what is more effective at reducing cost drg or medicare advantage

If a hospital can effectively treat you for less money than Medicare pays for your DRG, then the hospital makes money on that hospitalization. If the hospital spends more money caring for you than Medicare gives it for your DRG, then the hospital loses money on that hospitalization. David Sacks/Stone/Getty Images What Does DRG Mean?

Full Answer

What is the Medicare DRG approach to hospital costs?

Under Medicare's DRG approach, Medicare pays the hospital a predetermined amount under the inpatient prospective payment system (IPPS), with the exact amount based on the patient’s DRG or diagnosis. 2 

What is the applicable reduction to base operating DRG payment amounts?

The applicable reduction to base operating DRG payment amounts is 2.00%. A HAC is a condition a patient gets during hospitalization (the condition wasn’t present on admission).

Is Medicare better than Medicare Advantage?

Neither Medicare nor Medicare Advantage is better, but one may be more suitable than the other for people in specific financial or medical circumstances.

What is the difference between the DRG and MS-DRG system?

Since the 1980s, the DRG system has included an all-payer component for non-Medicare patients plus the MS-DRG system for Medicare patients. 1  The MS-DRG system is more widely used and is the focus of this article. (MS stands for Medicare Severity.)

What happens if a hospital's cost exceeds the DRG payment rate?

If the hospital’s cost is less than the DRG payment rate, it retains the surplus payment, and if its cost exceeds the DRG payment rate, it bears the loss on that case. Hospitals responded by sharply reducing average length of stay. Spending per beneficiary by Medicare Hospital Insurance (Part A, which covers hospital inpatient ...

When did Medicare Advantage start?

In 1997 and again in 2003, Congress expanded the number and scope of private plans available through this program, now called Medicare Advantage. Medicare Advantage plans receive a monthly payment for each Medicare beneficiary enrolled in the plan, based on the location, age, and health status of the beneficiary.

What is Medicare payment policy?

Medicare payment policy has evolved from the cost- and charge-reimbursement approach that was the predominant model when the program was enacted to the establishment of prospective payment systems in the 1980s and 1990s and, more recently, to movement toward value-based payment. 1 The enactment of the Affordable Care Act of 2010 (ACA) and the recent announcement of value-based payment goals for Medicare, along with the enactment of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), have accelerated that movement and provided Medicare with the means to accomplish the goals of better health care, smarter spending, and a healthier population. 2,3 The first two papers in this series focused on Medicare’s accomplishments over its first 50 years, the impact of the ACA on the program, and the challenges that remain; this paper focuses on the evolution of Medicare payment policy and the potential of payment reform to help address those challenges. 4,5

How does the Affordable Care Act help Medicare?

The Affordable Care Act (ACA) has provided the Medicare program with an array of tools to improve the quality of care that beneficiaries receive and to increase the efficiency with which that care is provided. Notably, the ACA has created the Center for Medicare and Medicaid Innovation, which is developing and testing promising new models to improve the quality of care provided to Medicare beneficiaries while reducing spending. These new models are part of an effort by the U.S. Department of Health and Human Services to increase the proportion of traditional Medicare payments tied to quality or value to 85 percent by 2016 and 90 percent by 2018. This issue brief, one in a series on Medicare’s past, present, and future, explores the evolution of Medicare payment policy, the potential of value-based payment to improve care for beneficiaries and achieve savings, and strategies for accelerating its adoption.

What is Medicare bonus?

Medicare provides bonuses to hospitals and other providers that achieve top-level scores on patient outcomes and care experiences. As of 2015, 1.5 percent of base payments for more than 3,500 hospitals is withheld and used to reward top-performing hospitals for the quality of their care and their patients’ experiences of care; this amount increases to 2.0 percent by 2017. 13 A similar program was initiated in 2015 for physicians in larger practices, and will expand to include all physicians by 2018. 14

How much did Medicare spend in 1985?

Between 1975 and 1985, annual Medicare spending per beneficiary rose from $472 to $1,579 —a growth rate of 12.8 percent per year, or 5.3 percent when adjusted for economywide inflation. 6.

How did Medicare pay for hospitals?

Hospitals were paid on the basis of their own costs, and physicians were paid on the basis of the fees they charged. These payment systems provided no incentive to control costs—in effect rewarding higher hospital costs and physician fees—and did not take into account the quality or appropriateness of care or its contribution to patient outcomes. Between 1975 and 1985, annual Medicare spending per beneficiary rose from $472 to $1,579—a growth rate of 12.8 percent per year, or 5.3 percent when adjusted for economywide inflation. 6

Why is the hospital eager to use DRG?

