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Medicare+Choice Risk Adjustment: Don't Leave Money on the Table - analysis of Principal In-Patient Diagnostic Cost Group methodology - Statistical Data Included

Healthcare Financial Management, August, 2001 by John K. Gorman

The Principal In-Patient Diagnostic Cost Group (PIP-DCG) risk-adjustment methodology for Medicare+Choice organizations uses inpatient hospital encounter data to trigger payment for certain diagnoses. Improved financial performance under PIP-DCG risk adjustment for Medicare+Choice organizations and their hospital partners lies in more complete and accurate coding and better record-keeping at the hospital level. It is important to track members with chronic or terminal conditions that may qualify for higher payments and to appropriately code these conditions to optimize funds that may be owed to the organization.

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When HGFA (now CMS) implemented the Principal In-Patient Diagnostic Cost Group (PIP-DCG) risk-adjustment methodology in January 2000, Medicare+Choice organizations and hospitals seemed resigned to the inevitability of reduced payment. The PIP-DCG system uses inpatient hospital encounter data to trigger payment for certain diagnoses.

It is critical that financial managers understand risk adjustment in the Medicare+Choice program for the following reasons:

* Medicare payments to HMOs are increasing annually at a far slower rate than healthcare expenditures or drug costs. At the same time, regulatory burdens and the cost of complying with the new payment system are driving up administrative costs.

* PIP-DCG risk adjustment can result in millions of dollars in variable payments to Medicare+Choice organizations. Improved reporting of encounter data to CMS helps optimize those payments.

* Senior executives of Medicare+Choice organizations are required to sign and submit a monthly form to CMS attesting that all data the plan submits are accurate. If CMS finds that data submitted are inaccurate, intermediate sanctions or even prosecution of the signatory under the False Claims Act can result.

* PIP-DCGs apply to the 10 to 15 percent of Medicare+Choice members with chronic conditions that account for up to 85 percent of costs. Greater attention to this population is a key to long-term survival in the Medicare market.

By understanding how risk-adjusted payments are determined and fostering more complete and accurate hospital coding practices, healthcare financial managers can form the foundation of a strategy to receive appropriate payment under Medicare+Choice risk adjustment.

Nuances of PIP-DCGs

Risk adjustment in Medicare+Choice works like this: if a Medicare+Choice HMO member spends a minimum of two days in a hospital with a qualifying principal diagnosis, the HMO receives an additional payment 12 to 18 months later, prorated over the next 12 months. For instance, a two-day stay for a principal diagnosis of congestive heart failure earns the HMO about $900 in additional payments per member per year (PMPY). A two-day stay for renal failure earns about $1,200 PMPY for the HMO.

Key features of the PIP-DCG methodology merit extra attention. First, the system resets annually Because chronic or terminal conditions are largely the only diagnoses that qualify for higher payments, persistence in coding from year to year for members with these conditions is critical. Without aggressive tracking of members who qualify for risk-adjusted payments, many Medicare+Choice organizations will not receive the funds due to them from one year to the next. Information systems should be configured to track such members and ensure that their frequent hospitalizations are accurately and appropriately coded.

Second, subsequent hospitalizations do not result in additional payments. In each calendar year, once a Medicare+Choice enrollee triggers a risk-adjusted payment with a qualifying hospital stay, later admissions do not mean more money unless the member is hospitalized for a more acute qualifying diagnosis. This fact has a negligible impact on medical management procedures for most Medicare+Choice organizations, which seek to avoid costly hospitalizations. After the member has incurred the qualifying hospital stay the incentive is to aggressively manage the patient's care and to avoid future admissions. Finally the PIP-DCG risk-adjustment methodology requires that "the money follow the member." If a Medicare+Choice enrollee triggers a risk-adjusted payment and then disenrolls from that plan and joins another plan, the plan that incurred the cost of care receives a payment prorated to the date of disenrollment. So there is a financial incentive to retain sick members once they have triggered the payment. Furthe rmore, if the member triggers a risk-adjusted payment and then dies, as often happens due to the severity of the conditions of qualifying beneficiaries, the Medicare+Choice organization receives a payment prorated to the date of death.

Therefore, Medicare+Choice organizations and their hospital partners should pay special attention to those conditions that are prevalent among beneficiaries and manageable for the 12 to 18 months between the triggering admission and the receipt of payment from CMS. These include congestive heart failure, chronic obstructive pulmonary disease, prostate and colon cancer, and heart attack followup.

Health Care Industry

Medicare+Choice Risk Adjustment: Don't Leave Money on the Table - analysis of Principal In-Patient Diagnostic Cost Group methodology - Statistical Data Included

Healthcare Financial Management, August, 2001 by John K. Gorman

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