Health Affairs, 25, no. 5 (2006): 1386-1393 doi: 10.1377/hlthaff.25.5.1386 © 2006 by Project HOPE	New Online   Senate Health Reform Bill   Rewarding Providers   Public Option Policy Brief   Health Reform & Abortion   Delivery System Reform

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Medicare Payment For Selected Adverse Events: Building The Business Case For Investing In Patient Safety

Abstract

 
This study estimates that Medicare extra payments under the hospital prospective payment system (PPS) range from about $700 per case of decubitus ulcer to $9,000 per case of postoperative sepsis in the five types of adverse events identifiable in Medicare claims. Medicare extra payment for the five types of events totals more than $300 million per year, accounting for 0.27 percent of annual Medicare hospital spending. But these extra payments cover less than a third of the extra costs incurred by hospitals in treating these adverse events. We conclude that both Medicare and hospitals gain financially by improving patient safety.

Understanding the financial aspects of adverse events, especially the financial incentives embedded in today’s health care system, is critical to the proper design of programs and financial incentives aimed at improving patient safety. This study assesses how much Medicare under its diagnosis-related group (DRG)–based prospective payment system (PPS) pays hospitals for five selected types of adverse events identifiable in Medicare claims, and how much of the extra costs are absorbed by hospitals.³ The objective is to provide the first insights into the intricate financial relationships surrounding adverse events and illustrate the business cases for both Medicare and hospitals to invest in patient safety.

Study Data And Methods

Top Study Data And Methods Study Results Discussion NOTES

 
Data and variables. Our primary source of data was the 2002 Healthcare Cost and Utilization Project (HCUP) Nationwide Inpatient Sample (NIS), developed by the Agency for Healthcare Research and Quality (AHRQ). The 2002 NIS file contains about 7.85 million uniform hospital discharge abstracts from 995 short-term, general hospitals in thirty-five states, approximating a 20 percent stratified sample of nonfederal acute care U.S. hospitals.⁴ The NIS includes variables on sources and types of admissions, DRGs, fifteen diagnosis codes from the International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM), fifteen ICD-9-CM procedure codes, procedure days from admission, discharge status, length-of-stay, total charges, patients’ demographic characteristics, insurance coverage, and a few hospital-characteristic variables. The database also includes sampling weights and design variables for generating national estimates.

Calculating Medicare payment under the hospital PPS required three data files from the Centers for Medicare and Medicaid Services (CMS): (1) DRG relative weights; (2) the Area Wage Index and a number of other variables representing variation in cost of living across the country, listed by metropolitan statistical area (MSA) codes, including a single code assigned for rural areas in each state; and (3) the Medicare IMPACT data, which include key variables for payment adjustments for individual hospitals, such as the resident-to-average-daily-census ratio, disproportionate share of low-income patients, urban/rural designation, number of beds, and cost-to-charge ratios.⁵ The IMPACT file was linked to NIS 2002 by a hospital identifier crosswalk created by AHRQ.

Identifying adverse events during hospitalizations. We used the AHRQ Patient Safety Indicators (PSIs) to identify adverse events during hospitalization.⁶ The AHRQ PSIs include twenty indicators with reasonable validity, specificity, and potential for fostering quality improvement. Inclusion and exclusion criteria were developed to screen out adverse events that are not preventable. Although the validity of these indicators is not fully established, both empirical data and an expert clinical panel agreed that these indicators have sound clinical validity in identifying preventable adverse events.⁷ Our analysis included the following five PSIs with relatively larger numbers of cases and representing diverse safety concerns.

Decubitus ulcer (DU). This includes a DU diagnosis in any secondary diagnosis field and in hospitalizations with stays longer than four days, excluding patients with principal diagnosis of DU; patients with any diagnosis of hemiplegia, paraplegia, or quadriplegia; and patients admitted from long-term care facilities.

