1. 3M Global Information Technology 11 © 3M. All Rights Reserved. 3M Global Information Technology Florida Hospital Association 3M Health Information Systems July 13, 2012 APR DRG Based Prospective Payment System Design

2. 3M Global Information Technology 22 © 3M. All Rights Reserved. State and Federal Payers  Are being directed to reduce payments for Medical Care while increasing their own roll of insured  Are chasing cost efficiencies obtained from primary care and outpatient interventions with the expectation that inpatient hospitalization costs will shrink  Are targeting weak payment methodologies that can be described as offering poor incentives to control costs.  Identifying the need to reform payment and enforce cost containment opens the door to budget cuts or hospital rationalization (closure).

3. 3M Global Information Technology 33 © 3M. All Rights Reserved. Payment Continuum Payer Provider

4. 3M Global Information Technology 44 © 3M. All Rights Reserved. Payment System Objective  “The ultimate objective of PPS is to set a reasonable price for a known product.  "A strong link between payment and diagnosis, along with the ability for hospitals to retain any amounts below the prospective rate, will invite more active medical participation in the financial and operating routines of hospitals.“  HHS Report to Congress, 1982

5. 3M Global Information Technology 55 © 3M. All Rights Reserved. Objectives for a Payment System Reform  Additional payments for special Cases – Outliers and Transfers  Maintain or improve access to care  Protect hospitals so that quality is maintained  Extend protection against extraordinary case costs to a greater number of cases by directing the same level of payments more efficiently  In effect, this is stop loss insurance which protects hospitals – and maintains access and quality  Improve payment accuracy  Give providers incentives to become more efficient  Reward efficient hospitals  Give inefficient hospitals tools which facilitate communication between hospital administration and physicians  Use the payment systems to create a foundation which supports continuous quality improvement

6. 3M Global Information Technology 66 © 3M. All Rights Reserved. Separation of the Classification System and the Establishment of Prices  The clinical model reflects the type of patients  The payment weights reflect the treatment processes and methods  Allows stable clinical categories to be maintained while payments are adjusted to reflect more accurate and complete data  Facilitates fine-tuning payments to accommodate other factors not taken into account by the classification system

7. 3M Global Information Technology 77 © 3M. All Rights Reserved. MS-DRGs are not applicable to non Medicare Population  MS-DRGs are fundamentally flawed for non Medicare populations, failing to adequately account for: newborn birth weight, many pediatric illnesses ( sickle cell anemia, cystic fibrosis, hemophilia, lead poisoning, nutritional disorders, congenital anomalies), high risk pregnancies, HIV-related co-morbidities.  These limitations are so extensive that a fair and equitable payment system for a non Medicare population can not be achieved using the MS-DRGs.  For example, hospital admissions for a typical Medicaid population are composed of roughly 16% newborns, 20% pediatric and 25% obstetric patients.

8. 3M Global Information Technology 88 © 3M. All Rights Reserved. The All Patient Refined DRGs  Need a set of categories that were capable of capturing differences in the case mix and severity of the patient mix at various types of participating hospitals  APR-DRGs  Developed for all patients  Sophisticated severity adjustment – Accurate payment and supports communication  Captures differences in expected cost across all participating hospitals – maintaining access and facilitating the measurement of efficient practice patterns

9. 3M Global Information Technology 99 © 3M. All Rights Reserved. All Patient Refined DRGs (APR DRGs)  APR DRGs are an extension of DRGs to account for SOI and ROM  314 base APR DRGs  Four severity of illness subclasses  Four risk of mortality subclasses  Assignment to a “Base” APR-DRG based on:  Principal Diagnosis, for Medical patients, or  Most Important Surgical Procedure (performed in an O.R.)  Assignment of SOI and ROM  Take into account the interaction among principal & secondary diagnoses, age, and, in some cases, procedures  Both admission APR DRG & discharge APR DRG are computed  Admission APR DRG requires the secondary diagnoses present on admission indicator

10. 3M Global Information Technology 10 © 3M. All Rights Reserved. All Patient Refined DRGs (APR DRGs)  APR DRGs were developed by 3M HIS in conjunction with the National Association of Children’s Hospitals (NACHRI) and encompass patients of all ages.  APR DRGs are assigned using standard administrative data.  No additional data collection required  APR DRGs are designed to facilitate linking payment and quality  Case mix/risk adjustment for both resource and quality measures

