Onur Baser, MS, PhD
University of Michigan

• Surgery accounts for almost half of overall spending.
• Under the Prospective Payment System, payments per surgical episode should vary little across hospitals.
• However, in practice …

Payments vary widely across hospitals

Distribution of Payments
Others (5%)
Physician
(%29)
Facility (67%)
DRG (89%)
Outliers (4%) Readmissions
(7%)

• Defined by principal diagnosis, major procedures performed and presence of comorbidities and complications.
(Weight*National Average DRG payment)
These weights indicate the relative costs for treating patients during the prior year. The national average charge for each
DRG is compared to the overall average

• For procedures and hospitalizations that are unusually expensive.
• A hospital is eligible for outlier payments when its estimated costs for a particular service (submitted charges multiplied by the hospital’s cost to charge ratio) exceed the PPS rate by a specified amount (the stop-loss amount FY06: $23,600)

Medicare currently pays for all rehospitalizations (except those in which patients are rehospitalized within 24 hours after discharge for the same condition for which they had initially been hospitalized) .

Objective
Assess the variation in hospital payments for patients undergoing coronary artery bypass surgery (CABG).
Link payments to the hospital quality

Study Design
• 2006 Medicare Claims Database.
• Hospital payments are categorized into three parts: Price standardized DRG payments, Outlier Payments and 30 day readmission costs
• Risk adjustment is done with multivariate analysis, controlling for age, gender, race, admission status and comorbid scores.

Summary Statistics
CABG Procedures (2006 Medicare data)
Number of patients
Number of hospitals
Patient characteristics
Age (% 75+ years)
Sex (% female)
Race (% black) urgent/emergent
Comorbidity (% 2+)
Provider characteristics
Hospital volume tercile
Low
Medium
High
89,732
722
40.5
32.5
6.0
52.6
57.7
16.6
26.7
56.7

Hospital Payments
$45,000
$40,000
$35,000
Readmission
"Outliers"
Initial Stay
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Lowest Cost Hospitals 2
Hospital Groups
3 Highest Cost Hospitals

• Combination of risk adjusted mortality and hospital volume (Dimick et al., Health
Affairs, 2009)
• Has been shown better than individual quality measures in terms of predicting future performance.
• Score is derived from 04-05 Medicare Data

Hospital Quality vs. Payment
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
$39,534
Lowest Quality
Hospitals
$37,417
2
$35,993
3
Hospital Groups
$34,048
4
$31,909
Highest Quality
Hospitals

Readmission vs Quality
0.25
0.2
0.15
0.1
0.05
0
Lowest Quality
Hospitals
2 3
Hospital Groups
4 Highest Quality
Hospitals

Outliers vs. Quality
12.0%
10.0%
Sour
8.0%
6.0%
4.0%
2.0%
0.0%
Lowest Quality
Hospitals
2 3
Hospital Groups
Source: Baser et al., Health Affairs ,
2009
4 Highest Quality
Hospitals

CMS payment for surgical episodes varies widely across hospitals.
Facility payments represents the largest share
Outlier and 30 day readmission have significant impact on variation.
Some of the variation may be attributable to unmeasured differences in patient case mix or to coding practices, but high quality lowers payments and readmissions.

• Pay on quality of what is done, not the quantity of what is done.
• Bundling of surgical episode payments is an important element of President Barack Obama's February 2009 proposal for financing health care reform.
• This would create payment incentives to reduce the rates of rehospitalization.
• CMS’s ongoing efforts to increase bundling of surgical episode payments could also include tighter restrictions on outlier payments.
• Annual bonus for high quality providers, “encourage” consolidation of low volume facilities, IT use

John Birkmeyer, MD, University of Michigan
Cathy Gust, MS, University of Michigan
Justin Dimick, MD, MPh, University of Michigan