How DRGs hurt academic health systems

Area of Science:

• Health economics
• Healthcare financial management
• Clinical cost variation

Background:

• Academic health centers (AHCs) provide comprehensive care, accepting patients with diverse clinical needs and financial risks.
• The mission of AHCs inherently involves managing a wide spectrum of patient acuity and associated costs.
• Understanding cost variation is crucial for financial stability and effective resource allocation in AHCs.

Purpose of the Study:

• To assess the variation in healthcare costs and financial risk for patients treated at AHCs.
• To propose and evaluate a novel reimbursement methodology for high-diagnosis-related group (DRG) cases to better align financial risks.
• To analyze the financial implications of patient case mix in academic medical settings.

Main Methods:

• Reviewed clinical and financial data from a large academic health center (n = 39,804).
• Classified diagnosis-related groups (DRGs) by patient volume (low to high).
• Calculated the coefficient of variation for total cost per admission and used regression analysis to estimate costs, benchmarking against actual reimbursements.

Main Results:

• Low-volume DRGs exhibited the highest cost variation compared to moderate and high-volume DRGs.
• Regression analysis accurately estimated costs within 25% for 64.7% of long-stay patients (LOS >= 4 days).
• Actual Medicare and Blue Cross reimbursements accurately covered costs in only 43.9% of long-stay cases.

Conclusions:

• AHCs disproportionately manage low-volume, high-variation DRGs, leading to significant financial risk.
• Proposed reimbursement methodology improves risk distribution between payers and providers.
• The new model mitigates adverse selection and moral hazard issues in healthcare reimbursement.