DRGs, Medicare, Hospitals, And Workers Comp

Armen Hareyan's picture
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Last Thursday's post showed that workers comp is a huge money maker for hospitals, generating about 16% of their profits on less than 2% of revenue.

The attempts to date to control hospital costs have been to set WC reimbursement using primarily DRGs (Medicare Diagnosis Related Groups) (NY), a percentage discount below charges (as in Florida), or on the basis of the facility's cost to deliver that service (Connecticut).

But it is never as simple as setting rates at DRGs or a discount below charges.

For the latter, a hospital could charge a billion dollars for an epidural, and the payer would (conceivably) have to pay 60% or 75% of that rate. So states add language around that provision requiring payment to be based on 'usual and customary' charges - which sounds fine until you try to define usual and customary. Florida is in the midst of just such an effort, and the process has become pretty contentious.

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Using Medicare as a basis is also problematic. DRGs were developed for Medicare patients - older with different conditions and often not working. The resources - procedures, services, therapies, setting, providers - employed in providing care to an 88 year old with herniated disk are likely quite different from those provided to a 33 year old with the same condition.

Yet these differences have never been evaluated. To my knowledge, there has never been any thorough study of how the inpatient or outpatient ospital resources used by workers compensation patients compare with resources used by Medicare patents per Medicare's inpatient MS-DRG groups or Medicare's outpatient APC groups.

Another option, and one I would argue is highly problematic, is to pay based on some multiple of Medicare. Several states use this methodology, including South Carolina (which has seen rapidly rising WC medical expenses). Texas recently announced that it is moving in this direction. The problem for payers, is that Texas is paying hospitals an extremely high multiple of Medicare. According to FairPay Solutions CEO VIncent Drucker (and HSA client); "This provides huge financial incentives for over-utilization of high cost hospital and hospital-based-specialist services [emphasis added]. Over utilization that Wennberg, for example, reports account for 25 percent of wasted dollars for Medicare chronically ill patients." (Drucker is referring to Dr John Wennberg's recently-published Dartmouth Atlas of Health Care.)

As a commenter noted last week, "TX and CA have a Medicare based system with a mark-up ranging from 25% - 100%. However most hospital contracts with group health insurers and PPO networks are below Medicare rates."

Why paying for health care so much?

Why do workers comp payers consistently overpay for hospital services? Why can't comp networks deliver the kind of reductions that are commonplace among group health insurers? Why do employers allow their payers and managed care firms to spend their dollars so carelessly?

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