Developing payment refinements and reforms under Medicare for excluded hospitals

Health Care Financing Review,  Spring, 1989  by John C. Langenbrunner,  Patricia Willis,  Stephen F. Jencks,  Allen Dobson,  Lisa Iezzoni

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An additional level of public funding has become available under the newly enacted Medicare Catastrophic Coverage Act of 1988 (Public Law 100-360). This legislation provides the greatest single expansion of benefits under Medicare since the genesis of the program in 1965. In terms of changes relating to hospital payment, the concepts of "benefit periods" and "lifetime reserve days" are replaced by unlimited hospital coverage for the entire year, with the beneficiary paying a 1-day deductible once each year.

Coverage under a related public program- Medicaid-can also play an important role. Children's hospitalization provides the most dramatic example of the situation in which Medicaid payments can sometimes account for a majority of a facility's total revenues. Almost one-half (45.8 percent) of expenditures for children's hospitalizations comes from public sources, the most important of which is Medicaid. For chronic care patients, Medicaid has also generally shouldered the majority of the payment burden. To the extent that States adopt prospective or alternative payment approaches for their Medicaid programs, Federal policies could serve as precedents for hospital exclusions, taking on additional importance.

In short, any consideration of payment refinement and reform for excluded hospitals could be a function, in part, of the absolute level of Medicare dollars involved, the relative rate of change in those payments in recent years, and the relative impact of PPS and other factors on Medicare payments to these facilities in the future. Current payment policies

Current Medicare payment policies for these excluded hospitals demonstrate the contrast in economic incentives of the present cost-based system of limits (established by TEFRA) with the incentives of a prospectively based system.

Prior to the TEFRA legislation, hospitals were reimbursed by Medicare according to a system of limits for daily routine occupancy costs, plus reasonable costs incurred for special and ancillary care. With the passage of TEFRA, reimbursement limits were extended to total operating costs per discharge for nearly all hospitals-acute care and specialty providers alike. Upper limits for inpatient 6perating costs per case were established by Section 1886(a) of the act, using an initial averaging of costs across the aggregate of cases treated in similar hospitals. "Similarity" of provider type was defined as belonging to one of seven Medicare-designated urban or rural bed-size classes. Medicare case mix was also taken into account.

An early form of DRG'S, using Medicare stay files to develop relative cost weights, was used to create a case-mix index (CMI) for each hospital. This CMI collectively weighted each hospital's average costs per discharge to account for differences in patient populations. Cost adjustments were made for wage-index differences nationally, and adjustments to limits were made for indirect medical education. Only sole community hospitals, new (i.e., established less than 3 years) providers, health maintenance organizations (HMO's), and rural hospitals with fewer than 50 beds were exempted from these TEFRA limits.