D. Using the "Pseudo Bill" to Find VA Healthcare Cost

2. How can I estimate what Medicare would have paid for a VA inpatient hospital stay?

VA cannot bill Medicare for care provided to veterans. However, calculation of a hypothetical Medicare reimbursement is useful to cost analysts who are interested in estimating the resources used to provide VA inpatient care. Medicare reimburses both hospitals and providers for the cost of inpatient stays. These two components are considered.

Hospital payment

Medicare reimburses hospitals based on the Diagnosis Related Group (DRG) that is assigned to the hospital stay. Medicare determines the national average charge for each DRG and expresses them as relative values; these are known as DRG weights. A schedule of DRG weights is published annually by Medicare; these are available from the Federal Register and from the Center for Medicare and Medicaid web site.

Medicare pays a standard amount for each unit of DRG weight. Medicare makes additional payments to hospitals for capital, to compensate them for outlier cases, for the indirect and direct costs of medical education, and to assist hospitals that have a disproportionate share of indigent and Medicaid patients.

Here is one method of estimating the Medicare reimbursement. This method assumes that the additional payments for capital, outliers, medical education, and disproportionate share, should be assigned to stays in proportion to their DRG weight. This assumption will result in a estimate that is likely to mean very near the national average Medicare payment for that DRG. This assumption means that the cost estimate won't reflect the effect of the hospital's own medical education or wage costs, which do influence Medicare reimbursement.

This example uses data from 1996. The sources of information used to calculate these payments included:

• Federal Register / Vol. 60, No. 170 / Friday, September 1, 1995 / Rules and Regulations, "Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1996 Rates; Final Rule".
• Medicare and the American healthcare System: Report to the Congress. Prospective Payment Assessment Commission, June 1997

It was determined that the average Medicare payment per DRG weight in 1996 was $5,267. The table lists the components that entered this payment calculation.

Payment Per DRG Weight	Type of Payment
$3808.00	Standard Payment
$194.22	Outlier Payments
$512.15	Capital Payments
$298.43	Indirect Medical Education
$291.94	Disproportionate Share Provider Payments
$162.19	Direct Medical Education
$5,266.93	Total Payment

Standard payment rate
There are separate standard payment rates for large urban and other areas. The value of $3,808 is an average of the values published in the Federal Register. The average was weighted by the DRG relative value units produced by hospitals in large urban areas and hospitals in other areas. The estimate of DRG relative value units was from the ProPAC report.

Additional payments
Outlier payments were expected to be 5.1% of the DRG payments according to the regulation. This was $194.22 per DRG weight. The regulation projected that 1996 capital payments would be $727.26 per discharge. Since there was an average of 1.42 DRG weights per discharge in FY96, capital payments would be $512.15 per DRG weight. The Indirect Medical Education (IME) Payments were 7.84%, or $298.43. The Disproportionate Share Provider (DSH) payments were 7.67%, or $291.94. Direct Graduate Medical Education (GME) payments were 4.26% or $162.19.

These additional payment rates were calculated from the 1997 projected data published by ProPAC. Total amount paid on the basis of standard payments was estimated by taking "operating payments" and subtracting outlier, IME, and DSH payments. Capital and direct GME were assumed not to be operating payments.

Alternate calculation methods. Using the $8 billion capital estimate in the ProPAC report gives a 13.63% capital cost, or $519.00 per DRG weight. Using the 5.28% outlier payments implied in the ProPAC report suggests a $201.11 outlier payment cost. Using this method, the total Medicare payment per DRG weight in FY 1996 is $5,281.

The CMS web site reports $87.5 billion in payments to acute hospitals for inpatient care in FY95, and that inpatient costs grew at an annual rate of 5.2% during the period 1990-1996. Also reported is the number of discharges by DRG in the Medpars data, and the schedule of DRG weight per discharge. These were used to determine that Medicare paid for 11.7 million discharges; these had an average DRG weight of 1.422, yielding a total of 16.7 million DRG weights. These data suggest an average payment of $5,509 per DRG weight in FY96. Since some discharges are excluded from the report (to avoid disclosing patient data) this figure represents an upper bound of the cost.