Uncle Sam’s quandary: Are you too good at your job?
Will capitation fall prey to skillful hospitals?
In IBM’s human vs. machine chess match, the machine won.
In Medicare’s prospective payment system (PPS), which pits hospitals against the complex system of coding and reimbursement, hospitals have won by figuring out how to wend their way through the system and maximize reimbursement.
Faced with a decisive rout of their attempts to cut costs, federal officials are now moving toward another payment model capitation despite their fears and trepidation about what might happen next.
Everyone knows how the game is played
Hospital coders, reimbursement experts, and cost analysts play the PPS game and always have with unmatched skill. They wrestle with the chesslike complexity of codes and rules, and they outwit the machinelike PPS system, despite its unparalleled bureaucracy. Since the mid-1980s, hospitals that couldn’t outwit the system didn’t survive; those that could tended to flourish.
"Games, games, games" they toppled the once famed credibility of PPS, leaving Medicare leaders to resort to capitation as fast as possible, says John E. McDonough, PhD, researcher for the Michigan Blue Cross Blue Shield Association, based in Ann Arbor.
Will hospital payment experts figure out new ways to outsmart the capitation payment system? Or isn’t it their professional responsibility to live within the rules and advocate with their technical prowess for their hospitals’ best interests?
Clearly, by following coding rules, DRG-based reimbursement improved. For example, the more intense the coding documentation, the higher the hospital’s case mix index, which provides an across-the-board payment update for the hospital. Officials didn’t anticipate just how skillful hospital employees could become. McDonough sees this as gaming the system; hospital experts see it as playing the game by the rules.
If you step back and look at the situation over time, you can see that PPS has experienced a rise and fall much like an inverted bell curve. (See graph at left.) Picture a graph that starts high on the left side, dips down into a low curve midway, then climbs back up on the right end. On the left side, the first point would be 13.4 billion in aggregate PPS inpatient margins in 1984, dipping gradually down to its lowest at -2.4 billion in 1991, and climbing back to as high as 12.7 billion in 1997. In short, PPS inpatient margins were very high in the first two years of PPS, then fell precipitously over the next several years, points out Donald A. Young, MD, executive director of the Prospective Payment Assessment Commission (ProPAC), in the June report on Medicare performance.1 (See related story, p. 116.)
In the 1970s, prior to PPS, cost-based reimbursement characterized Medicare payment methodology. By 1980, more than 30 states had adopted an alternative their own version of PPS for Medicaid as a way to cut spiraling costs. Seen as the great savior of the system, PPS was adopted nationwide by the Health Care Financing Administration (HCFA) in 1984, and its use for Medicare reimbursement was required of virtually all hospitals by 1986.
But in 1997, only two states (Maryland and West Virginia) remain bound to Medicaid-PPS, and even the federal government is making stunning efforts to replace Medicare-PPS with as much capitation as possible.
When PPS first began spreading, states found it highly effective for reducing their rate of growth per discharge and per capita, McDonough points out. But just as Medicare adopted PPS, some of the states with experience starting with Wisconsin began to drop it.
Incomprehensible systems
The biggest reason for dropping PPS: "rate-setting systems were complex and often incomprehensible," McDonough says. One New Jersey official called it a "methadone program, a guaranteed bottom line every year, and no one could understand how it worked." A Massachusetts senator once described DRGs as "Sanskrit no one could understand them, [not] even the hospital people."
But the problem is that "hospital people" understood the DRGs all too well, argues McDonough. "The confusion fed suspicions that rate setting was subject to excessive gaming by powerful players, most often by the teaching and urban hospitals that benefitted disproportionately from the redistributive aspects of the systems," he contends in a recent article chronicling the diminishing popularity of state-based hospital rate-setting.2
Now managed care is seen as the hero, but McDonough calls capitation just another, expanded version of PPS. "Rather than rejecting prospective payment, [officials] are moving to a newer form of prospective payment capitation that combines all medical [not just hospital] services into one price," he writes. "Some business leaders who supported rate setting in its early development understood it to be a transitional arrangement until private payers could harness their own leverage."
Since that time, health care has witnessed significant changes, but it remains to be seen if the chesslike mastery of PPS that hospitals developed will be extrapolated to capitation and hinder its cost-cutting effectiveness, he says.
"The rate-setting experience demonstrates key stakeholders’ ability to manipulate regulatory and reimbursement systems to their own advantage," he argues. "This is important to remember as we enter the brave new world of capitated payments. From our experience with per diem and per case prospective payment, we should expect the new bearers of risk to find creative means to manipulate payment incentives, to use political influence in both formal and informal ways, and to craft the presentation of relevant data and information for their own purposes."
References
1. Prospective Payment Assessment Commission. Medicare and the American health Care System. Washington, DC; June 1997.
2. McDonough, JE. Tracking the demise of state hospital rate setting, Health Affairs 1997; 16:142-149.
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