I was fascinated to read a “Perspective” column published in the March 16 issue of The New England Journal of Medicine. Written by Merle Ederhof, Ph.D. and Paul B. Ginsburg, Ph.D., “Improving Hospital Incentives with Better Cost Data” offers a novel suggestion for enhancing financial incentives to hospitals towards improved cost-effectiveness, essentially by asking hospital executives to “open the kimono” and share with the government their real cost data across a range of clinical services.
Drs. Ederhof and Ginsburg begin their commentary by stating that, “Under the current Medicare payment system, hospitals are reimbursed for inpatient stays on the basis of each patient’s assigned Medicare severity diagnosis-related group (MS-DRG). The Centers for Medicare and Medicaid Services (CMS) attempts to set reimbursement rates so that the average hospital has the same profit margin for the care they provide regardless of a patient’s MS-DRG. The finding that some services, such as orthopedic surgeries, are systematically more profitable than others, whoever, suggests that there is still mispricing in the payment rates,” they write. “Such mispricing has encouraged providers to increase capacity and patient volume for the most profitable services and reduce capacity for the least profitable ones—ultimately reducing the overall efficiency of the healthcare system.”
Ederhof and Ginsburg next consider the fact that the accountable care organization (ACO) programs under Medicare, and the voluntary bundled payment programs under that agency, “Continue to serve as the building blocks” for new payment models. “As a result, mispricing in the current payment rates will continue to create incentives for hospitals to favor services with higher profit margins,” they note.
In other words, there still is a lot of fuzz in the system. But here’s where it gets interesting: “CMS sets Medicare payment rates to reflect the relative costs that hospitals incur in treating patients in each MS-DRG, but its cost-measurement system is fairly crude. In response to increasing pressure to control costs, many U.S. hospitals have adopted superior internal cost-measurement systems that enable them to estimate costs with greater accuracy and to identify services with high and low profit margins,” they note.
And so that leads to their proposition: “We believe, the authors write, “that CMS could substantially improve Medicare’s payment system for inpatient care by drawing on the highly detailed and accurate cost data that are produced by these sophisticated internal systems. In addition to yielding more accurate payment rates, this arrangement would synchronize the cost data used by hospitals and those available to CMS, thereby eliminating any possibility for hospitals to use their superior data to cherry-pick the most profitable services.”
Even more interestingly, they cite a HIMSS survey to buttress their argument: “Using 2013 survey data collected by the Healthcare Information and Management Systems Society, we estimate conservatively that 37 percent of the 3580 U.S. hospitals whose cost data are currently included in the Medicare payment-rate estimation have adopted a granular internal cost-measurement approach. Although larger hospitals are overrepresented, many smaller hospitals have been adopting such methods through their membership in multihospital systems.”
They argue that sampling hospitals’ internal cost data systems could yield data going to CMS that could “substantially increase the accuracy of the Medicare payment rates currently used for inpatient hospital care, and by extension, the accuracy of new payment models such as ACOs and bundled payment.”
So in theory, this sounds like a great idea, and I agree that in principle, it would be terrific for CMS to be receiving detailed internal cost data from hospitals that could enrich the payment formulas that animate and refine the Prospective Payment System. There’s just one problem: what would motivate hospitals to voluntarily share such data with CMS? Right now, hospital leaders continue to find “higher ground” when it comes to service lines that are “safer” from payment reform-related reimbursement reductions, particularly as they move into ACOs—both Medicare-sponsored and private insurer-sponsored—and participate in Medicare’s bundled payment programs—both the voluntary programs and the two mandatory bundled payment programs that have either begun or been announced (one of each), but which might be eliminated or made voluntary under the new Secretary of Health and Human Services. In any case, the key point is that hospital executives are very much worried that they will soon be left with no “higher ground” to which they can retreat in specific operational areas.
Here’s what might work: if senior CMS officials really want to improve some of the core data inputs going into PPS, they might consider working with some of the leading associations and alliances that are using data to improve hospital operational and cost efficiency—for example, the Charlotte-based Premier Inc.; as well as larger consulting entities like The Advisory Board Company (Washington, D.C.). There’s a heckuvalot of data out there already that could help CMS, and, if senior leaders within that federal healthcare agency are serious about improving the payment systems that rely on data inputs from the field, there are a lot of paths forward.