Iatrogenic pneumothorax (IP). This includes an IP diagnosis in any secondary diagnosis field, except in patients with principal diagnosis of IP, trauma patients, and patients with thoracic surgery or lung or pleural biopsy or assigned to cardiac surgery DRGs.

Postoperative hematoma or hemorrhage (H/H). This includes an H/H requiring a procedure after an operating room (OR) procedure, except in patients with principal diagnosis of H/H, patients with the only OR procedure that is postoperative control of hemorrhage or drainage of hematoma, and patients in whom a procedure for postoperative control of hemorrhage or drainage of hematoma occurs before the first OR procedure.

Postoperative pulmonary embolism or deep vein thrombosis (PE/DVT). This includes a PE/DVT in any secondary diagnosis field after an OR procedure, except in patients with principal diagnosis of PE/DVT, patients in whom a procedure for interruption of vena cava is the only OR procedure, and patients in whom a procedure for interruption of vena cava occurs before or on the same day as the first OR procedure.

Postoperative sepsis (PS). This includes a sepsis in any secondary diagnosis field in elective surgical discharges with length-of-stay of four days or more and an OR procedure, except in patients with principal diagnosis of sepsis or infection and any diagnosis of immunocompromised state or cancer.

Calculating Medicare payment for hospital claims. The Medicare hospital PPS pays for inpatient services based primarily on DRGs. The DRG system sorts patients into more than 500 groups, each group of cases having related clinical problems and expected to have similar costs. Each DRG has a relative weight reflecting the relatively costliness of the DRG compared with other DRGs. Medicare PPS payment for inpatient services has five components, base operating payment, base capital payment, an indirect medical education allowance, an adjustment compensating hospitals for treating disproportionate shares of low-income beneficiaries, and an adjustment for cases with unusually high costs relative to the payment rate for the DRG.

Formulas and parameters for payment determination are published at the beginning of every federal fiscal year. For this study we used specific formulas from the Medicare Payment Advisory Commission’s (MedPAC’s) March 2002 report to Congress on Medicare payment policy, supplemented by additional details from other sources.⁸

Calculating Medicare extra payment for adverse events. We first screened the selected types of adverse events based on ICD-9-CM codes recorded in Medicare claims. The DRG for each claim with an adverse event was assigned using a DRG grouper from 3M Inc., and Medicare payment for the claim was calculated.⁹ In the second step, the ICD-9-CM codes indicating adverse events were removed from the claim, the DRG was reassigned, and payment was recalculated. The second step created a simulated claim mirroring the original claim without the adverse events. This step required a total charge for the simulated claim to determine cost outlier adjustment along with the cost-to-charge ratio obtained in the Medicare IMPACT data. Using the 2000 NIS, Chunliu Zhan and Marlene Miller estimated excess charge attributable to each PSI, including the five types of events studied.¹⁰ The total charge for the simulated claim thus was determined by deducting the excess charges from the claimed total charge and inflating to 2002 dollars: simulated total charge equals the claimed total charge minus [1.101 x (excess charge due to PSI)]. In the third step, we examined the differences in DRG designations and Medicare payment between the actual case and the simulated case, and we estimated the changes in payment components and the national total of Medicare payment for the selected adverse events.

Study Results

Top Study Data And Methods Study Results Discussion NOTES

 
Adverse events during hospitalization. The 2002 NIS contained more than 2.5 million hospital discharge abstracts for patients who were age sixty-five or older and who claimed Medicare as their primary or secondary payer. Exhibit 1 shows the national estimates of the five types of events among these Medicare beneficiaries. The event rates vary from one case of iatrogenic pneumothorax to thirty-four cases of decubitus ulcer per thousand discharges at risk.

Medicare payment for adverse events. The Medicare payment for adverse events under the PPS ranged from $735 per case of decubitus ulcer to $8,881 per case of postoperative sepsis (Exhibit 3). For 80 percent of hospitalizations with decubitus ulcer, the Medicare payment would have been the same had the ulcer not occurred. About half of the cases with postoperative sepsis would not have changed Medicare payment had the sepsis not occurred. The estimated national Medicare payment ranged from $16.4 million for iatrogenic pneumothorax to $125 million for decubitus ulcer; it totaled $313 million a year for the five types of adverse events.

