Row 16 provides the big picture: The overall CMI for ABC Hospital was 1.8, and the average length of stay (ALOS) was 22% higher than the geometric mean LOS (GMLOS). Many hospitals use GMLOS as their benchmark target for ALOS, and they would likely view exceeding GMLOS by such a large margin as an indicator that the physicians and case management have significant room for improvement. However, reviewing outlier benchmark and normal benchmark categories presents a completely different picture.
Outlier discharges. The CMI for all outlier DRGs (row 6), at 4.0, is more than twice as high as the CMI for all discharges, which is 1.8 (or 2.1 if deliveries are not included). The outlier ALOS is 237% higher than the GMLOS. These figures underscore for management the extent that outliers skew the key indicators and can distort the overall performance when compared with other low-outlier hospitals.
Normal non-outlier discharges. The overall ALOS was still 6% higher than the GMLOS, which is still high because the Medicare GMLOS includes outliers. For non-outliers, hospitals would want the ALOS to be lower than the GMLOS.
P&L implications looking at actual costs
Senior executives need to understand these how these changes impact their overall profit and loss (P&L) by major service lines to develop their strategic plan on what changes may be needed to survive or thrive if a Medicare-for-All program is adopted. To assess the potential effects on a large hospital if it were paid 100% Medicare payment for all discharges, a P&L analysis was performed for ABC Hospital, drawing on actual hospital financial statements to ensure the integrity of service line reports by major diagnostic category (MDC).[b] Here are some key findings of that analysis.
Effect on total discharges. If ABC Hospital were paid 100% of Medicare DRG rates, it would have lost $1,700 per discharge.
Effect on benchmark DRGs. Total discharges among benchmark DRGs (row 13) showed a loss of $2,600 per discharge. Yet outliers among benchmark DRGs lost $34,800 per discharge because the Medicare payment methodology paid only 60% of total costs (not Medicare Allowable costs). Not including the outliers, the loss associated with benchmark-DRG non-outliers still amounted to $1,200 per discharge. Yet it was noted that there remained significant cost-reduction opportunities for LOS and cost resource consumption that could lead to a breakeven or better.
The large Medicare losses for benchmark DRG outliers reinforce that outlier payments under a 100% Medicare-based payment system for all would be woefully inadequate, and they would need to be dramatically increased for the system to be viable.
Effect on modified MDC 15. This non-benchmark modified MDC showed an overall profit of $3,900 per discharge (row 14). Yet this profit reflected the impact of a $55,200 loss per discharge (row 3) associated with outliers, and when the outliers were removed from the picture, the remaining non-outliers showed a huge a huge profit of $10,600 per discharge (row 9). Because Medicare patients rarely deliver babies, they are usually higher risk, and consequently more costly. This reality skews the obstetrics (OB) payments because Medicare’s database does not include the lower-cost, lower-risk normal deliveries for non-Medicare patients. Hospitals providing care to high volumes of OB patients, no NICU services and minimal outlier services could be the biggest winners under a Medicare-for-All payment program.
Medicare very rarely pays for MDC 15 services, which are delivered in the NICU, so using MS-DRGs for payment of such services does not seem suitable for patients with commercial insurance or Medicaid coverage. The findings indicate ABC Hospital would have a windfall profit in this area among normal patients but would incur huge losses for the NICU outliers.
Effect on all other non-benchmark DRGs. These DRGs, which comprised OB deliveries, showed a profit of $100 per discharge. A single outlier incurred a loss of 37,600. (Separate payments for mother and newborn were combined.)
Benchmarking to other hospitals
For benchmark comparisons with other hospitals, it is most reasonable to use only the normal, non-outlier discharges (rows 7-11), thereby factoring out the outliers for which ALOS exceeds GMLOS by 22%. This approach is not perfect for an AMC, which may still have sicker patients, but it minimizes the skewing impact of an AMC’s higher percentage of outliers, such as is seen in the totals in row 16.
As major changes in payment for healthcare delivery are adopted, particularly if the industry moves toward adoption of a 100% Medicare-based payment system, the MMBS can help facilitate the development of new financial and key indicators by MDC/DRG to provide insight into where changes in the Medicare-for-All payment approach might be required. Hospital and health system CFOs can play an integral role in creating new management reports for hospital and physician leadership to help make the transition easier to understand and to promote ongoing financial success. (See also the sidebar "Implications for a CFO-led strategic response to a Medicare-based payment system.")
[a] Kazahaya, G., “Transitioning to a new Medicare-based benchmarking paradigm for commercial payment, hfm, October 2018.
[b] The findings presented here represent only the surface of this analysis, which also drilled down to assess payment by the top 30 major payer groups, by MDC, by DRG, by physician and by payer.