I. Finding and Using Healthcare Data
12. How can I estimate Medicare payments for an inpatient short-stay acute hospitalization?
The cost of providing medical/surgical care in a hospital includes both a facility and a physician component. This answer explains how to estimate the hospital component.
Payments are based on the Diagnosis Related Group (DRG) and adjusted for each specific hospital. With the DRG and hospital Medicare identifier number, you can determine what Medicare would have paid for the hospital stay.
FAQ F3 describes how to get the DRG weights.
For an inpatient stay, Medicare calculates (1) hospital operating costs and (2) capital costs. Both 1 and 2 start with a standardized amount; hospital in urban areas with more than 1 million persons face one set of standardized amounts, while all other hospitals face another set of standardized amounts.
The standardized amount is first adjusted to account for labor costs, using the wage index. The standardized amount is then adjusted by the diagnostic related group (DRG) weight to reflect the patient’s case mix. In addition to the adjusted base amount, hospitals receive additional payments to reflect their share of low-income patients (known as disproportionate share) and their indirect medical education.
In addition to receiving Medicare reimbursement for hospital operating costs and capital costs, hospitals can request outlier payments and additional reimbursement based on their direct medical education. The outlier payment is for those patients who are much sicker and who stay much longer than average, and the Centers for Medicare and Medicaid Services have a description of outlier payments on their web site.
The steps are summarized in an Excel File (see below). If you would like more information about the nuts and bolts of calculating Medicare payments, please contact HERC. Also, if you are interested in outpatient costs, please refer to HERC’s Outpatient Average Cost Dataset Users Guide, which describes using Current Procedure Terminology (CPT) codes to calculate estimated payments.
With some simplifying assumptions regarding the wage index, disproportionate share and indirect medical education, a researcher can calculate a “national average” reimbursement for a particular DRG. In fact, this would result in two averages: one for large urban hospitals and one for all other hospitals. These averages would not include any outlier payments and they would not reflect direct medical education. Approximately 28% of all US hospitals in FY04 were teaching hospitals. For teaching hospitals, DME can represent an additional 10-20%.
Researchers should also recall that these estimated Medicare payment are for the facility and exclude professional fees (i.e., the physician’s reimbursement).
The Centers for Medicare & Medicaid Services (CMS) distribute a PC program called the Prospective Payment System (PPS) PC PRICER. If you enter the hospital identifier (PPS number), the DRG, the admission and discharge date, and the billed amount (charges), and whether the stay involved a transfer, the program tells the Medicare reimbursement. The program calculates teaching payments, disproportionate share payments, geographic adjustments, and capital payments for that hospital. Since these change each year, there is a different version of the program for each year.
Unless the stay is unusually long (an outlier), the billed amount does not affect the reimbursement. Thus it is possible to estimate a reimbursement without knowing the charges. Also, the length of stay does not usually affect reimbursement, so it is not critical to know the admission or discharge dates either. It is important to indicate if the stay involved a transfer to or from the hospital.
The program requires the hospital identification number. This six-digit identifiers consists of two digits for the state and four digits for the hospital. View the "Impact File" for one source of provider identifiers.
The Pricer software yields the cost of the hospital stay from Medicare's perspective. It may not be the “economic cost,” for example, if the stay is more expensive than expected for that DRG, Medicare pays the flat (DRG based) payment, and the hospital loses money on the stay.
To ensure the protection of VA information, we have restricted access to certain files (denoted by the"lock" icon). Contact HERC to download these restricted files.
- Calculating Medicare Inpatient Payments by DRG
Date: 9/1/2005 | Size: 2.16Mb