Top Study Data And Methods Study Results Discussion NOTES

Business case for patient safety. This study also suggests a business case for hospitals with substantial shares of Medicare patients to improve patient safety. Our findings show that hospitals get no additional payment under the Medicare PPS in 48 percent (postoperative sepsis) to 80 percent (decubitus ulcer) of the cases when adverse events occur. In these cases, hospitals have to absorb the extra costs in treating the adverse events. Although it is difficult to estimate how much hospitals absorb the extra costs under the PPS, it can be inferred. Previous studies estimated excess charges per case at $10,845 for decubitus ulcer, $17,312 for iatrogenic pneumothorax, $21,431 for postoperative hematoma or hemorrhage, $21,709 for postoperative pulmonary embolism or deep vein thrombosis, and $57,727 for postoperative sepsis; and inpatient cost-to-charge ratios had a national weighted average of about 45 percent in 2002.¹² Based on these estimates and the extra payments presented in Exhibit 3, Medicare under the PPS pays for only about 15 percent, 18 percent, 24 percent, 26 percent, and 34 percent, respectively, of the extra costs for the five types of adverse events.¹³ In other words, hospitals absorb most of the costs of treating adverse events under the PPS.

Implications for the Medicare PPS. This study also helps inform changes in Medi-care PPS policies. First, the current PPS does not distinguish between comorbid conditions that are present at admission and complications or adverse events that occur during hospitalization in assigning the DRG and in determining payment. Our findings support MedPAC’s 2005 recommendation that the CMS should require hospitals to identify on their claims forms which secondary diagnoses were present on admission.¹⁴ This information would allow Medicare to distinguish between payment for treating comorbid conditions, which is reasonable, and payment for treating adverse events, which is questionable. Second, our findings support and inform the CMS’s efforts in developing pay-for-performance (P4P) schemes for patient safety. Our study suggests that some patient safety measures could form the basis of a P4P plan, and a national benchmark could be estimated, as presented in Exhibit 1, to facilitate the assessment of relative performance of individual hospitals and the determination of performance awards. Third, MedPAC proposed a set-aside of 1 percent of total Medicare spending for P4P purposes.¹⁵ Our approach could help decide the amount of set-aside needed to target specific safety issues—for example, $59 million a year on P4P incentives targeted at postoperative sepsis.

Study limitations. Some limitations should be noted. First, we studied only five selected types of adverse events identifiable through Medicare claims. The large volumes of the claims and the ICD-9-CM codes recorded in the claims made our analysis possible; in the meantime, our findings should be interpreted in light of the limitations of the data and the methods.¹⁶ In general, missing codes, erroneous codes, and lack of codes for specific safety events are expected. As a result, the reported adverse events represent only a subset of patient safety events and are subject to identification errors. More seriously, despite the best effort to identify only preventable adverse events, some of the adverse events identified in Medicare claims might not be preventable. Nevertheless, this approach has been well established and is the best available method for our purpose.

Second, we calculated extra payment for the five selected adverse events made by Medicare under its DRG-based PPS. The finding is not generalizable to other payers or payment systems. As our analysis showed, the extra payments vary greatly by types of adverse events. Subsequently, Medicare extra payment for other types of events might be very different from the reported estimates. In addition, the payment calculations were not exact because some payment adjustments could not be accurately factored in.

Third, our findings should be interpreted with care from hospitals’ perspective. Hospitals might be fully paid for the extra costs of treating adverse events occurring in patients covered by fee-for-service plans or prepaid plans, and it is likely that hospitals shift the uncompensated costs from Medicare patients to other patients. More detailed data and sophisticated design are needed to study how hospitals are affected financially by adverse events, given that they serve all types of patients and are paid under multiple systems.

