Mark A. Hall, Fred D. and Elizabeth L. Turnage Professor of Law
When I entered teaching in 1985, Medicare DRGs had only recently been adopted. I remember going to my first Health Law Teacher’s conference where one of the issues being discussed was whether or not to teach this complex reimbursement system in an overview health law course. Coming fresh out of hospital law practice, I was bemused that anyone might consider not teaching DRGs, and indeed the topic is routinely covered in the leading health law casebooks that were first published in the late 1980s. Now that 20 years have passed, however, one might reasonably ask whether it is still important to cover DRGs, and how best to do so.
I still cover DRGs, but not from the same perspective I used when first teaching. Then, I took the viewpoint of a practicing hospital lawyer who needs to understand his or her client’s business environment in intimate detail. I realize now that law students are too far removed from a highly applied focus for this viewpoint to have great relevance, and there is plenty of time later for them to learn the ropes of DRGs in detail if they end up becoming hospital lawyers. Instead, my current purpose in covering DRGs is to train my students to think like health policy analysts.
My basic pitch throughout my course on health care law and policy is that lawyers who have clients in regulated industries need to understand the vocabulary and mindset of public policy analysis in order to represent their clients effectively. Certainly this is true for clients with legislative issues. But, even in front of ordinary judges, the public policy aspects of legal issues often predominate. Law students might think that explicit use of policy analysis is relevant mainly for legislative lobbyists, but fluency in policy analysis is also critical for a regulatory practice. Regulators live, eat, and breathe policy analysis. If lawyers don’t instinctively know the public policy way of thinking about the world, they can’t effectively communicate with those who govern their clients.
DRGs are a great focal point for dissecting the interactive public policy, legal, and business implications of a financial regulation. First, I start with a broad overview of the nature of the problem. Doctors and hospitals, like everyone else, are economic creatures at least in part. Their behavior is shaped to a considerable extent by the structure of financial rewards. Therefore, it is important to consider the full spectrum of ways that providers might be paid. Payment methods array themselves from the most microscopically discrete (fee-for-service for every single item) to the most globally bundled (salary or annual budget). It takes only brief thought about the incentives created by these extremes to understand why something in the middle might work better.
Next, we consider what might work well for hospitals. A per diem does not constrain the length of stay, so what about payment by episode of treatment - i.e., by admission? The main problem is that admissions are hardly uniform, so we need a method to adjust for severity of condition. That’s the basic logic of DRGs, but, naturally, a few complicated details need to be mastered. They can be limited to the following: There is a basic average rate (which varies somewhat by hospital type and location, but never mind that for now), and a diagnosis-based weighting factor. The weights are intended to be a zero-sum game: each is relative to the average case, which is weighted 1. A few simple hypotheticals illustrate how this works. There’s no need to be precise with the numbers - it’s the basic concept that matters. Also, I usually don’t get into outlier payments, geographic adjustments, disproportionate-share hospitals, and the like, unless these come up in discussion.
With grasp of these essentials, the main focus turns to how hospital administrators might respond to these basic incentives, and which of these responses are favorable, or not, from a public policy viewpoint. Lots could be said, so to organize and stimulate classroom discussion, I ask students to think of ways that hospitals could either: 1) increase revenues, or 2) decrease costs. Sometimes, I appoint students to play the role of expert consultants advising me as a hospital administrator. In one way or the other, I try to guide discussion so that the following points come out.
There are lots of ways to increase revenues under DRGs by gaming the system, e.g., double admits, or admits for things that could be done on an outpatient basis. Also, “DRG creep” and its pseudonym “case-mix management” are always entertaining to mention. But, hospitals can go only so far with such tricks. The best and most straightforward way to increase revenues is simply to admit more patients, by doing what hospitals have always done, except more so: winning the favor of physicians by being a better-quality or more physician-friendly hospital. This creates a strong economic counter to the incentive to cut corners. Of course, the more cynical view is that there are more personally lucrative ways to win physicians’ favor, which presages upcoming issues relating to referral fees, joint ventures, etc.
Turning to reduction of costs, one essential point is that hospital administrators don’t control the main cost drivers, physicians do. This highlights the built-in tension between prospective payment for hospital services and retrospective payment for physician services. Is this intentionally wise, or accidentally stupid? You be the judge. In either event, this points toward using “gainsharing” to resolve the tension, followed by regulators’ schizophrenic reaction about whether they really want cost containment or not, and on what terms. Also, this presages “economic credentialing.”
If DRGs work, as they certainly have by shortening lengths of stay, what’s to stop them from going too far? It’s important to realize that “quicker and sicker” discharges aren’t necessarily bad if “discharge planning” places patients in a more efficient settings for convalescence. But what checks are there against going too far? In addition to the points above about the hospital’s reputation for quality, the obvious response is liability exposure — which raises issues about institutional or “enterprise” liability.
Typically, I cover all of this in either a 50- or 80-minute class, which is doable. I try to simplify and demystify the complexities of DRGs so that students can understand the core idea as easily as possible and then focus their analytical minds on the implications. To evaluate how well I’ve done, I sometimes ask them a simple essay question focused on one of the several paragraphs above (but not all of them), for instance: “Discuss from a hospital administrator’s point of view what are the best measures to decrease costs in response to DRGs.” Or, I might use DRGs as the backdrop for a hospital adopting a specific response, such as economic credentialing, that requires legal analysis. In the end, the outcome I aim for is to sensitize students to how numerous legal, regulatory, and public policy initiatives can flow from a single but central change in payment structure.