Money for nothing

The wacky world of hospital reimbursement

MASSACHUSETTS HOSPITALS appear to be getting more money while providing no added value to patients. Patients, premium payers, and the state or federal governments (funded by our payroll or income taxes) are footing the bill.

As reported recently in Commonwealth, the Health Policy Commission research team at the agency’s September 11 board meeting presented data suggesting that Massachusetts hospitals are bringing in hundreds of millions of dollars of additional fee-for-service revenues each year by augmenting the severity of patient diagnoses.

It’s important to say up front that no fraud is involved. Rather, with the evolution of coding schemes for diseases and conditions, a hospital’s enhanced ability to extract information from electronic medical records, and an industry of consultants and trained staff with revenue maximization goals in mind, inpatient admissions are being upgraded to a higher level of severity and hospital payment.

I say “new round” because this sort of practice has happened periodically going back to the 1980s when diagnostic related group (DRG) payments first entered the hospital reimbursement world in a dedicated way.

But the Health Policy Commission data indicates this new effort to enhance hospital revenues has taken shape in Massachusetts over these past few years at significant cost to premium and tax payers.

From 2010 to 2017, the overall proportion of hospital discharges categorized as higher acuity increased from 56 percent to 62 percent, according to the Health Policy Commission data.

On the private insurance side, the impact from reported increases in patient acuity tied to inpatient billing from 2013 through 2018 resulted in average commercial hospital spending per discharge growing from $14,000 to $18,300, which is about 5 percent annual growth.  During this same period, the rate of hospitalization per 1,000 members decreased by almost 13 percent while hospital spending grew by almost 11 percent.  Data covering the 2014-2016 period indicated slightly more than half of spending growth was due to annual price increases paid to hospitals, but the rest came from higher hospital bills tied to illness severity.

So even though doctors are hospitalizing patients less, we premium payers don’t seem to be capturing hospital savings from that accomplishment.  Instead, hospitals appear to be offsetting the loss of money from having fewer inpatients by maximizing revenue for the admissions that are coming through their doors. They are maximizing the revenue by claiming that patients being hospitalized are actually much sicker now on average compared to five or so years ago.

Are patients sicker? There is a slight but persistent aging of the population.  There is also an evolution toward providing more care on an outpatient basis for procedures and treatments which used to require an overnight stay—witness the growth in outpatient surgery.  Also, patients who present ill to a hospital emergency department sometimes spend time occupying a bed for up to a day or two while being evaluated, and are categorized as having “observation stays” rather than a hospital admission for the care received.

Both of these evolutions in care practice could result in hospital admissions that are sicker today than they were before.

But the Health Policy Commission data suggest that’s not the case. From 2013 to 2018 the average level of sickness for patients grew by about 10 percent, but the length of stay over the five years only grew by about 2 percent and the total number of intensive care unit days actually decreased by almost 10 percent.  So by these proxy indicators for severity of illness, it does not appear that patients who occupy hospital beds in Massachusetts are actually sicker than before.

It seems much more like gaming of the payment system.

Let me be clear—the gaming is not illegal. It is a way for hospitals to grow their revenues when admissions are declining and the Health Policy Commission and others are focused on trying to find ways to keep hospital price increases in check.

Even if one assumes that as more information is gathered about patients as compared to a few years ago leading to an inflation in the average severity of illness for a given diagnosis, then    the answer is to reset the base levels of payment—i.e. have a smaller add-on payment for someone categorized at a higher level of severity.

While the practice of augmented coding is taking place across all hospital categories – community, teaching, and academic medical centers – the acuity growth across hospital systems is not the same across all providers. The “have” health systems with greater resources to hire well-trained coding staff and to buy systems that can more easily extract the data and information needed for augmented coding tend to do better than the “have not” systems.

The commission cited Partners Healthcare over the 2013 to 2018 period as having the highest growth in reported patient acuity – about 15 percent over that period.  Interesting, May 2015 was when Partners first went live with its EPIC electronic health records system.

Insurers, who one would think would only be net losers from augmented coding, may in fact have mixed incentives of their own tied to the practice, according to the commission researchers. Maybe that’s why the insurers haven’t pushed to rebase their DRG payment systems?

Meet the Author

Paul A. Hattis

Associate professor, Tufts University Medical School
Perhaps we need to adopt a Maryland-style system of paying hospitals global budgets, ending fee-for-service billing and all the gamesmanship accompanying it. Let’s hope the Health Policy Commission at its October cost trends hearing can dig into all of these issues a bit more.

Paul A. Hattis is an associate professor at Tufts University Medical School.