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Many physicians have never thought about how hospitals are paid. Physicians (before you close this email), even the ACGME has stressed the importance of learning the business of medicine. As I’ve said many times before, physicians must properly understand the system to optimally navigate it (and change it, as so many say they want to do).

I will talk much about CMS (The Centers for Medicare and Medicaid) and their rules. No, they don’t run the entire show and tell everyone what to do. You can generally divide insurance companies into governmental and commercial. While commercial payers are private companies that can do whatever they want, they generally follow CMS’s lead - not to mention the many government plans that are outsourced to commercial plans.

How’d We Get Here?

In the 1800s, payment for medical services was pretty straightforward. A physician set their price and the patient paid what they could.

In 1964, President Lyndon B. Johnson established Medicare for those 65 and older and Medicaid for low-income families and disabled people. At the time, reimbursement was simply based on what hospitals reported as their costs. But as you can imagine, this got out of hand as costs sored to 3x inflation.

Diagnosis Related Groups (DRGs) had been developed at Yale University in the 1970s to determine how much money it took to care for patients grouped around diagnoses. Because of those increasing costs, in 1983 President Ronald Reagan established the Medicare Prospective Payment System (PPS), which adopted DRGs as its reimbursement model.

Note that some hospitals (such as critical access hospitals, children’s hospitals, and cancer hospitals) are exempt from the PPS and are paid with different payment structures.

Remember I said in a previous newsletter that the government really doesn’t like to get into the nitty gritty details and prefers to contract out to private companies? Yeah, every DRG version since that first one at Yale (the “first” one by CMS was called “CMS 2.0”) have been updated by 3M (yes, the same company that makes tape).

Though DRGs were developed to approximate the amount of money it would take to care for a patient within that group, not all patients are made the same. Those with additional comorbidities/complications (CCs) would cost more to care for. So, many DRGs had a second tier that included CCs and therefore reimbursed a bit more to cover that additional cost.

But in version 25 starting Oct 1, 2007, CMS had revised the CC list so much that they renamed it to MS-DRG (Medicare-Severity DRG). They also added a list of MAJOR complications or comorbidities (MCC)_, which reimbursed even more than just the CC. Thus, many DRG’s had 3 tiers (which you may hear referred to as “triads.”)

How Do Patients Get Placed Into a DRG?

That’s where the principal diagnosis and surgical procedure comes in. Physicians, TAKE NOTE.

Why?

Because I can’t tell you how many times we’ve been asked to look at some hospitalizations that some specialists think were “coded wrong” because it hurt their metrics and they didn’t understand why it was “tagged to them” (usually based on DRG).

First, here’s the decision tree from CMS:

(Don’t get hung up on “Major Diagnostic Category.” To oversimplify it, DRGs are grouped by organ systems and these are called “Major Diagnostic Categories” or MDCs.)

The principal diagnosis is selected as “that condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care.” Essentially, what diagnosis led to the admission based on the work-up by the time of discharge. That’s why I say feel free to list as many differential diagnoses as you want on admission, but make sure to document ruled in/ruled out as you go and make sure your problem list on discharge is accurate (as the final discharge diagnosis will ultimately guide the principal diagnosis and DRG placement).

Two nuances usually trick people up, causing them to ask us if something was “coded wrong”:

1. When a procedure was done and it was “unrelated” to the reason the patient stayed in the hospital as long as they did. Example: a patient that presented with both a GI bleed and a heart failure exacerbation. The patient underwent an EGD on the first day and stabilized quickly from the GI bleed but stayed in the hospital 6 more days for their heart failure. GI docs will get upset that it’s “tagged” to them. But, as you can see in the decision tree, Yes/No for a procedure guides the algorithm.

2. Let’s say no EGD was done in that example, but the patient’s anemia issues seemed to complicate things just as much as the patient’s heart failure. Which do you pick as the principal diagnosis? The GI bleed or the heart failure? The guidelines state: “…When two or more diagnoses equally meet the criteria for principal diagnosis… Any one of the diagnoses may be [picked].”

Okay, that’s all fine and dandy, but how do you standardize it so everyone is using the same terminology across the entire country?

DRG Takes Advantage of ICD Codes

Many are shocked to find out that the U.S. did not invent ICD codes. ICD stands for INTERNATIONAL Classification of Diseases, and are developed by the WORLD Health Organization, which has its origins all the way back to the 1700s. ICD-10 is the 10th revision of these codes. An 11th has already been developed but the U.S. has not yet adopted it.

These already-developed codes represented an easy way to standardize the assignment of diagnoses to DRGs: This list of ICD codes → That DRG.

The U.S. does have our own twist on these codes that we call ICD-10-CM. CM stands for Clinical Modification.

But when we adopted ICD-10-CM in 2015 there was a problem: it didn’t include procedures. So, CMS (contracting with 3M again), developed a procedural coding system and called it ICD-10-PCS (although it borrows the naming scheme of WHO’s ICD-10, it’s a completely U.S. developed list and is not used internationally).

How Does All of This Equal $$$?

Each DRG has an assigned “weight.” See the 3rd column in the below table:

Each hospital has a blended payment rate (BPR). For example, $6,000.

You multiply the weight of that DRG by that rate and you get the payment to the hospital. So, using the DRG weights above:
0.5530 × $6,000 = $3,318
0.7447 × $6,000 = $4,468
1.2022 × $6,000 = $7,213

So, yes, the hospital gets that lump sum of money regardless of if the patient stays in the hospital two days or ten days (there are outliers, which I won’t get into).

You can see why there is a focus to capture CCs and MCCs. But adding more than one CC or MCC will not increase the payment further but may decrease the chance of a successful denial by an insurance company.

What About the Children?!

If MS-DRG is optimized for the Medicare population and the Medicare population is generally 65 or older, what about the children?!

Well, 3M (yup, there they are again) developed a separate system called the APR-DRG (APR = All Patient Refined) to capture the details for newborns and children. Instead of various levels based on CC and MCC, it stratifies by “severity of illness” and “risk of mortality” - each on a scale of 1 - 4. The APR-DRG model is used by many state Medicaid programs and some commercial insurance companies.

I hope that helps you understand the U.S healthcare system a bit more. Knowledge is power!

That’s all for now. Don’t hesitate to ask questions as they help inspire future issues!

Cheers,

Robert

Thanks to Laura Samson, RN BSN CCDS, and my wife Kara (for grammar) for editing this newsletter!

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Sources:

The Hospital Guide to Contemporary Utilization Review: 3rd Edition