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This study examined why the average cost of Medicare hospital discharges increased more rapidly than inflation after the implementation of Medicare's prospective payment system (PPS). The average cost per Medicare case rose by 28.4 percent between 1984 and 1987. The increase in the hospital market basket was 11.0 percent during this period, thus, the real increase in cost per case was 15.7 percent. The authors decomposed this change in real cost per case into two major components: changes across DRGs (i.e. case mix) and changes within DRGs (i.e. intensity). Average cost per case increased 11.2 percent due to changes in case mix, and 4.5 percent due to higher costs per case within DRGs. We further decomposed the across- and within-DRG increases into the following components: technology, outpatient shift, and a residual. The authors estimate that technology changes accounted for 5.8 percent of the total increase in cost per case, while outpatient shift accounted for 3.4 percent of the total increase.

Hospitals --- Rates --- Prospective payment.

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The authors investigated how the costs of transfer cases are related to length of stay (LOS) and to the resource intensity of the DRG. The authors use this relationship to develop alternative payment formulas for transfer cases and evaluate the effect of these alternatives on the adequacy of payment for transfer cases, on hospitals that transfer a high proportion of their cases, and on the distribution of reimbursement and risk among groups of hospitals. The average daily cost of transfer cases declines with LOS, but at a decreasing rate. After controlling for LOS, the standardized cost of a case is approximately proportional to daily DRG weight and to the payment for a typical day in the DRG. These facts led the authors to develop a payment formula that results in a 30 percent improvement in the match of payment amounts to transfer care costs. The policy is similar to adding payment for one extra day to the current payment amount. It increases reimbursement to the ten percent of hospitals with the highest fraction of transfer cases by 1.5% and reduces their financial risk by 2%. The policy has very little effect on other hospitals. The authors also simulated a policy which increased outlier payments for transferring hospitalizations. This policy appears to have only a modest effect. A future report will examine the cost of care at the recipient hospital, total cost for the entire episode, and the care delivered during the episode.

Hospitals --- Medicare. --- Prospective payment

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When Congress designed and implemented the prospective payment system (PPS), the best available method to adjust for differences in case mix was the diagnosis-related groups (DRGs). The DRG system classified all patient cases, and had already been implemented in New Jersey's prospective payment system. While some of the problems in an earlier version of the DRGs have been resolved, concern remains that DRGs may need to be refined or replaced to better reflect variation in patient condition. This report was prepared as background to a report that the Congress requested from the Health Care Financing Administration. It compares the structure and performance characteristics of case mix adjustment measures being considered as replacements for or refinements to the diagnosis-related groups. The authors reviewed published papers, prepublication drafts, and technical reports on five case mix systems: APACHE II, Disease Staging, MEDISGRPS, Patient Management Categories, and Severity of Illness Index. The alternative systems differ in classification structure, data requirements, and stage of development. The findings suggest that, at present, no system appears to perform better than the DRGs.

Hospitals --- Hospital patients --- Diagnosis related groups --- Prospective payment. --- Classification --- Evaluation.

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Hospitals --- Surgery --- Medicare --- Prospective payment --- Patients. --- Cost control.

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Cancer --- Hospitals --- Treatment. --- Prospective payment. --- Hospital prospective payment --- Hospital prospective reimbursement --- Medicare hospital prospective payment --- Payment, Hospital prospective --- PPS (Medical care) --- Prospective payment, Hospital --- Prospective pricing, Hospital --- Prospective reimbursement, Hospital --- Reimbursement, Hospital prospective --- Diagnosis related groups --- Hospitalization insurance --- Cancer therapy --- Cancer treatment --- Prospective reimbursement --- Rates --- Therapy