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Medicare's payment-by-diagnosis system requires a diagnosis code for its computers to specify the payment. Codes are the way doctors can conduct their activities on a medical level while revealing to the billing department what the activity is worth. The billing department knows well enough these values will be later smudged and bloated, so why make work for yourself being accurate? Careful, fellows, your foot is on a slippery path.
High-handed Codes. The government could have chosen a coding system called SnoMed (Standard Nomenclature of Medicine), which specifies several million diagnoses in detail. Or it could have specified ICDA (International Classification of Diseases), which in its various iterations can identify several thousand. What it did choose was DRG, or Diagnosis-related Groups, specifying about two hundred. With various adjustments and offsets, this translates: there are only two hundred different price buttons to push -- for millions of diagnoses. The theory is, some cases will cost more, some will cost less, but in the long run, it all comes out just exactly right. Saves work for the billing clerks, that way.
Careful, fellows, you have stepped over the line of what is allowable latitude. Buried in your computer cubicles, hidden behind green eyeshades, you have convinced yourselves the world will tolerate anything you do for your own convenience. Try talking to one of them some time -- you will surely find the door is locked, or the boss is out to lunch, or it isn't company policy to allow accountants to talk to outsiders. If you have credentials, you may talk to a spokesman who seems to keep repeating himself. It does not seem to have occurred to anyone that the public wants to know if the charges are fair, and at the very least has a right to know if they are accurate. How can they be either fair or accurate, if millions of activities are reduced to two hundred price buttons?
Pure and simple: A rationing system.
I remember well, sitting in the Congressional hearing room when this proposal was first made. I giggled over Congress letting someone even utter such nonsense, let alone pass a law to go ahead with using it. But now I have to listen to reports this system has been in place for twenty years, and it works just wonderfully fine. A friend of mine was a graduate student at Yale, helping to develop the DRG system in its original form. He, too, is appalled that such an unexpected usage could even be considered, for what had an entirely different original purpose. The DRG was part of a coding system devised to assist the Professional Standards Review Organizations in monitoring insurance claims for errors and fraud. The behavior of each diagnosis group was studied for its general outline, and general patterns were identified. If a case fell outside the norms, it was tagged for investigation. Just how well DRG's worked out for that particular purpose, I have no idea. But to extend it for the actual payment of particular claims, simply boggled the mind, and still does.
Children Playing With Matches. When you let people do things like that, some pretty unexpected things happen. In the first place, using a system tailor-made for Medicare, you need at least one extra system to pay for patients who don't have Medicare. However, Medicare accounts for about half of average hospital revenue, so there is automatic pressure on everybody to conform to the system of the big cajun. An elaborate system called Chargemaster was devised for itemized services to be listed on an itemized bill, which now runs to dozens of pages for each patient. Since nobody much was going to use anything but DRG, the reasoning went that constant revision of thousands of itemized charges would be a big and useless task. Since you had to do it, you set the charges so high you wouldn't have to come back and revise them so often. Countless reporters have asked dozens of hospital administrators to explain the itemized bills which emerge, and almost every administrator admits he doesn't understand Chargemaster, and never looks at it.
Chargemaster. The billing clerks of the hospital look at it, however, and the patients look, and reporters look. Itemized bills totaling tens of thousands of dollars are sent, first to the patients, and then to the bill collectors. Stephen Brill's America's Bitter Pill is filled with "Tom and Mary of Tuscon" anecdotes, so let me add a couple of personal ones. For example, I received a bill for Seven thousand dollars from my own hospital accident room for twenty minutes treatment for a sprained wrist; the hospital clerk had joined in such a welcoming reunion for old times' sake, he forgot to collect my insurance numbers. After several strikingly threatening letters, communication eventually stopped. I have to assume they eventually found my insurance numbers on the record of an earlier admission. In another case, I discovered that another of my hospitals sends its bills when tests are ordered, not when they are performed. Consequently, a patient I discharged from the accident room without having the tests the interne had ordered, received an astonishing bill for the services, anyway. Since he was vice-president of the insurance company which covered him, there were some gratifying repercussions. On a later occasion, my oldest son received a bill for $8,500 for a colonoscopy from a famous Boston Hospital, and asked me what I thought was fair. I said it was worth a couple of hundred dollars, so he called his insurance company, following which the revised bill was one thousand dollars. He fell all over himself writing a check, for what I still say was a gross overcharge. Notice one theme running through all of these true stories. They all involved outpatient services.
You see, the hospitals were all shifting to a Chargemaster system for outpatients because the inpatient charges (often for the same services) were frozen by the DRG. In fact, it is widely quoted that inpatient profit margins were 2%, accident room profit margins were 15%, and the outpatient area made a profit of 30%. If anything approaching that is true, well, what would you do in their place? The next time you go past your local hospital, try to notice if a construction crane is working on a new building. The chances are excellent you will find it's a new outpatient building.
If you put physicians on salaries, you get an instant forty-hour week. Soon, you get physician shortages.
Hospitals are busy buying up physician practices because of the indirect effect of the DRG. Furthermore, the prices are high and the government is paying the bill through the hospital reimbursement system. My old friends smile, and a wink they will go back into practice if the hospital reimbursement declines. That long-term cost has to be factored in, although I doubt it will happen as they age. But if it does, the cost of reconciling a physician surplus might have to be included in the eventual reckoning of what the DRG did or did not save.
When you get down to it, the DRG is an excellent rationing tool, and rationing invariably creates shortages. Robert Morris learned that lesson the hard way during the Revolutionary War. He didn't speak much during the Constitutional Convention in 1789, but he was utterly determined that we not construct a command economy -- which is rationing on a grander scale. He kept his attention on his own business, while his protege Alexander Hamilton did the talking, and his best friend George Washington did the listening. How is the DRG a rationing tool? The government makes the rules, sets the prices, and monitors the outcome. However you choose to achieve a 2% inpatient profit margin, its economic effect is remorselessly judged as 2% revenue, operating within a 2% inflation rate, achieved by a 2% inflation target at the Federal Reserve. All the slack in the system has seemingly been driven into the out-patient and accident room areas. Except it hasn't. Everything the inpatient system asks for shall be given to it, on a 2% cost-plus basis. Profit margin, indeed. What we have is a cost-plus procurement system.
Originally published: Sunday, April 12, 2015; most-recently modified: Tuesday, May 21, 2019