Hospital Case-Mix Change: Sicker Patients Or Drg Creep?

Prologue: Medicare's prospective payment system (PPS) has for the past five and a half years attempted to constrain the rising payments to hospitals for care of the nations elderly. Early on, the new system appeared to reward hospitals with double-digit Medicare profit margins. Later reports predicted that over half the hospitals would show a negative margin if annual update factors were not increased. Debate over the level of increase in the update factor for PPS's unit of payment, diagnosis-related groups (DRGs), pits hospitals and government against each other, leading to mistrust between provider and payer. One payment factor that has not received much attention is the effect of PPS on hospitals' case-mix (the mix of patients across DRGs in a hospital). Yet case-mix change under PPS has greatly affected payment levels to hospitals, say Bruce Steinwald and Laura Dummit. They write: “The cumulative formal update from the beginning of PPS through fiscal year 1988 totals less than 8 percent. The cumulative increase in payments due to case-mix change for the same period is over 20 percent.” Understanding case-mix change is important as Congress continues to set hospital payment rates. This article offers new information and insights into the “below the surface” phenomenon of case-mix change to help “dispel some of that mistrust between payer and providers,” said Steinwald. Both authors are staff members of the congressionally mandated Prospective Payment Assessment Commission (ProPAC). Steinwald, who serves as deputy director, received his master of business administration degree and took additional training in economics at the University of Chicago. Before joining ProPAC, Steinwald worked for the Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (ASPE), rising to the level of acting deputy assistant secretary for health planning. Dummit received her master of public health degree from the University of North Carolina, Chapel Hill, and worked for the Alpha Center in Washington, D.C. before joining ProPAC as a senior policy analyst.