Diagnosis-Related Groups (DRGs) and Insurance Reimbursement Changes

          In 1983, a prospective payment strategy, Diagnosis-Related Groups (DRGs), was introduced by the Federal Government as a way to control the costs of health care provided to Medicare recipients. Prior to DRGs, health care providers had been paid on a fee-for-service basis. When Medicare began, a hospital or physician sent a bill for services rendered. If the bill was for $50.00, Medicare paid $50.00. If the bill was for $1000.00, Medicare paid $1000.00 with few questions asked. With the introduction of DRGs, hospitals were no longer going to be able to hand over a bill at the end of a patient’s hospital stay and be paid for health care services rendered without question. DRGs were designed as a method to encourage hospitals to regulate the use of resources and health care delivery archetypes. Hospitals were now going to have to project expenses and accept payment based on the average patient’s course of treatment within a specific DRG category.

          In the DRG system, based on diagnosis at discharge, a patient is placed in a particular DRG category. Under DRGs, health care institutions are reimbursed a predetermined amount of money for a particular illness episode within the DRG category the patient is placed no matter how long the patient is in the hospital. Further, this sum generally does not change based on how much care or how many supplies are needed to appropriately care for the patient unless the health care provider can justify there is another diagnosis or another reason for receiving more money. With this system, hospitals are compelled to seek methods for timely patient discharges. When complications arise, extending a patient’s stay, the hospital is not reimbursed more money. The hospital ends up “eating” the extra patient care expenses. As another way to control costs, Medicare has recently come up with offering Health Maintenance Organizations (HMOs) to Medicare eligible patients. As a result, responsibility for paying the patient’s health care costs no longer rests with Medicare, but instead is transferred to the HMO. The HMO operates on a capitated system; so, the health care provider is paid a monthly sum of money that is expected to be used to care for these Medicare/HMO patients.

          In the mid 1980s, the private insurance industry also realized a need to cut costs. At that time “…90% of people were insured with fee-for-service” (Skinner, 1997). The insurance industry sent a message to health care providers indicating if costs were not controlled, reimbursement would be (Wojner, 1997). Despite this warning, the rise in health care expenses continued and the third party payers’ power to refuse/reduce payment rose with it. Rising health care costs led to many significant changes in when, where, and how health care services were provided. As health care costs began to spiral upward, the initial focus of the insurance industry was on control of utilization of inpatient health care services. Once the benefits of controlling the costs of inpatient health care services was seen, the insurance industry moved onto managing physician referrals and controlling the use of high-cost medical procedures. Thus, managed care was born.

          Managed care brought into focus yet another form of cost containment in the way of capitation. With capitation, the third party payer covering a group of patients pays health care service providers a set amount of money each month for each of the patients within a specific health care plan subscriber group. The health care provider must then use this sum of money to pay for all health care expenses incurred by this group of patients in a month’s time. For example, if patients X, Y, and Z represent a health care plan subscriber group, and all of these patients are well the whole month of November, the health care provider can pocket their capitated fee. However, if patient X and patient Y are well and do not require any health care the month of December, but patient Z becomes very ill and requires medical care that extends beyond the provided capitated fee, the health care provider must use patient X’s and patient Y’s capitated fees to help pay for patient Z’s health care expenses. This provides for a “some months you win and some months you lose” method of reimbursement. In knowing this, the health care provider must plan so a balance occurs. Otherwise, losses add up and the health care provider will be out of business.

          “Currently, (all third party) payers closely scrutinize care delivery and are empowered as gatekeepers for consumer health care access” (Wojner, 1997). Almost completely gone is fee-for-service in which the provision of health care occurs with the maximum use of resources and medical technology (Conger, 1998). Now, the driving forces are emphasizing the provision of health care in the most cost-effective way possible. The focus has now switched to wellness versus treatment of the disease state. Third party payers now control where the patient is treated, who treats the patient, how long the patient can be treated for, and how much the health care provider will be paid for treatment. As a result of this third party payer control, health care providers are continually restructuring to meet the current trends in expected health care delivery. Unable to generate more revenue by increasing their charges, health care institutions survive by finding ways to decrease actual costs.

