In a move that could shift billions of Medicare dollars to teaching hospitals at the expense of small and rural facilities, a congressional advisory panel may recommend that Medicare nearly double the number of DRGs it uses to pay hospitals for inpatient care to beneficiaries.
The problem with the current system of 491 DRGs, according to the Medicare Payment Advisory Commission, is that it does not adequately reflect differences in the severity of patients' illnesses that occur within a single DRG, resulting in overpayments to some providers and underpayments to others. Using as many as 900 DRGs, however, would make the payment system more sensitive to those differences.
Such a proposal would shift billions of dollars from hospitals that treat simple cases, such as small and rural facilities, to hospitals that treat highly complex cases, such as teaching facilities.
Under the best scenario, rural hospitals as a whole would lose 1.5% of their total Medicare payments. Under the worst, they would lose 2.7%, and those that have fewer than 50 beds and receive no federal rural-health subsidies would lose 5.1%.
Teaching hospitals would gain between 0.2% and 0.5% under three scenarios outlined by MedPAC analysts.
MedPAC is aiming to make inpatient payments more accurate. Now each DRG encompasses a wide range of patients, for which hospitals receive roughly the same fee regardless of the severity of the patients' conditions.
"Something that has too much variance within a class overcompensates some and undercompensates others," said MedPAC Chairwoman Gail Wilensky.
As a result, the small and rural hospitals that can treat only less severe cases are overcompensated, and the large urban teaching facilities that have the expertise to treat more-severe cases are undercompensated.
The increase in the number of DRGs would allow for payments that are closer to hospitals' costs for more-severe and less-severe cases. As a result, the hospitals that tend to treat sicker patients, such as urban teaching facilities, would see increased payments, while those treating less-acute patients, such as smaller rural hospitals, would see decreased payments.
But Mary Wakefield, a MedPAC member and a rural health policy analyst at George Mason University in Fairfax, Va., raised some concerns about the redistributive effects.
"I think there are some categories of providers that need some protection," Wakefield said. "We need to say first, do no harm to those providers receiving those special protections."
National hospital groups are not commenting, although representatives said privately that the redistribution makes the proposal a politically tough sell at a time when rural providers are the cause celebre of the hospital industry's efforts to alleviate payment restraints imposed by the Balanced Budget Act of 1997.
The relief package passed last fall increased payments to rural hospitals by $800 million over five years and payments to teaching hospitals by $700 million over five years.
Kenneth Raske, president of the Greater New York Hospital Association, downplayed the impact of the potential redistribution. He said MedPAC is looking at several changes to payment policies that could offset the teaching hospitals' potential gains under the inpatient refinement. And the budget law is still trimming teaching hospitals' payments, he added.
"If we had to say what's the problem with New York hospitals, it's the (Balanced Budget Act)," Raske said.
He said the GNYHA's focus will be on increasing the payments that the budget law had reduced.
Rural hospital representatives said they hadn't seen MedPAC's proposals and weren't prepared to comment.
MedPAC is expected to recommend ways to refine payments in a report to be released in June. The report will address how to minimize the reimbursement shift caused by expanding the number of DRGs.