/provided
• -The unit costs of each service

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• Method 3
• Cost Regression
• Cost Function
• - Function is used to estimate relative value
  weights
• - Estimated from external data on cost and
  characteristics of stays (not from own study
  data)
• - Obtain characteristics of stay from own study
• - Apply function to estimate cost of stay
• Advantage fewer variables than a pseudo-bill
  
• Disadvantage could have large error for
  individual bills

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• Cost Regression
• Dependent variable is charges or cost-adjusted
  charge (CAC)
• Independent variables
• Clinical information
• Diagnosis Related Group
• Diagnosis
• Procedures
• Vital status at discharge
• Length of stay
• Days of ICU care
• Cost data - frequently skewed ? log
  transformation to make assumptions more tenable

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• Example Medical/Surgical hospitalizations
• A statistical model to estimate cost
• Step 1. Build a model with inpatient discharge
  data (Medicare)
• Dependent variable is
  cost-adjusted charges (CAC)
• CACi ß1 LOSi ß2 DRGi ß3 ICU daysi ß4
  Agei ..ei
• Step 2. From the regression model, save the
  parameter estimates (ßs)
• Step 3. Plug in our data to estimate cost
• Estimated cost ß1 LOSii ß2 DRGii ß3 ICU
  daysii ß4 Ageii

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• Combining Methods
• No single method may fill all needs, even
  within a single study
• Hybrid method may be the best
• Direct method or pseudo-bill on utilization
  most affected by intervention
• Cost regression or Medicare payment for other
  utilization

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• (8) Opportunities and Challenges

Health plans Hospitals
Oppor-tunities - ?? Adm. efficiencies related to contracting -? Predictability of expenditure - Ability to benchmark hospital performance and create incentives to award high-performing hospitals - Methods to control cost - Provide clinical and quality information supporting pay for performance - Clinically meaningful to focus on efficiency and effectiveness - Grouper software (for analysis) - Full responsibility for LOS and resources - Adm. savings / reduced costs in contract negotiations - Greater predictability of expenditures - ?? case-mix management - More meaningful information to physicians in their care practices - Hospitals put on level playing field to recognize best in class
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• (8) Opportunities and Challenges (continued)

Health plans Hospitals
Challenges - Cost containment initiatives ? DRG implementation slow - IT systems changes required for groupers - Infrastructure changes required for (i) focus activities from LOS Mx to Mx of admissions, transfers, readmissions (ii) training on DRG (iii) periodic review of coding - ?existing groupers/find another to meet the needs - Determination of outliers payment ( if failure, eroding the value of DRG) - Financial risk (on how DRG implemented) - Additional costs to buy grouper software - Coordination/communication with physicians - Small or low-volume hospitals have fewer cases ? risks - Determination of outliers payment
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• (9) Countries Using DRG payment
• - USA
• - Australia
• - Canada
• - Europe UK, Germany, France, Demark,
  Finland, Italy, Austria, Belgium,
  Netherlands, Norway, Portugal, Spain,
  Sweden
• - Asia Thailand, Taiwan, Indonesia,
  Singapore, Malaysia, China
• - Some OECD countries Austria, Chile,
  Czech Republic, Estonia, Greece, Hungary,
  Iceland, Ireland, Israel, Japan, Korea,
  Luxembourg, Mexico, Poland, Slovakia Republic,
• Switzerland, Turkey

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• (10) DRG and Myanmar
• - Too far to introduce DRG payment
  system
• - To establish it, the followings should
  be considered
• (a) Political will for health care
  reform and for change of financing
  policy
• (b) Enactments including health
  insurance
• (c) Establishment of strong HIS and
  data libraries
• (d) Human resources with international
  exposure and experiences on health economics
• (e) Capacity building
• (f) International inputs
• (g) DRG Supervisory Committee
• (h) DRG Auditing
• (i) Research and Development

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• (11) References
• (i) Budi Hydayat (2011). Lecture notes on
  Diagnosis Related Groups (DRGs) Overview,
  Costing Methods and Empirical Evidences. Training
  on Health Care Financing and Payment Systems
  Ensuring Efficient Universal Coverage. Sept 2001.
  Bali, Indonesia.
• (ii) Clinical Research and Documentation
  Departments of 3M Health Information Systems
  (2003). All Patient Refined DRGs (APR-DRGs).
  Version 20.0. Methodology Overview. Willingford,
  Connecticut and Murray, Utah. pp 85.
• (iii) Donald Pardede (2011). Lecture notes on
  DRG/CBGs Payment by Jamkesmas Experience and
  Challenges. Training on Health Care Financing and
  Payment Systems Ensuring Efficient Universal
  Coverage. Sept, 2011. Bali, Indonesia.
• (iv) Diagnosis Related Groups (DRGs) and the
  Medicare Program Implications for Medical
  Technology- A Technical Memorandum, Washington,
  DC US Congress, Office of Technology Assessment,
  OTM-TM-H-17, July 1983. pp 82.
• (v) Integrated Health Care Association (2009).
  DRG-Based Payment Assessment. Navigant Consulting
  Inc. California, USA. pp 9.
• (vi) JC Langenbrunner, C Cashin and SODougherty
  (2009). Designing and Implementing Health Care
  Provider Payment Systems How-To Manual. The
  International Bank for Reconstruction and
  Development/The World Bank 1818 H Street NW
  Washington DC 20433 pp 325.
• (vii) Ohio Hospital Association. Internet data
  downloaded on 1 Nov, 2011. (website
  www.ohanet.org/ceohio/attachments/medicare-formula
  .pdf)
• (viii) Office of Inspector General, Office of
  Evaluation and Inspection, Region IX (2001).
  Medicare Hospital Prospective Payment System How
  DRG rates are Calculated and Updated. USA. pp 18.
• (ix) WHO (2009). Health Financing Strategy for
  the Asia Pacific Region (2010-2015). pp 43.
• (x) 256-522-DRG. Internet data downloaded on 6
  Nov 2011. (website ebookbrowse.com/256-552-drg-pp
  t-d59656225)

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THANK YOU VERY MUCH