The current Medicare payment system is considered to be prospective, in that the amount paid to a hospital for a patient is fixed in advance and depends only on the diagnoses and major procedures reported at discharge. In reality, payments under this system have never been completely prospective, being influenced to some degree by what happens to an individual patient during a hospitalization. For example, higher payments are made on behalf of patients in whom clinically significant complications develop after admission than for those with the same diagnosis who have no such complications. There are also so-called outlier payments that partially compensate hospitals for the additional expenses incurred for very-high-cost cases. With regard to preventable complications, these retrospective features of the DRG payment system have harbored a perverse incentive: hospitals that improved patient safety and eliminated problems such as nosocomial infections saw their Medicare revenues, and sometimes their profits, reduced.

Believing that this counterproductive incentive should be eliminated, Congress instructed the Secretary of Health and Human Services in 2005 to "select at least 2 conditions that are (a) high cost or high volume or both, (b) result in the assignment of a case to a DRG that has a higher payment when present as a secondary diagnosis, and (c) could reasonably have been prevented through the application of evidence-based guidelines." After issuing a proposed set of measures and considering comments from stakeholders and experts, CMS decided to disallow incremental payments associated with eleven secondary conditions that it sees as preventable complications of medical care. These conditions, if not present at the time of admission, will no longer be taken into account in calculating payments to hospitals after October1, 2008.

The eleven selected conditions include:

1. Foreign Object Retained After Surgery (750 cases nationally in 2007)
2. Air Embolism (57 cases)
3. Blood Incompatibility (24 cases)
4. Stage III and IV Pressure Ulcers (257,412 cases)
5. Falls and Trauma (193,566 cases)
6. Catheter-Associated Urinary Tract Infection (12,815 cases)
7. Vascular Catheter-Associate Infection (29,536 cases)
8. Surgical Site Infection-Mediastinitis after Coronary Artery Bypass Graft (69cases)
9. Surgical site infections following elective procedures
10. Glycemic Control issues such as diabetic ketoacidosis, nonketotic hyperosmolar coma, diabetic coma, and hypoglycemic coma (16,060 cases)
11. Deep Vein Thrombosis / Pulmonary Embolism (140,010 cases)

While the new reimbursement rules present significant risk to hospitals and health systems, they also create great opportunity to develop world class quality management processes, infrastructure, and organization.

Significant Financial Impact

The new rule will result in hospitals seeing substantial reductions in payment for the care of individual patients with preventable complications. For example, if a patient were admitted to a Boston-area hospital with pneumonia and developed a urinary tract infection or bed sores during the hospitalization, the hospital would currently be paid $6,253.58, under DRG 89 ("pneumonia with complications"); under the new rule, if there were no other complications, the hospital would be paid only $3,705.38, under DRG 90 ("simple pneumonia"), a difference of $2,548.20 (a reduction of approximately 40%).

A study of the reimbursement impact on nosocomial urinary tract infections alone at one New York hospital was reported in AHIMA Perspectives online journal. The urinary tract remains a significant site for hospital-acquired infections, with 66 percent to 86 percent of UTIs being associated with urinary catheterization. The prevention of UTIs represents a potentially rich opportunity to reduce the incidence of hospital-acquired infections. Analysis of w/CC vs. without CC DRG-pair reimbursement for patients having a secondary diagnosis of UTI, and under the assumption that the UTI was the reason for upcoding to the with complication DRG, resulted in the hospital receiving $4.5 million greater reimbursement due to the nosocomial infection. Three DRGs were randomly selected for detailed chart review, and within that subset it was determined that the nosocomial infection was the sole reason for about 15% of the higher DRG assignment. Extrapolation of this to the entire population resulted in an estimation that the hospital would have received $675,000 less in Medicare reimbursement for the UTI issue alone.

Vascular catheter associated infection represents another major area of risk for hospitals. A significant number of patients rely on vascular access devices, like PICC lines, to deliver needed medication. The line has to be placed and maintained in a specific manner, or it has a potential to cause a catheter-related bloodstream infection (CRBSI.) CRBSI, along with ventilator-associated pneumonia (which CMS is considering adding to the selected conditions list for FY2009), are the two most costly infections to treat. Analysis in one Midwestern hospital identified that the average cost to treat a CRBSI was $91,000, whereas the average reimbursement was about $67,000; an operational loss of $24,000. As of Oct. 1, 2008, reimbursement will be zero. The CDC estimates 250,000 central line-associated infections occur in the United States annually, with an attributable mortality rate of 12 to 25 percent.

This reimbursement change represents the leading edge of a series of anticipated CMS reforms of provider payment, which include a shift toward pay for performance. Hospitals may therefore view the new policy as a harbinger of things to come and act in anticipation of more substantial reimbursement changes. Nine additional HACs are being considered for addition to the reimbursement exclusions in October, and 43 additional are being considered for implementation in FY 2010. Finally, as was observed with the DRG reimbursement system, private third party payers will be expected to adopt a similar approach.

Proactive Solutions

Just as advent of the Prospective Payment System revolutionized hospital Cost Management in the two decades ago, pay for performance will revolutionize hospital Quality Management over the next decade. To prepare your health system for this change in the game, we recommend you take the following steps:

* Assess your Health System Quality Management Readiness. Evaluate how your Health System stacks up in the five Critical Markers of quality management effectiveness: Strategy, Process, Infrastructure, Organization and Culture. Identify Gaps and corrective strategies.
* Estimate the impact on your Hospital or Health System. Using macro data analysis and chart sampling estimate your risk exposure by major diagnostic category and HAC.
* Identify the Gaps. Identify major problem areas and identify the required metrics, clinical and process improvements, available technology enablers, and organizational enhancements required to significantly reduce your risk exposure.
* Design the Fix. Assemble multidisciplinary process improvement teams to develop effective Present on Admission (POA) assessment processes, address the root cause of quality gaps leading to hospital acquired conditions, and to design innovative sustainable solutions.
* Implement the Fix. Test and refine the designed solutions in innovation labs and adopt a Quality Accelerator approach to integrating the solutions into the fabric of your health system.
* Measure the Results. Design and implement monitoring systems that measure the effectiveness of your efforts and provide closed loop feedback to ongoing quality management activity.

When healthcare quality is high, everything else follows. Patients are delighted. Physicians and employees are happy, efficient and effective. Market share rises. Margins increase. Your organization grows and thrives.

Scott Hodson is a Principal in Maverick Healthcare Consulting.



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