A conceptual model of the case-based payment scheme for New Jersey hospitals

In this paper I propose a methodology for paying short-term general hospitals on the basis of prospective cost-based case-mix revenue budgets. A hospital's budget is divided into patient care--related components and other components. The patient care--related budget is based on the case mix of patients treated by the hospital. Diagnosis-related groupings of patients are developed and a revenue per case amount is calculated for each group, based on reasonable costs of treatment, with a profit incentive for cost reduction resulting from improvements in productivity, efficiency, or more rational delivery of hospital services. The institutional budget is calculated on the basis of interinstitutional comparisons using a peer grouping method. I discuss various fundamental issues related to payment including paying for bad debt and indigency, the effect of insurance coverage, and a regional approach to capital funding. Case-mix payment allow for closer integration of payer programs with the activities of Professional Standards Review Organizations and health planning agencies. Additionally, payment based on the treatment of patients encourages a clear-cut management relationship between physician activities and hospital programs.