A New Approach to Reducing Payments Made to Hospitals with High Complication Rates

Fuller, Richard L., McCullough, Elizabeth C., Averill, Richard F., Inquiry

This article proposes a redesign o J the Medicare inpatient prospective payment system to reduce payments made to hospitals with high complication rates. We compute risk-adjusted, expected complication rates for hospitals and compare them to actual complication rates in order to determine the number of excess complications. Hospital payment reductions then are computed based on the number of excess complications in a hospital. Medicare hospital payment could be reduced by approximately 8% ($8.5 billion) if hospitals were held to a "best practice" standard and if payments made for excess complications were eliminated.

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The Deficit Reduction Act of 2005 (DRA) required Medicare to eliminate hospital payments resulting from certain inpatient complications, referred to as hospital-acquired conditions (HACs). Its passage established a pay-for-performance model that is based upon an outcome of care as opposed to a process of care. The Centers for Medicare and Medicaid Services (CMS) defined 11 types of complications as HACs for fiscal year (FY) 2009. These HACs are excluded from Medicare severity adjusted diagnosis-related groups (MS-DRGs) during assignment, thereby eliminating any payment increase associated with an HAC.

Excluding every occurrence of an HAC from MS-DRG assignment implies that HACs are always preventable. Such a strict standard severely limits the number of post-admission complications that can be considered HACs. Indeed, CMS has estimated that HACs impact only .017% ($20 million) of Medicare inpatient prospective payment system (IPPS) payments (CMS 2008). As a result of this strict standard, high-volume post-admission complications such as pneumonia and septicemia are not included in post-admission complications considered HACs. The HAC policy is further restricted by failing to recognize the link between patient susceptibility to an HAC and patient severity of illness at the time of admission. Taken together, these issues ensure that HAC policy is limited to those complications that are virtually always preventable. No new complications were added to the HAC list in FY2010.

As we demonstrate, including complications that are not always preventable, such as pneumonia and septicemia, would expand the number of discharges that might be considered as receiving payment for HACs to more than 10% of all discharges. A fundamental change in HAC payment policy therefore is necessary to broaden the quality agenda to address the spectrum of preventable hospital complications that fall outside current policy.

The Medicare Payment Advisory Commission (MedPAC) has proposed a readmission payment policy that would "reduce payments to hospitals with relatively high readmission rates" (MedPAC 2008). The Patient Protection and Affordable Care Act (PPACA) of 2010 (P.L. 111-148) requires CMS to begin reducing IPPS payments in 2012 to hospitals with high readmission rates. This payment approach for readmissions is analogous to that required for complications. Clearly, most complications are not always preventable. Thus, an HAC policy that determines payment reductions based upon a hospital's excess number of complications--as determined by comparing a hospital's actual complication rate to its risk-adjusted complication rate (i.e., expected complication rate) avoids requiring a direct link between the payment reduction and the absolute preventability of a complication for an individual patient. The use of a risk-adjusted threshold, over which a complication rate would be deemed in excess, would replace a mentality of "this should never happen" with a more realistic attitude--"this has happened too often"--and thus sidestep the argument as to whether an individual has received low-quality care.

The PPACA establishes ambitious cost containment and quality improvement goals while expanding access to the uninsured. This article demonstrates that a substantial portion of current payments to hospitals is the result of costs incurred by additional care necessary to treat patients who experience post-admission complications. Modifying the current HAC payment policy to quantify variation in the amount expended on post-admission complications and use that amount as the basis of payment reductions could help further cost containment while improving quality. The proposal differs from current HAC payment policy by:

* Expanding greatly the number of complications used to determine hospital payment adjustments;

* Determining payment adjustments based upon a hospital's excess number of complications by comparing a hospital's actual complication rate to its risk-adjusted complication rate;

* Basing a hospital's payment adjustment on the estimated cost of each type of complication instead of the payment decrease associated with exclusion of a complication from MS-DRG assignment.

Together these reforms create a more comprehensive system for identifying complications and adjusting payments. We estimate the impact of these reforms on Medicare payments.