Other quality improvement programs. Recent years have witnessed rapid increases in attempts to implement value- or quality-based purchasing and P4P systems that financially reward high-quality providers and penalize low-quality providers.¹⁷ For example, the Deficit Reduction Act of 2005 directed Medicare to reduce payment to hospitals when patients acquires infections during a hospital stay, starting 1 October 2008; and the Minnesota-based HealthPartners announced in November 2004 that it would not pay providers for twenty-seven "never" events designated by the National Quality Forum as events that should absolutely never happen.¹⁸ To succeed, such systems must take into account the financial incentives that are already embedded in the current system, strengthening the positive incentives and offsetting the negative ones.

OUR STUDY SHOWS that the financial aspects of an adverse event are not always apparent, and robust research is needed to recognize the embedded incentives and support the design of new ones. Although this study does not provide a complete business-case analysis, which should have entailed estimation of investments needed, it illustrates the potential returns to investments for Medicare and Medicare-serving hospitals and provides valuable insights into the complexity of the financial aspects of patient-safety improvement.

Editor's Notes

 
Chunliu Zhan (czhan{at}ahrq.gov) is a senior health services researcher at the Agency for Healthcare Research and Quality (AHRQ) in Rockville, Maryland. Bernard Friedman is a senior economist at AHRQ. Andrew Mosso is a senior analyst at Social and Scientific Systems Inc. in Silver Spring, Maryland. Peter Pronovost is a professor of critical care medicine and health policy and is director of the Center for Innovations in Quality Patient Care, School of Medicine, at the Johns Hopkins University in Baltimore, Maryland.

The authors thank Marge Keyes and James Battles, Agency for Healthcare Research and Quality (AHRQ), and David Hunt, Centers for Medicare and Medicaid Services (CMS), for useful comments. The authors also acknowledge the thirty-six statewide data organizations that participated in the Nationwide Inpatient Sample (NIS) 2002, from the following states: California, Colorado, Connecticut, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, and Wisconsin. The authors are solely responsible for the contents of this paper; no statement herein should be construed as an official position of AHRQ, the U.S. Department of Health and Human Services, or the Johns Hopkins University.

NOTES

Top Study Data And Methods Study Results Discussion NOTES

 