Disposable Patient Care Supplies and Equipment, Increased Technology, Reduced Lengths of Stay, and Intensifying Patient Acuity Levels

          In today’s health care world, in an effort to protect both patients and staff, large numbers of disposable patient care supplies and equipment are being employed. The supplies and equipment being used cost more per item than in the past. It used to be the increased cost for these patient care supplies and equipment could be passed onto the consumer, but in the age of managed care this is no longer true. The amount of money the health care provider receives from whatever third party payer is paying the bill must be made to cover patient care supply and equipment expenses.

          Technology continues to develop at an alarming rate, and with increased technology invention comes increased cost. In the fee-for-service period of time, the cost for technology use used to be incorporated in the health care bill and sent onto third party payers for payment. With the virtual disappearance of fee-for-service, this no longer happens. It is estimated that by the year 2007 the number of people with fee-for-service insurance coverage will be at or below 10% of all insured individuals (Skinner, 1997). Technology must also be paid for out of the budget third party payers allow health care providers. This leads to the need for careful scrutiny with regard to the level of technology actually required for quality patient care. Overuse and/or misuse of technology can cost health care providers dearly.

          With managed care, patients are staying in hospitals for shorter time periods than ever. The impetus is now on getting the patient out of the inpatient setting and into a lower level of care as soon as possible without incurring increased health care costs or compromising quality care. Thus, lengths of stay are becoming dramatically decreased. This phenomenon is not new. It has been around for over two decades, but third party payers are now beginning strong-arm enforcement of reimbursement amounts. Along with reduced lengths of stay, comes increased patient acuity. Patients are sicker and have more complex and compounding medical problems than ever before. The complex, multiple-diagnosis intensive care unit patient of ten years ago is now the typical general medical/surgical unit patient of today. It is not unusual to see a patient with three or more central intravenous lines receiving multiple medications and TPN; on telemetry, oxygen, hourly outputs, and hemodialysis; with multiple complex sterile dressing changes; and in isolation on a general medical/surgical unit. This type of patient obviously incurs higher health care costs, uses more hospital resources, and requires more labor intensive nursing care than the less complex patient; yet, reimbursement pretty much stays at a constant level.

Duplication and Fragmentation of Health Care Services

          With the changing health care delivery system of the present and the future, duplication and fragmentation of health care services must be eliminated altogether. In the 1980s, a system of utilization review was developed. This system helped to cut down on duplication and fragmentation of health care services but, to a certain degree, these two “reimbursement depleters” still exist today. The complex patient with multi-system involvement generally requires the expertise of multiple health care specialists. With the patient having so many body systems affected and receiving care from multiple health care professionals, each entitled to an opinion and treatment course, it is not hard to see why duplication and fragmentation still occur. 

          Managed care is demanding coordination of all the health care disciplines assigned to a case to defray costs and delete duplication and fragmentation of medical treatment. “Health care reform calls for control of resources and better management of treatment for patients across the health care continuum” (Cohen & Cesta, 1994). Health care administrators are eliminating overlapping of services by integrating responsibilities and maximizing talents. “Because of continued focus on cost containment and limited resources in health care, practitioners need to wear more than one hat” (Smith & Wolf, 1997).

Implications for Practice

          The present status of the health care delivery system is changing based on a more intense shift toward access to quality care with attention paid to the rising costs of health care combined with concern over current health care reimbursement. This move toward more accessibility of affordable, quality health care is making it necessary for health care administrators to examine the health care delivery models in use today. The escalating health care costs and the changes in reimbursement methods have caused health care administrators to redesign health care delivery procedures (Goodman, 1997). Updated models of health care need to include a way to identify the best patient results while coordinating appropriate resource utilization. This calls for comprehensive, integrated health care delivery. The Accreditation Manual for Hospitals mandates that all health care delivery disciplines be involved together in designing and implementing coordinated models of patient care (Vautier & Carey, 1994). “We are truly experiencing a paradigm shift that will continue to be a challenge to hospital leadership” (Vautier & Carey, 1994).

