Performance Improvement 2008. How Can Medical Inpatient Cost Estimates Be Improved?


Researchers examined how to improve Medicare inpatient hospital discharge cost estimates in order to construct better diagnostic-related group relative weights. These weights largely determine how much Medicare pays for hospital stays under the inpatient hospital prospective payment system. The study sought to improve how well charges were adjusted to costs and reduce "charge compression" (hospitals´ tendency to mark up high cost items less than low cost items).

The analyses confirmed that charge compression and other aggregation-related problems may bias the new cost-based diagnostic-related group weights, and that refinements to the cost-to-charge ratios can reduce that bias. A number of options could improve the accuracy and precision of the cost-to-charge ratios derived from the Medicare cost report, and also reduce the need for statistically-based adjustments.

The options can be divided according to whether they can be implemented over short, medium or long-term time frames. Short-term measures include tighter editing of cost reports from providers with extreme cost-to-charge ratios and revisions of cost report instructions to improve the matching of costs and charges. Longer-term changes could include revisions to the charge groupings in the Medical Provider Analysis and Review (MedPAR) file data (a data base of all Medicare beneficiaries who use inpatient services) and the addition of new cost centers on the Medicare cost report that would permit the calculation of more accurate cost-to-charge ratios.

Report Title: A Study of Charge Compression in Calculating DRG Relative Weights,
Agency Sponsor: CMS-ORDI, Office of Research, Development, and Information
Federal Contact: Philip Cotterill, 410-786-6598
Performer: RTI International

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"PerformanceImprovement2008.pdf" (pdf, 1.29Mb)

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