11. 3M Global Information Technology 11 © 3M. All Rights Reserved. © 3M 2007. All rights reserved. APR DRG 221 Major Small & Large Bowel Procedures Source: HCUP 2007 - Medicaid Discharges

12. 3M Global Information Technology 12 © 3M. All Rights Reserved. PPS Components  Relative Weights  Base Rates  Outlier and Transfer Policy  Transfer Policy

13. 3M Global Information Technology 13 © 3M. All Rights Reserved. Relative Weights  Relative Weights are Unitless Numbers that Express the Relative Resource Use for a Visit in One Category in Relation to the Average Visit  Major Policy Decisions Include:  Based on Actual Costs or Charges  DRG Average vs Hospital Specific Relative Value  Geometric vs Arithmetic

14. 3M Global Information Technology 14 © 3M. All Rights Reserved. Top 10 APR DRGs by Total CM

15. 3M Global Information Technology 15 © 3M. All Rights Reserved. Base Rates  Base Rate and Adjustments  The base rate is an amount, that when multiplied by an APR- DRG specific relative weight, will yield a price for each APR-DRG  Major Policy Decisions Include :  What costs should be included or excluded in developing a base rate  The way that the base rate is inflated over time  Amounts (if any) which are withheld from the initial base rate to allow for improvements in coding after the system is introduced  What adjustments to the base rate are needed to account for exogenous factors that influence hospital costs

16. 3M Global Information Technology 16 © 3M. All Rights Reserved. Base Rate Objectives  Create fair base rates suitable for replication that can withstand review  Base variation in base rates upon variation in “efficient” costs  Efficient cost is a loose term but is treated here as the cost of production after adjusting for those mission related factors beyond hospital control that create systematic variation in the cost of providing care  Which costs should be included or excluded in developing a base rate?

17. 3M Global Information Technology 17 © 3M. All Rights Reserved. Base Rate Adjustments  Hospital Administrators subject to costs beyond their control. DRG payment using averages without recognition of legitimate cost differences can unfairly penalize or reward different hospitals.  Which factors influence hospital costs? And to what magnitude? How should these factors be recognized?  Hypothesize variables to measure efficient cost variation and create base rate adjustments to account for it

18. 3M Global Information Technology 18 © 3M. All Rights Reserved. Adjustments to Base DRG Budget  Potential causes for adjustment  geographic location  local wage rates  direct and indirect health professions education  Hospital mission (e.g., children’s, teaching)  cost and length of stay outliers  inflation adjustments

19. 3M Global Information Technology 19 © 3M. All Rights Reserved. Methods for Adjustment  Formula (e.g., Medicare teaching adjustment)  Pass-through of actual costs (e.g., direct medical education)  Actual costs of base year trended forward  Hospital specific rates  Peer Grouping  location, size, teaching status  Blending of hospital specific, peer group, regional and/or national rates  Standard allowance

20. 3M Global Information Technology 20 © 3M. All Rights Reserved. Variables Used to Measure “Efficient” Cost Variation Local/Regional Differentials:  Regional variations in the cost of doing business exist for all industries. Multiple factors can drive cost variation. The wage index produced by Medicare was used as a proxy through which to group hospitals facing similar regional cost pressures. Teaching Mission:  Teaching hospitals bear hidden patient care costs through their roles in research, training, providing new technologies and unmeasured severity within the patients they treat. The resbed ratio published by CMS was used as a proxy for the costliness of teaching to group hospitals Indigent Burden:  Disproportionate Share (DSH) has long been a necessary variable to test for as a source of hospital cost variation. Once again the CMS variable was used to group hospitals within similar ranges

21. 3M Global Information Technology 21 © 3M. All Rights Reserved. Variables Used to Measure “Efficient” Cost Variation Mission Related Binary Variables Considered:  Lavel 1 Trauma Center (1/0)  Level 2 Trauma Center (1/0)  Burns Center (1/0)  Pediatric Trauma Center (1/0)  Does the hospitals claims data constitute 2% (or greater) of all pediatric claims and also 2% of the highest severity level (3 and 4) pediatric claims. If so the hospital is designated an “Intense Pediatric” provider All of the above have been hypothesized as adding incrementally greater cost to the provision of care not reflected in patient level case mix variation.

