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.
1
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
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
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
DRG Description
N01 Died w/in one day, same hosp
N02 Died w/in one day, recv hosp
N04 Transferred w/in 4 days
N10 Less than 750 grams - discharged dead
N14 Less than 750 grams - discharged alive
N20 Less than 1000 grams - discharged dead
N24 Less than 1000 grams - discharged alive
N37 Less than 1500 grams - discharged dead
N38 Less than 1500 grams - O.R. performed
N39 Less than 1500 grams - no O.R. performed
N48 Less than 2000 grams - O.R. excl circumc
N49 Less than 2000 grams - no O.R. performed
N50 Less than 2500 grams - O.R. performed
N56 Less than 2500 grams - no O.R.- major dx
N57 Less than 2500 grams - no O.R.- minor dx
N70 Less than 2500 grams - no O.R.- no dx pr
N76 2500 and greater grams - no O.R.- major
N77 2500 and greater grams - no O.R.- minor
N78 2500 and greater grams - no O.R.- no dx
N80 2500 and greater grams - O.R. performed
5
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
DRG Payment Formula
The formula for a DRG payment is:
Payment
=
(DRG Relative Weight)
x
(Hospital Base Rate)
+
(Outlier Adjustment)
7
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
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
Hospital Classification Data
Obtained from CMS
H ealthcare
C ost
R eport
I nformation
S ystem
10
Five Classification Variables
Obtained from HCRIS
1) Critical Access Hospital/Not C.A.
2) Large/Small Hospital < 300 beds
3) Teaching/Non-teaching Hospital
4) Sole Community Hospital/Not S.C.
5) 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
Peer Grouping Procedure
1) 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.)
2) 32 different types of hospital are created
from all combinations of the five variables.
3) The regression equation is used to
compute the predicted average cost for
each type of hospital.
4) The cumulative percentage distribution of
predicted cost is divided into five
quintiles.
12
32 Hospital Types and
5 Hospital Cost Groups
Hospital Cost Peer Groups
7.7 100%
1 2 3 4 90%
5
Cumulative Percent
7.65 80%
Predicted Cost
70%
7.6 60%
50%
7.55 40%
30%
7.5 20%
10%
7.45 0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32
The 32 types are arranged from lowest to highest
average cost, and grouped into five quintiles by
cumulative percent of cost.
13
Peer-Group Base Rate
Calculation Procedure
1. Use the observed distribution of discharges
across the 32 hospital types to compute the
weighted-average predicted cost for each
peer group.
2. The relative base rate is the ratio of the peer
group average to the over-all average.
3. 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
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
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
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
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
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