Since those services mean you can be discharged sooner, the hospital is eager to use them so it's more likely to make a profit from the DRG payment.

What is a DRG in Medicare?

A DRG, or diagnostic related group, is how Medicare and some health insurance companies categorize hospitalization costs and determine how much to pay for your hospital stay. Rather than pay the hospital for each specific service it provides, Medicare or private insurers pay a predetermined amount based on your Diagnostic Related Group.

Why is DRG payment important?

The DRG payment system encourages hospitals to be more efficient and takes away their incentive to over-treat you. However, it's a double-edged sword. Hospitals are now eager to discharge you as soon as possible and are sometimes accused of discharging people before they’re healthy enough to go home safely. 6 .

What was the DRG in the 1980s?

What resulted was the DRG. Starting in the 1980s, DRGs changed how Medicare pays hospitals. 3 .

What was included in the DRG bill?

Before the DRG system was introduced in the 1980s, the hospital would send a bill to Medicare or your insurance company that included charges for every Band-Aid, X-ray, alcohol swab, bedpan, and aspirin, plus a room charge for each day you were hospitalized.

What happens if a hospital spends less than the DRG payment?

Your age and gender can also be taken into consideration for the DRG. 2 . If the hospital spends less than the DRG payment on your treatment, it makes a profit. If it spends more than the DRG payment treating you, it loses money. 4 .

What is DRG system?

The DRG system is intended to standardize hospital reimbursement, taking into consideration where a hospital is located, what type of patients are being treated, and other regional factors. 4 . The implementation of the DRG system was not without its challenges.

When do hospitals have to report Medicare Advantage rates?

Hospitals must report the median rate negotiated with Medicare Advantage organizations for inpatient services during cost reporting periods ending on or after January 1, 2021.

What is CMS update rate?

CMS updates the hospital-specific rates for Sole Community Hospitals (SCHs) and Medicare Dependent Share Hospitals (MDHs) 2.4% when they submit quality data and use Electronic Health Records (EHR) in a meaningful way. The update is 1.8% if providers fail to submit quality data. The update is 0.6% if providers only submit quality data. The update is 0.0% if providers submit no quality data and don’t use EHR in a meaningful way.

How long does Medicare cover psychiatric services?

Medicare covers patients’ psychiatric conditions in psychiatric hospitals or Distinct Part (DP) psychiatric units for 90 days per benefit period, with a 60-day lifetime reserve. Medicare pays 190 days of inpatient psychiatric hospital services during a patient’s lifetime. This 190-day lifetime limit applies to psychiatric services in freestanding psychiatric hospitals but not to inpatient psychiatric services in general hospitals or DP IPF units.

How long does Medicare cover inpatient hospital care?

The inpatient hospital benefit covers 90 days of care per episode of illness with an additional 60-day lifetime reserve.

How many days does Medicare cover?

Medicare allows 90 covered benefit days for an episode of care under the inpatient hospital benefit. Each patient has an additional 60 lifetime reserve days. The patient may use these lifetime reserve days to cover additional non-covered days of an episode of care exceeding 90 days. High Cost Outlier.

Does Medicare cover OPPS?

Medicare excludes payment for certain types of OPPS services , such as outpatient therapy services and screening and diagnostic mammography. Get more information about these services at 42 CFR Section 419.22.

Does CMS recognize ASCs?

CMS recognizes Medicare-certified participating ASCs by entering into a legal agreement with them according to 42 CFR Section 416 Subpart B to get Medicare payment.

What is a DRG in Medicare?

DRG stands for diagnosis-related group. Medicare's DRG system is called the Medicare severity diagnosis-related group, or MS-DRG, which is used to determine hospital payments under the inpatient prospective payment system (IPPS). It's the system used to classify various diagnoses for inpatient hospital stays into groups and subgroups ...

When do hospitals assign DRG?

When you've been admitted as an inpatient to a hospital, that hospital assigns a DRG when you're discharged, basing it on the care you needed during your hospital stay. The hospital gets paid a fixed amount for that DRG, regardless of how much money it actually spends treating you.

How many technologies are eligible for add on payments?

In 2020, the Centers for Medicare and Medicaid Services approved 24 new technologies that are eligible for add-on payments, in addition to the amount determined based on the DRG. 6

How much did nonprofit hospitals make in 2017?

The largest nonprofit hospitals, however, earned $21 billion in investment income in 2017, 4  and are certainly not struggling financially. The challenge is how to ensure that some hospitals aren't operating in the red under the same payment systems that put other hospitals well into the profitable realm.

Why are hospitals in rural areas losing money?