22. 3M Global Information Technology 22 © 3M. All Rights Reserved. Outliers  Additional payments for special Cases – Outliers and Transfers  Maintain or improve access to care  Protect hospitals so that quality is maintained  Stop loss insurance which protects hospitals – and maintains access and quality  More accurately classifying cases as inlier cases, allows better identification of the outlier cases that really need stop loss protection  Allows payment policy to lower the outlier pool size (amount all hospitals have to pay for the insurance) while still maintaining the same level of risk (outlier threshold) thus increasing the amount paid out in the base rate to all hospitals

23. 3M Global Information Technology 23 © 3M. All Rights Reserved. Prospective Payment and Budgeting - Long Stay and Cost - Purpose  Key objective - financial protection for provider  Has quality dimension in that the pressure from a catastrophic case is reduced by an appropriate outlier policy  It is critical that the outlier policy not encourage providers to keep cases until outlier status is reached

24. 3M Global Information Technology 24 © 3M. All Rights Reserved. Prospective Payment and Budgeting – Long Stay and Cost - Identification  Limiting risk implies fixed threshold (RAND)  Fixed threshold is often coupled with statistical threshold

25. 3M Global Information Technology 25 © 3M. All Rights Reserved. Transfers  Not all hospitals have technologies to handle complex cases. Reasonable option for a hospital to stabilize and transfer a case that is beyond its technical capabilities to another hospital. The transferring hospital does not provide most of the care for these cases, and should not receive the full DRG rate.  Transfer cases are really only a special kind of short stay outlier  Identifying Transfer Cases is based on Discharge Status

26. 3M Global Information Technology 26 © 3M. All Rights Reserved. Transition Strategies  Issue: Transition strategy needed to  protect against unanticipated expenditures and to protect hospitals' cash flow  minimize disruption of normal hospital operations to allow hospitals to adjust to new system

27. 3M Global Information Technology 27 © 3M. All Rights Reserved. Transition Strategies  Approaches  Immediate Financial Protection  Risk Corridors  Initial Payment Limits  Blended Rate Policies  Allow Response to Incentives

28. 3M Global Information Technology 28 © 3M. All Rights Reserved. Benefits of a DRG Resource Allocation and Payment System  Provides a Rational and Scientific Method to Allocate Scarce Resources to Providers  Creates financial incentive for hospitals to provide efficient care  Provides a fair basis for allocating a limited budget to hospitals  Creates a language for communicating the financial implications of clinical decisions  Focuses on the needs of patients

29. 3M Global Information Technology 29 © 3M. All Rights Reserved. Benefits of a DRG Resource Allocation and Payment System  Provides clinically meaningful information to promote care management and quality improvement  Provides a means of identifying “reasonably efficient” hospitals  Is easily understood and administratively straightforward  Not a burden for hospitals

30. 3M Global Information Technology 30 © 3M. All Rights Reserved. Summary  Understanding a hospital’s case mix using APR-DRGs address the serious problem of measuring differences in resources needed to treat various types of inpatient cases  Allows for a more equitable allocation of monetary resources  The information produced using these kinds of severity-base analysis for measuring hospitals’ output can be applied to hospitals’ treatment of inpatient cases; facilitating planning, utilization review, and quality assurance activities

31. 3M Global Information Technology 31 © 3M. All Rights Reserved. Summary  Critical aspect of a DRG system is the extent to which it supports communication between hospital administrators and the clinicians with privileges at the hospital. And the key to successful communication with physicians is that the DRG system recognizes severity of illness.  APR-DRGs have sophisticated clinical logic which uses clinically coherent patterns of secondary diagnoses in a consistent four level severity framework to recognize the severity of each patient.  APR-DRGs are an effective tool which facilitates communication between hospital administration and physicians.  Support efforts by both the Payer and the hospitals to improve both efficiency and quality of care.

32. 3M Global Information Technology 32 © 3M. All Rights Reserved. Questions?