1. In particular, see E.J. Thomas et al., "Costs of Medical Injuries in Utah and Colorado," Inquiry 36, no. 3 (1999): 255–264, which estimated the costs of preventable adverse events at $159 million in Utah and Colorado and $17 billion in the United States annually[Web of Science][Medline]; D.W. Bates et al., "The Costs of Adverse Drug Events in Hospitalized Patients," Journal of the American Medical Association 277, no. 4 (1997): 307–311, [Abstract/Free Full Text] which estimated that preventable adverse drug events increased hospital costs from $2,262 to $4,700 per admission, amounting to $2.8 million annually for a 700-bed teaching hospital and about $2 billion for the nation; and L.T. Kohn, J.M. Corrigan, and M.S. Donaldson, eds., To Err Is Human: Building a Safer Health System (Washington: National Academies Press, 1999), which has extensive discussion of costs associated with adverse medical events.
2. C. Zhan and M.R. Miller, "Excess Length of Stay, Charges, and Mortality Attributable to Medical Injuries during Hospitalization," Journal of the American Medical Association 290, no. 14 (2003): 1868–1874.[Abstract/Free Full Text]
3. This assessment is possible because Medicare’s PPS, unlike fee-for-service, capitated, or other payment systems, pays hospitals a predetermined amount per hospital discharge based primarily on diagnoses and procedures, classified as DRGs, recorded in the claims that hospitals submit to Medicare for reimbursement. The payment amount can be calculated using formulas published by Medicare.
4. Agency for Healthcare Research and Quality, "Overview of the Nationwide Inpatient Sample (NIS)," May 2006, http://www.hcup-us.ahrq.gov/nisoverview.jsp (accessed 16 June 2006).
5. Centers for Medicare and Medicaid Services, "Acute Inpatient PPS: Steps in Determining a PPS Payment," http://www.cms.hhs.gov/Acute InpatientPPS/02_stepspps.asp (accessed 3 August 2006).
6. See C. Zhan and M. Miller, "Administrative Data Based Patient Safety Research: A Critical Review," Quality and Safety of Health Care 12, no. 2 Supp. (2003): ii58–ii63; and AHRQ, "Patient Safety Indicators Download," May 2006, http://www.qualityindicators.ahrq.gov/psi_download.htm (accessed 16 June 2006).
7. University of California, San Francisco–Stanford University Evidence-based Practice Center, "Evidence Report for Measures of Patient Safety Based on Hospital Administrative Data—The Patient Safety Indicators" (Rockville, Md.: AHRQ, March 2002), examined all potential patient safety measures applicable to administrative data and constructed twenty Patient Safety Indicators (PSIs) based on literature review, empirical data analysis, and expert-panel consensus.
8. Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington: MedPAC, March 2002). The detail of the payment calculation is available from Chunliu Zhan, czhan{at}ahrq.gov.
9. 3M Inc., "Inpatient Reimbursement Reference Guide" (Murry, Utah: 3M Health Information Systems, 2004).
10. Zhan and Miller, "Excess Length of Stay."
11. MedPAC, Report to the Congress: Medicare Payment Policy (Washington: MedPAC, 2004). Note that the payment formulas used here are for traditional Medicare under the PPS, which covered about 85 percent of Medicare beneficiaries in 2002. Most of the remaining 15 percent of beneficiaries were enrolled in Medicare managed care, where the amount of Medicare payment for adverse events is different, and its calculation is beyond the scope of this study.
12. Zhan and Miller, "Excess Length of Stay." The cost-to-charge ratio can be calculated based on average costs and average charges per discharge found at AHRQ, "Select Outcomes and Measures for Which You Want Statistics," April 2006, http://hcup.ahrq.gov/HcupNet.asp?Id=FF82E753DA34FFB7&Form=&GoTo=SelOutC&JS=&DefId=Costs (accessed 16 June 2006).
13. The business cases can be further illustrated for an average hospital with 40 percent of discharges of Medicare patients age sixty-five or older in 2002. If the hospital reduces its number of decubitus ulcer from the seventy-fifth percentile of forty-six cases to the twenty-fifth percentile of four cases, it would save $205,800 a year in uncompensated costs in treating decubitus ulcer and also save Medicare $30,870 in payment.
14. MedPAC, Report to the Congress: Medicare Payment Policy (Washington: MedPAC, March 2005), 191.
15. Ibid., 184.
16. See Zhan and Miller, "Administrative Data Based Patient Safety Research," for a full discussion of various limitations of administrative data–based patient safety measures.
17. M. Rosenthal et al., "Paying for Quality: Providers’ Incentives for Quality Improvement," Health Affairs 23, no. 2 (2004): 127–141. Also, MedPAC’s 2005 report on Medicare payment policy made P4P the key recommendation for Congress to consider in Medicare payment policies.[Abstract/Free Full Text]
18. The Deficit Reduction Act of 2005 stipulated that starting in October 2006, Medicare should redesignate DRGs so that the payment rate is lower if there is a secondary diagnosis that results from infections acquired during the hospital stay. For the HealthPartners announcement, see Medical Newswire, "HealthPartners to Stop Paying for Major Medical Mistakes," 16 November 2004, http://medicalnewswire.com/artman/publish/article_4501.shtml (accessed 19 June 2006); and for the list of events, see B. Vaszily, "Twenty-seven ‘Never Events’: They’re Not Supposed to Happen, but They Often Do," 10 February 2006, http://www.articles-hub.com/Article/39878.html (accessed 16 June 2006).

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