          The viability of health care institutions relies heavily on the procurement of managed care contracts. To protect the livelihood of their health care institution, health care administrators frequently sign these managed care contracts knowing that costs will not be covered by the reimbursement terms of the individual contracts. Not signing the contracts would surely mean the health care institution’s doors would eventually be closed to all business. To compensate for the difference between actual operating costs and what is reimbursed, health care administrators are forced to look at cutting costs within the health care institution’s budget. This requires the health care administrators to carefully screen all budget items and validate their need. It also means health care administrators must look closely at the justification for the institution’s health care programs and staff positions. If, after evaluation, a health care program does not display cost effectiveness or is not proven to directly impact health care delivery, it and the personnel who run the program are being eliminated as a means to cut health care costs (Barretto & Haskell, 1997). Prudent scrutiny of the need for each staff member position is something health care administrators have been forced to do (Conger, 1998). “Downsizing” or “rightsizing” are the buzzwords used to describe the need for staff layoffs (Wojner, 1997). “Yet, restructuring health care financing and delivery systems will succeed only if the people we serve benefit from the changes” (Quinn, 1996).

          Health care administrators now have to find innovative ways to provide high quality health care with finite resources in a limited reimbursement climate. Methods that deliver quality patient care with judicious use of constrained resources need to be found. Nursing case management is one solution for health care administrators to consider when looking at health care delivery redesign. “Case management is an approach to the clinical and financial management of care that concentrates on the care recipient as well as the funders of care” (Quinn, 1996). The literature has shown that when nursing case management is instituted, continuity of quality patient care and reduction in hospital inpatient costs occur. Case management by nurses working closely with all members of the health care team reduces fragmentation of care and over-utilization of resources. Nursing case management facilitates cost effective health care while focusing on the patient as the center of an increasingly complicated health care system.


Summary

          DRGs, insurance reimbursement changes, increased use of disposable patient care supplies and equipment, increased technology, reduced lengths of patient stays, intensifying patient acuity levels and duplication and fragmentation of health care services all challenge the delivery of cost-effective quality care and have led to the “Age of Redesign.” To alleviate the effects of these factors, health care administrators are obliged to find a health care delivery model that coordinates all aspects of quality patient care across all health care disciplines while incorporating cost containment strategies. Health care is so costly, it compromises a large percentage of the Gross National Product. Cohn and Cesta (1994) noted that the 1993 U.S. Bureau of the Census indicated “national health care expenditures have escalated into the billions of dollars and amount to an estimated 13.2% of the gross domestic product” (p.110). Health care is now a business, and the expenses involved in the delivery of quality, patient-centered care have become the guiding forces leading to the search for and institution of innovative health care delivery models, one of which is nursing case management.


REFERENCES

Barretto, P., Haskell, S. (1997). Development of a nurse entrepreneurial role: Patient care manager. Nursing Economics, 15(5), 262-264.

Cohen, E., Cesta, T. (1994). Case management in the acute care setting a model for health care reform. Journal of Case Management, 3(3), 110-115.

Conger, M. (1998). Integration of acute care CNS and case manager roles. Critical Care Nursing Clinics of North America, 10(1), 127-134.

Goodman, D. (1997). Application of the critical pathway and integrated case teaching method to nursing orientation. The Journal of Continuing Education in Nursing, 28(5), 205-210.

Quinn, J. (1996). The future of long-term-care case management. Journal of Case Management, 5(1), 2.

Skinner, N. (1997). Issues of cost and reimbursement what does our future hold? Orthopaedic Nursing, March/April Supplement, 62-65.

Smith, G., Wolf, D. (1997). Orientation program for a hospital-based dual case manager and educator role. Journal of Nursing Staff Development, 13(2), 77-82.

Vautier, A., Carey, S. (1994). A collaborative case management program: The Crawford Long Hospital of Emory University model. Nursing Administration Quarterly, 18(4), 1-9.

Wojner, A. (1997). Outcomes management: From theory to practice. Critical Care Nursing Quarterly, 19(4), 1-15.