8 There are also indications that even well-established, heavily trafficked hospitals are losing money in some areas, but that's due in part to an overabundance of high-priced technology, replicated in multiple hospitals in the same geographic location, and hospital spending on facility and infrastructure expansions. 9

Does Medicare increase hospital base rate?

Each of these things tends to increase a hospital’s base payment rate. Each October, Medicare assigns every hospital a new base payment rate. In this way, Medicare can tweak how much it pays any given hospital, based not just on nationwide trends like inflation, but also on regional trends.

Does Medicare factor in blended rate?

Other things that Medicare factors into your hospital’s blended rate determination include whether or not it’s a teaching hospital with residents and interns, whether or not it’s in a rural area, and whether or not it cares for a disproportionate share of the poor and uninsured population. Each of these things tends to increase a hospital’s base payment rate.

What is a DRG?

A DRG covers all charges associated with an inpatient visit—from admission to the point of payment. Documenting the patient journey and assigning proper DRG classifications and relative weights, which are adjusted on an annual basis, requires effective communication between clinical and revenue cycle teams. [2] .

Why did Medicare and Medicaid create diagnosis related groups?

The Centers for Medicare & Medicaid Services created diagnosis-related groups (DRG) to encourage efficient care and cost containment, and remove incentives to over-treat patients. Despite being rolled out in the early 1980s, many hospitals and health systems are still losing revenue to DRG-related oversight.

Why should Medicare pricing be improved?

On the other hand, current Medicare pricing approaches can also be improved to ensure providers are not underpaid and to remove distortions in how care is provided.

How much will Medicare save in 2020?

The move would save Medicare an estimated $810 million in 2020, while saving beneficiaries an average of $14 per visit. The agency also proposed a wage index increase for struggling rural hospitals, while decreasing the index for high-wage facilities.

How does rotating RUC occupancy affect Medicare?

One analysis found that rotating RUC occupancy resulted in a statistically significant three to five percent increase in Medicare expenditures related to corresponding highly specialized procedures. Researchers focused on work RVUs (wRVUs), which are only a portion of the total RVU evaluated by the RUC and are based on time and mental effort required to perform a procedure. 47 This indicates that member specialists are likely to value related specialty procedures more highly, especially because changes were not correlated with reimbursement components that are not subject to RUC action (e.g. malpractice RVUs which are computed using malpractice insurance rates).

How does Medicare work with private payers?

Private payers usually establish provider prices through contract negotiations. If providers and payers are unable to agree on contracted prices, the provider is typically excluded from the insurer’s network. Medicare, on the other hand, is a price setter and uses a variety of approaches to determine the prices it will pay, depending on whether it is paying a hospital, doctor, drug or device. Through its rate setting process, Medicare aims to cover the costs that “reasonably efficient providers would incur in furnishing high-quality care.”3

What is upcoding in Medicare?

Hospitals and physician practices may be upcoding, a practice whereby providers use billing codes that reflect a more severe illness or expensive treatment in order to seek a larger reimbursement from Medicare. A study of 364,000 physicians found that a small number billed Medicare for the most expensive type of office visit for established patients at least 90 percent of the time. 50 One such example is a Michigan orthopedic surgeon who billed at the highest level for all of his office visits in 2015. The probability that these physician practices are only treating the sickest patients is quite low. In the past, CMS has justified reductions in payments to hospitals and physician groups to compensate for the costs of this upcoding—a vicious cycle we would not want to perpetuate.

Why are hospitals in concentrated or heavily consolidated markets using high revenues from private payers?

MedPAC analyses have asserted that hospitals in concentrated or heavily consolidated markets use high revenues from private payers to invest in cost-increasing activities like expanding facilities and clinical technologies —thereby leading to negative margins from Medicare because of an increased cost denominator. 16.

What is the CMS system for outpatient care?

25 Medicare originally based payments for outpatient care on hospitals’ costs, but CMS began using the Outpatient Prospective Payment System (OPPS) in August 2000. 26 This system pays hospitals based on predetermined rates per service using the Ambulatory Payment Classifications (APCs). APCs are associated with one or more Healthcare Common Procedure Coding System codes (HCPCS codes) which are updated annually. This payment method, compared to cost-based reimbursement, aims to incentivize cost-control and to give CMS the ability to predict and manage program expenditures. To account for geographic differences, CMS adjusts the labor portion of the national unadjusted payment rate (60 percent) by the hospital wage index for the area. Payments are further adjusted for rural vs. non-rural, patient severity, and whether the facility complies with certain rules, for example, participating in the hospital Outpatient Quality Reporting Program.

What is non benchmark MS DRG?