Reforming the Hospital-Acquired Conditions Policy

Replacing the current case-by-case payment adjustment mechanism with a rate-based approach yields numerous advantages. A summary of these advantages appears in Table 1.

Specifically, the table summarizes six key improvements that a rate-based approach offers in comparison to the current HAC policy. A rate-based approach does not require an assumption that complications are always preventable, and recognizes that patient susceptibility to a complication is related to the patient's severity of illness at time of admission. While it is desirable to establish a policy that incentivizes improvement of quality of care, it is not desirable to discriminate against hospitals that provide care to sicker patients. Calculating hospital complication rates, adjusted for patient mix, permits the comparison of an individual hospital's actual complication rate to a risk-adjusted, expected complication rate. Deviation from the expected determines the number of complications that are considered "excess." In this way, the assumption that a complication is always preventable is replaced by one that assumes for an equivalent mix of patients, hospitals should be expected to achieve a complication rate attained by their peers. This permits a greater range of complications to be considered. In Table 1, these factors are referred to. as "Preventability" (1) and "Comprehensiveness" (2).

A rate-based approach also can be integrated more effectively within the payment system (3). The HAC policy operates by excluding complication codes from DRG assignment. Claims with hospital-acquired complications face payment reductions only when exclusion of a complication code results in reassignment of the claim to a lower-paying DRG. Any resulting reduction depends upon the difference in payment weights between the lower- and higher-paying DRG. This reduction may be further offset by an additional outlier payment. This results in the administration of a series of claim-specific payment adjustments of varying magnitude rather than a uniform series of known penalties. Since current HAC policy does not create a direct relationship between the cost of the complication and the extent of the payment reduction, the value obtained by reducing individual complications is obscured from hospitals and payers yet incorporated within DRG weights and IPPS payments. Conversely, a rate-based approach permits the estimated cost of a complication to be used as the basis for determining the magnitude of the payment adjustment associated with excess complications (Fuller et al. 2009). This approach increases transparency by explicitly identifying both the cost and relative frequency of complications (4).

A rate-based approach to payment better maintains incentives to code diagnoses completely (5). Under the HAC policy, the submission of a complication code can only result in reduced payment. Thus, there is no incentive to report complications, potentially causing the loss of important quality of care information. Under a rate-based approach, the reporting of complications could increase per case payments, and additionally could result in a rate-based payment reduction proportional to the frequency of a complication within a DRG. The net payment impact is far from obvious at the individual case level, thereby maintaining the financial incentive to report complications.

Finally, the rate-based approach better supports the goal of achieving behavioral change (6). By design, the HAC policy focuses on the failure of care in treating an individual patient. This assumes that the caregiving team, most notably the physician treating the patient, has provided substandard care. The behavioral response to the HAC approach is denial and defensiveness by the individual rather than institutional commitment to change. Post-admission complications are usually traced back to multiple potential sources within a hospital, outside the immediate supervising physician. Given this, looking at systematic differences in rates of complications across hospitals is more appropriate and useful. The financial incentives in a rate-based system are directed at the hospital, and emphasize global rewards and penalties based on the hospital's overall complication rate. By focusing on the pattern of complications rather than on an individual patient's complication, there is greater likelihood that efforts to reduce complications will be successful.

The development of a hospital-specific payment adjustment for complications requires five steps:

1. Identifying complications that are potentially preventable;

2. Calculating risk-adjusted complication rates and norms;

3. Comparing the actual and expected risk-adjusted complication rates of hospitals to determine the number of excess complications;

4. Using the excess number of complications to determine hospital-specific payment reductions;

5. Incorporating the payment reductions into the payment system.

These five steps result in a single payment reduction factor for each hospital that would be applied to all admissions. …

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Publication information: Article title: A New Approach to Reducing Payments Made to Hospitals with High Complication Rates. Contributors: Fuller, Richard L. - Author, McCullough, Elizabeth C. - Author, Averill, Richard F. - Author. Journal title: Inquiry. Volume: 48. Issue: 1 Publication date: Spring 2011. Page number: 68+. © Not available. COPYRIGHT 2011 Gale Group.

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