This is the Healthcare Delivery Providers, part of the Healthcare Marketplace Specialization. This is module 2.1.5, how hospitals get paid. Learning outcomes for this lecture that we will review how hospitals get paid and discuss the various adjustments that happen to end up with the final rate. And I have to warn you that this is a little bit of a complicated topic. I have tried to break it down to make it much simpler. Remember that the ultimate payment methodology is extremely complicated, but hopefully as I break it down you will follow it along with me. Medicare Severity Diagnosis Related Groups. Indirect Medical Education. Disproportionate Share, Hospital, or DSH. Okay, so this is the basic road map of how the hospital is going to get paid. So, we'll start there, so let's go all the way to the left. There is a big base rate that is calculated so that's let's say a And then it is adjusted by geographical factors adjustments, so it's a + b, say. Then this is where the patient, for example, Harlan Reeves, and his condition matters. So the more complicated the condition, the more amount the hospital will get paid, and so on. So this is adjusted and so now it becomes a little bit larger. Then it is adjusted by some policy adjustments, so abcd, and that could be the final amount that is paid to some hospitals so, it is paid to the hospitals. However, if the hospital transfers the patient out, there is adjustment to reduce the amount, reduce the amount. Or if the patient is too costly and the cost for the patient is very high, that amount is increased. So again, let's dig into this a little bit more in detail. Let's start with the base payment rate. And I'll use Medicare again as an example. Know that the commercial insurance companies follow a little bit of a similar methodology. But there are some nuances where I want you to focus in on the Medicare payment. Other insurance companies typically will adjust that slightly, but this really sets most of the standards. So base payment rates could be either operating base payment rate which covers labor and supply costs. And the other base payment rate is the capital base payment rate which covers depreciation, interests and rents etc. So these are the two types of base payment rates that are updated annually based upon factors like patient conditions, market conditions, called a market basket update. And this particular rate, the base rate, defines the standardized payment amount that is paid per discharge for each patient that is discharged from each hospital. So, this will be the original amount that is calculated for each patient. And then it is adjusted, as we will see. So next, the base rate is adjusted according to geographical factors. So, based upon local market prices for labor, the age wage index is applied to adjust the base rate. And that is applied only to the operating base rate. And then also sometimes there can be more payments for new technology or bad debts, in case the beneficiary is unable to pay his or her expenses to the hospital. This is one of the more important concepts that I would like you to take away from this lecture, and that is the Medicare Severity-Diagnosis Related Group. And this is a complicated way of saying that if a patient has heart disease, then, that particular patient is categorized according to a particular Medicare severity, DRG or diagnosis related group. And another patient that has exactly the same heart disease would also be coded according to that same standardized MS-DRG. So, there are over 700 MS-DRG's out there and they keep changing and being updated. These are based upon the principle diagnosis. So, for heart it would be the congestive heart failure and also secondary diagnoses. For example, what else is happening to the patient, either before the patient came into the hospital, or during the hospital stay. And these DRGs are grouped according to how much resources are used in taking care of a average patient like, for example, Harlan. Let's do a quiz now. So far we have looked at the base rate, which was adjusted by some wage and geographical factors, which was adjusted then most importantly by the MSDRG. And now it is further adjusted by some policy adjustments. So for example, if the hospital provides medical education, there is a payment made for that. And it's calculated by how many residents does the hospital have per bed and what is the teaching intensity. There's also a direct cost of medical education that is paid separately. Other types of policy adjustments include the disproportionate share payments to hospitals. And these are additional payments for those hospitals that serve a low income patients, so as to make them whole. And there are other add-on payments based upon where the hospital is located, are there other hospitals around it, and so on and so forth. Now we come to some quality adjustments that are made to the amount that has already been calculated. So for example, there is a program called Readmissions Reductions. So, there's a payment reduction that happens if the rate of readmission for that particular hospital is high. Another program is called the Value Based Incentive program, which withholds payments for all DRGs and then creates a pool. And that pool is then redistributed based upon who does well with the value based program and who does not do well. So, hospitals that do well get that pool of money divided amongst themselves. Now we come to the adjustment called transfer adjustment. So, the DRG payment that the hospital would have received is reduced, if the length of stay is one day or more less than average for that particular DRG. So the patient on average for that condition typically stays for four days. This particular hospital only had the patient for two days. So the payment would be reduced. Also, if the patient is transferred to some, not all, but some Post Acute Care settings or to another hospital that provides similar services. Then the payment with the original, originating hospital are also reduced. The high cost outlier payments apply if the patient that is in the hospital costs a lot of money, or is exceedingly high cost. Then there is an additional payment above the DRG payment made to that hospital. And this particular outlier payment is offsetted by reductions in both Operating and Capital Base Rates. So a pool is created by both of these for all hospitals, and then outlier payments are made to those hospitals that have high cost patients. In summary, the hospital payments are calculated in quite a complicated way by adjusting a set base rate. And the adjustment, most importantly, happens by the patient acuity and conditions. That really dictates how much the hospital gets paid. There are additional factors and adjustments. For example wage indices, policy adjustments and also high cost outliers that lead to further adjustments to calculate the final payment rate.
