The analyses presented in this section examine the extent to which there is variation in the average total payments per episode across the nine conditions and within episodes related to each of the nine conditions. These average payments have been standardized based on 2005 payment rates and payment policy to exclude variations in resource use due to geographic differences (e.g. wage adjustments) and policy considerations (e.g. payment to teaching hospitals). For example, for inpatient acute care hospitals stays, the base Medicare payment was multiplied by DRG weight for the DRG on the claim and adjusted for transfers and high-cost outliers. Thus, we did not include adjustments for area wages, IME payments or disproportionate share hospital (DSH) payments. Appendix D provides information on Medicare FFS payment policy in 2005 and the approach taken to standardize costs for each type of Medicare provider.
Figure 5. Average Standardized Payment per Episode, ETGs
Figure 5 (ETGs) shows there is substantial variation in the average total standardized payment per episode across the nine conditions we examined. Episodes for AMI and hip fracture are more expensive on average than episodes for management of low back pain or diabetes.
Figure 6. Coefficient of Variation for Standardized Payments for Related Episodes, ETGs
Figure 6 shows the coefficient of variation (COV), which is the standard deviation in payments divided by the average payment per episode, for ETGs. This measure provides a measure of how much variation there is in standardized payments between episodes related to the same condition. While episodes related to diabetes had the lowest average standardized payments per episode, they had the largest variations in standardized payments suggesting that these episodes may not be homogeneous. To some extent, across these nine conditions, we observe that the COV is inversely related to the average payment. AMI and hip fracture, while having the largest average standardized payments per episode, had lower COV indicating relatively less variation in the costs of episodes, representing more homogeneity in the way these patients are treated.
The observed variation in standardized payments for episodes related to a specific condition could be due to a variety of factors, such as variation in patterns of care, which could be due to undesired variations or heterogeneity in the clinical condition (e.g., severe pneumonia versus mild pneumonia) and random variation.
Figure 7. Average Standardized Payment per Episode, MEGs
Figure 7 presents comparable information for the episodes created by MEGs. A similar pattern between average standardized payments and COV is observed overall.
Figure 8. Coefficient of Variation for Standardized Payments for Related Episodes, MEGs
Figure 8 presents comparable information for the episodes created by MEGs. A similar pattern between average standardized payments and COV is observed overall.