• Hospital payment methods

    The latest report from the Center for Studying Health System Change (PDF) is worth a read. What I found most informative about it–due to the nature of and deficiencies in my own base of knowledge about various topics covered–is how hospitals and physicians are paid.

    The report tells us that the vast majority of physicians are paid by private plans using the same methodology as Medicare, the Medicare physician fee schedule. (We’ll be hearing a lot more about that as Congress struggles with another “doc fix” over the next month or so. The fact that it is the dominant payment method for both public and private payers makes it and its problems very important.)

    However, the report also tells us that insurers (or the largest four at least) do not use Medicare methodology, the diagnosis-related groups (DRG) system, in making payments to hospitals. Here’s the table from the report (click to enlarge):

    The “per diem” and “discounted charges” methods are much more common than DRG-based payments. What does this mean? Actually, I don’t know. I know what DRGs are (more here). I can guess what “per diem” and “discounted charges” mean but my guesses don’t really help me understand how they differ or how they work and why hospitals and/or plans might prefer them to the DRG system. Can anyone help me out? Can you explain how these payment systems work or point to a good resource that does so?

    • Here’s Uwe Reinhardt with a blog post and a link to a paper of his on the subject. : http://economix.blogs.nytimes.com/2009/01/23/how-do-hospitals-get-paid-a-primer/

    • His conclusion: “No one really understands the determinants of the wide variations in prices paid hospitals by a given insurer for basically the same medical episode. Presumably these variances reflect the relative bargaining strength of the two parties in each instance.”

    • I’ve seen a number of hospital per diem contracts, with just a couple of categories (med-sug, NICU, ICU).

      US average length of stay (ALOS) for all hospital admissions has fallen despite the fact that many are also paid on a per diem. For the data on ALOS, see p. 35 of the International Federation of Health Plans 2009 Report for a helpful chart (http://www.scribd.com/doc/22035128/International-Federation-of-Health-Plans). Many hospital internal management reports track the ALOS and this data is routinely reported to their board and to the bond rating agencies.

      One possible explanation is that hospitals generally treat all patients the same (they don’t have separate surgical processes for Blue Cross patients v. Medicare patients). The Medicare & Medicaid hospital reimbursement system drives change and the effects spillover, even to the private plans with per diem reimbursement.

    • Hospitals would prefer a discount of charges because it puts the payer completely at risk on each case, and gives them more control over their revenue. On per diem and DRG based contracts, they usually have an outlier provision that puts the payer at risk for charges more than twice the per diem or DRG based charge; but then the hospital is at risk for up to that 200% level.

      The payer always prefers a per diem or DRG based reimbursement because it transfers some/most of the risk to the hospital.

    • I deal with insurance companies daily on the inpatient side, and I will add this to above re: an in the trenches addendum:

      A company that uses per diem charges has active concurrent daily review. They will deny or approve days, and can make life extraordinarily difficult. You will often need to appeal or call the company to get days back or give them additional info (see INTERQUAL). By carving out days, they can deny up to 8-10% of charges.

      With DRG format, hospital may get denied on day #1 and must appeal or eat the admission. Obviously, a capitated format and there is incentive to move things through.


    • Discounted charges is basically just FFS, with each payer having negotiated its own discount off of whatever the hospital charges per service. So it has the same basic problems inherent in any FFS reimbursement scheme.