By digging into MEDPAR data, the author determines that the most promising inpatient cost-containment opportunity lies with sepsis, a type of blood poisoning that is on the rise. Better management of sepsis will save thousands of lives each year, as well as millions in Medicare dollars.


When evaluating a healthcare organization for cost-containment opportunities, you would definitely want to look at the areas that are growing most quickly—as outpatient lines are for many hospitals. However, you would also want to focus on the area with the greatest cost—and that is unquestionably the inpatient area.


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For every $1 spent on outpatient care, Medicare will spend $3.56 on inpatient care, according to the Medicare Payment Advisory Commission’s (MedPAC’s) 2014 report to Congress.

If we were to consider Medicare inpatient care as a singular business, what would we learn about our largest service lines and greatest cost-containment opportunities? Further, what could we do with that information to create efficiencies for our country’s delivery system—beginning with your facility?

Our recent analysis helps healthcare finance leaders answer these questions by pinpointing the top 10 MS-DRGs in terms of highest costs and highest cost growth.

Beginning with the Data

To determine the greatest inpatient cost-containment opportunities, we began with the 2012 MEDPAR inpatient claims data that represent every inpatient claim Medicare received during the federal FY. We then filtered out Medicare HMO claims to focus attention on cost control of traditional Medicare claims. To have a point of comparison, we also took the 2008 MEDPAR file to evaluate how costs have changed over time. We used 2008 data because this was the first full year after the MS-DRG structural change.

We need to make one distinction clear: We evaluated the hospital cost of care as opposed to Medicare cost, which would be payment. For many cases, those numbers are nearly equivalent because many hospitals are close to breakeven for Medicare inpatient services. We focus on cost because that is the area providers can more directly control.

Confirming General Conclusions

Our broad conclusions are in line with what MedPAC described in its March 2014 analysis: Medicare inpatient discharges are declining. At more than 10 million discharges, we show about 5 percent fewer discharges in 2012 than in 2008.

We also show a modest increase (10 percent) in average cost per case. This increase is much smaller (3 percent) when accounting for national inflation less medical care inflation. We did this to see how much higher hospital costs are when excluding the inflation they contribute.

However, adjusting for medical service inflation (the inflation that hospitals and other providers directly contribute to national cost growth), average cost per discharge was actually 4 percent less in 2012 than it was in 2008. This means that hospital inpatient services were able to achieve a lower cost growth than other medical service areas. While that news is encouraging, there was still more than $4 billion in unadjusted cost that was added during the time period. To give some perspective, that would represent 10 percent of all Medicare outpatient payments in 2012.

While there are fewer inpatient discharges, there is more cost—and that added cost, which is growing more slowly than in the past, is still a very sizable figure.

Identifying the Top 10 Highest-Cost MS-DRGs

This exhibit lists the top 10 total cost MS-DRGs in 2012, as compared with 2008.  

Top 10 Highest-Cost MS-DRGs, 2012 vs 2008

Several interesting observations emerge from this analysis:

Our highest-cost areas haven’t changed much. Eight of the 10 highest-cost inpatient areas in 2008 are also our highest-cost areas in 2012. The only two MS-DRGs that made the top 10 in 2008 but not in 2012 were 194 (simple pneumonia) and 004 (tracheostomy without major procedure).

We’re spending more on top cases. In 2008, 19 percent of total inpatient costs were in 10 areas. In 2012, that figure was nearly 21 percent. The provider costs for these top 10 areas represent approximately two-thirds of all Medicare outpatient spending.

Hips and knees are huge. As most hospitals know, MS-DRG 470—major joint replacement without major complication or comorbidity (MCC)—is by far the largest cost area. In 2012, costs for MS-DRG 470 were nearly 50 percent higher than the next highest cost MS-DRG (871, or septicemia without mechanical ventilation 96+ hours with MCC).

Medical rules the list. Six of the top 10 highest-cost MS-DRGs were medical in 2008 and 2012. While surgical care can be costly because of operating room (OR) time and implants, the most extreme medical cases become costly because of long length of stays (LOSs), which may involve time in high-intensity nursing units.

Determining the Top 10 Greatest Cost Growth MS-DRGs

Digging into more detail, we examined which MS-DRGs experienced the greatest cost growth from 2008 to 2012. We created this list based on total cost difference, meaning total provider cost in 2012 less total provider cost in 2008 (as opposed to percentage growth).

Top 10 MS-DRGs for Total Cost Growth

Highlights include the following:

Our highest cost areas are also our highest growth areas. In 2012, five of the top 10 cost growth MS-DRGs were also among the top 10 highest-cost cases:

  • 871, or septicemia without mechanical ventilation 96+ hours with MCC
  • 470, or major joint replacement without MCC
  • 460, or spinal fusion except cervical without MCC
  • 853, or infectious and parasitic diseases with OR procedure with MCC
  • 193, or simple pneumonia and pleurisy with MCC 

Family drivers. Two MS-DRG families comprise half of the top 10 highest-growth areas: septicemia (MS-DRGs 870, 871, 872) and cardiac valve/cardiothoracic procedures (MS-DRGs 219-220).

