The Issue is Actual Cost of the Service to the hospital verses DRG payment

Stanley Feld M.D.,FACP,MACE

I apologizing for forgetting to link the complete report; “Proposed changes to hospital inpatient prospective payment system” is in the Federal Register April 25, 2006. It is a formidable document. It has been predicted to revolutionize the way hospitals do business.

The New York Times Article goes on to say; The basic payment for surgery to open clogged arteries, by inserting a drug-coated wire mesh stent, would be cut by 33 percent, to $7,590. The payment for implanting a defibrillator, like the one used by Vice President Dick Cheney, would be cut 23 percent, to $22,000, while the payment for hip and knee replacements would be reduced 10 percent, to $14,500.

Drug and device makers have been lobbying Congress and the Bush administration to delay the changes to allow further analysis. Device makers are scheduled to meet with top White House officials this week. More than 200 members of Congress have signed letters supporting a one-year delay.

The charges should definitely be lined up with costs of service. These charges seem very high to me. The actual cost of the service, procedure and device should be calculated into the charge. We have seen some device charges to be extremely secretive. A reasonable profit should be added to the cost. The fee for the community is then determined. If one provider is more efficient than another provider the efficient provider should not be penalized. The efficient provider should be rewarded by the extra profit. If costs go down then the charge will go down.

The New York Times Article goes on to say; The goal of the new payment system is to pay hospitals more accurately for the cost of care. But Jayson S. Slotnik, director of Medicare policy at the Biotechnology Industry Organization, a trade group, said that payments would, in many cases, be less accurate because the government had relied on old hospital cost reports and claims data that did not reflect the use of new technology.

Without a delay, Mr. Slotnik said, hospitals can expect to see a 35 percent reduction in Medicare payments for stroke patients treated with clot-busting drugs. The basic payment for such cases is now $11,578.

Is this the actual cost of service plus a reasonable profit or the distortion created by the DRG payment systems? Are these distortions leading to profits that have enabled hospitals to be make vast improvements in their infrastructure and facilities?
Physicians treating patients are not aware of these distortions when they order the procedures to practice the best medicine they can. Physicians only see the decreases in payment they receive while experiencing and increase in overhead. Physicians experiencing a decrease in net profit should be thinking about how to become more efficient and decrease their overhead.

The hospitals taking care of less profitable diseases should be encouraged to develop centers of excellence for those less profitable disease, so they can become more efficient and in turn more profitable.

Mark B. McClellan Medicare administrator said in an interview “If you take a big step back and look at Medicare spending, 90%-plus of what we are spending is going for the complications of chronic disease.” He goes on to say “We can get healthier beneficiaries and lot lower costs related to complications if we can get more prevention.”

A problem in the system is we do not provide reimbursement for prevention. We will discuss this in detail in the future.

In Focused Factories, the system has an increased chance of experiencing less complications from diseases and procedures than in a general care facility. We should be encouraging “Focused Factories” and not discourages them.

There is much more to say about this article. These new rules can lead to more dysfunction in the healthcare system as well as a decrease the quality of care. However, prices paid for DRGs have to be aligned to be more realistic with the actual cost the hospital accrues for care. This will be extremely difficult to obtain voluntarily. In a consumer driven environment, the consumer can demand this price transparent.