Again, non-benchmark MS-DRGs represent all other MS-DRGs typically not being paid by commercial health plans based upon the Medicare method of multiplying the relative weight times the baseline MS-DRG payment rate negotiated by the hospital and health plan , as shown above. For example, the commercial health plan might pay for a C-Section as follows.

Why are MS-DRGs non-benchmark?

Although MDC 14 and MDC 15 apply to general acute care services, MS-DRGs for deliveries (765-768, 774-775 and 795) have all been redefined as non-benchmark MDCs and MS-DRGs because hospitals that provide high volumes of OB deliveries compared with other benchmark MS-DRGs will skew the analytical data. For example, OB and newborn cases have much lower CMIs, average charges, and costs that other cases, so including them in the aggregation of general acute care data can have a major impact on the total data summary reports—e.g., lowering overall CMI, charges, costs, and outliers, especially on a per diem and/or per-discharge basis. The effect would be to render the data meaningless for comparing the hospital with other hospitals that may not provide OB services.

What would happen if hospitals adopted the benchmarking model?

If hospitals were to universally adopt this model, it would pave the way for the use of a new benchmarking system that would allow side-by-side, per-case performance comparisons among hospitals, and thereby provide a more reasonable and useful basis for measuring payment performance according to various factors, such as by payer and by MS-DRG. It also would help supplement current per-diem-based standards still in use.

What is the aim of the Focus reporting model?

The aim in converting to the Medicare FOCUS reporting model would be to help identify which components of the existing Medicare MS-DRG model would work under a uniform all-payer payment approach and which components (i.e., MS-DRGs and other factors such as outliers) would not be reasonable for hospitals, and would therefore be unacceptable.

Why do hospitals need to change from per diem to case rate?

However, in converting from per diem rates to case rates, hospitals will require new measures based on ad missions and/or discharges, because the key performance indicators must correlate to the new case rate method of payment.

What is case rate approach to Medicare?

As commercial health plans adopt a case-rate approach to payment based on Medicare’s MS-DRGs, modifications are needed to account for how health plans’ populations differ from the Medicare population.

Do MS-DRGs have utilization data?

Again, because MS-DRGs were developed for Medicare’s more senior patients, many of these MS-DRGs may not adequately address utilization and payment data for commercial health plans that have younger, healthier patient populations. Although APR DRGs are far more sophisticated for OB, newborn, and neonatal patients, most hospitals may not have purchased the APR DRG system and, therefore, the data would not be readily available to them. Consequently, for benchmarking continuity purposes, these DRGs need to be excluded from the case-rate payment model.

What is the new MS-DRG for Car T?

New CAR-T MS-DRG: As proposed, the CMS created a new MS-DRG 018 (Chimeric Antigen Receptor [CAR] T-cell Immunotherapy), moving CAR-T cases out of their current MS-DRG 016. As illustrated in Figure 1, this new MS-DRG has a much higher relative weight than MS-DRG 016, with an unadjusted MS-DRG base payment rate of $239,929 (a slight increase over the proposed rate of $239,490).

Does total reimbursement vary by hospital?

Total reimbursement will vary by hospital and case, with adequate reimbursement in some cases but with potential risk for hospitals on significantly costly cases, especially if the CMS doesn’t appropriately account for a hospital’s costs to treat a patient with CAR-T.

Does CMS reimburse for CAR T?

Adjustment for Clinical Trial Cases: The CMS finalized a proposal to reimburse for CAR-T clinical trial cases, which do not incur drug costs, at a lower rate than non-clinical trial cases. In the final rule, the CMS determined that clinical trial cases for CAR-T treatment typically cost 17% of non-clinical trial cases (an increase over the originally proposed amount of 15%) and therefore will apply an adjustment factor of 0.17 to the relative weight of MS-DRG 018 for these cases. This results in a base rate for clinical trial cases of $40,788.

Is MS-DRG 018 a NTAP?

Impact on Hospital Margins – The finalized base rate for MS-DRG 018 is generally in line with FY 2020 total payment including NTAP for CAR-T treatment. Total reimbursement will vary by hospital and case, with adequate reimbursement in some cases but with potential risk for hospitals on significantly costly cases, especially if the CMS doesn’t appropriately account for a hospital’s costs to treat a patient with CAR-T.

Background

Evolution of Medicare Payment Policy

Moving The Focus of Payment Policy from Volume to Value

• Medicare has made significant improvements in the original payment methods modeled on the private insurance payment practices of the 1960s, and recent actions by Congress and the Department of Health and Human Services (HHS) have focused on accelerating that change. The ACA includes an array of provisions that are laying the foundation for fundamen...

See more on commonwealthfund.org

Strategies For Expanding Value-Based Payment