Increased volume is the primary driver. Bucking the national trend of declining inpatient discharges, the top 10 growth areas are experiencing large increases in expenses because of significant increases in patient volume. The “percentage change in average cost” is up for all of these MS-DRGs; however, the percentage change would be lower in 2012 than in 2008, if adjusted for medical care inflation. Still, unadjusted cost growth is huge, and there may be some things worth learning with one final deeper dive into the numbers.

Selecting Sepsis as a Cost-Containment Opportunity

One MS-DRG family appears to be an ideal candidate to explore for cost-containment opportunities: septicemia (MS-DRGs 870, 871, 872). Every MS-DRG in the sepsis family is on the top 10 cost growth list (871 being the highest), and all are among the top 25 largest total cost cases (871 being number two on that list). Unadjusted costs of care for this family increased by more than $2.25 billion from 2008 to 2012.

The key driver for this growth was increased volume; sepsis discharges increased by 36 percent over the period. However, cost per case also increased as is evident by looking at the cost-per-case growth percentages; the three septicemia MS-DRGs were among the highest in terms of total cost growth.

To drill deeper into cost drivers, we selected the highest-cost growth and largest-cost area MS-DRG among the family: MS-DRG 871. What we found was very interesting. While more than $1.5 billion in unadjusted cost was added during the period, there was a sizable group of hospitals (more than 1,000 providers) that were able to decrease costs—without accounting for inflation.

Septicemia MS-DRG 871: Hospitals with Increasing and Decreasing Costs

While a modest portion of this decrease was volume-related, the key driver was actually cost per case.

Positive margins for sepsis care are possible but require significant cost reduction. Average cost per case declined by an average of $1,616 per case for hospitals that were able to decrease total MS-DRG 871 cost. This contrasts with an average increase of $2,069 for hospitals that added cost during the period. Profitability did improve among both groups; however, the hospitals that decreased costs had a small margin in 2012 as a result of their reductions.

Large LOS reductions among hospitals that reduced costs do not appear to be related to acuity. Both groups were able to decrease average LOS. However, the group that decreased costs started with a much higher value (8.51 days) and ended with a level that was well below the group that increased costs (7.08 days).

Acuity does not appear to be the driver because both groups documented increases in secondary diagnoses among patients, and 2012 levels were similar among both groups. Intensity also does not appear to be a factor because the average number of procedures is similar among the groups.

Both groups were able to achieve reductions in mortality. However, the hospitals that increased costs began with higher mortality rates and reduced these rates to levels that were, on average, below the rates of hospitals that decreased costs.

In sum, there appears to be contrasting elements at work: The hospitals that decreased costs were able to achieve quality improvements and dramatic cost/financial improvements. Conversely, the hospitals that increased costs were able to achieve dramatic quality improvements and more modest profit improvements—but still, negative margins. Certainly, there could be a debate about which strategy is appropriate.

Drilling Down to the Physician Level

Individual hospitals likely have high-performing physicians that are providing high-quality and efficient sepsis care that can serve as a benchmark within the organization for performance improvement and excellence. To evaluate this, we examined a case study hospital with more than $1 million in annualized MS-DRG 871 cost-savings potential when benchmarked against the national average. Within that case hospital, we reviewed the two highest-volume physicians.

Septicemia MS-DRG 871: Physician Detail for Case Hospital

Both physicians have significantly different total average-cost-per-case values, which are driven by LOS and resource utilization. Note, in particular, the difference between routine nursing care and intensive care (ICU/CCU). We ruled out differences in acuity and procedure intensity. We also evaluated outlier impact to see if a single claim (or small number of claims) was responsible for the difference. None were present for these cases.

With this information, the hospital is able to have an informed dialogue about clinical efficiency in the context of quality care. This conversation could lead to significant savings for the provider that will improve profitability while maintaining high-quality care standards.

Starting a Conversation

An evaluation of our country’s highest-cost and highest cost growth inpatient cases has shown us the magnitude of savings potential with modest improvements. As seen, these improvements do not have to come at the expense of less favorable patient outcomes.

We found that our country’s largest savings opportunity could be in sepsis care through an evaluation of LOS and resource-intensity levels. However, these opportunities will not be realized without the hard work of hospital administrators and clinicians. These leaders will need to review performance levels—similar to our case study—and, subsequently, have conversations around clinical efficiency and outcomes. These conversations could yield significant financial gains for the hospital and, in turn, sizable savings for our national healthcare delivery system. 


James O. Cleverley, MHA, is president, Cleverley & Associates Inc., and a member of HFMA's Central Ohio Chapter.

Publication Date: Tuesday, June 10, 2014