Medicare's Prospective Payment System is designed to pay hospitals fairly and provide similar financial incentives for admitting different types of patients, so that no group of patients is systematically a financial winner or loser for the hospital. To accomplish this, Medicare bases its payments on the diagnosis-related group (DRG), which correlates to a patient's discharge diagnosis. However, a recent study at one teaching hospital in Cleveland, OH, found that hospital costs were 23 percent higher for elderly Medicare patients with low functional status, even after adjustment for DRG payments and patient characteristics.
If this finding holds true in other hospitals, DRG-based payments provide hospitals a financial incentive to avoid patients dependent in activities of daily living (ADLs, for example, dressing, bathing, or transferring from bed to chair). DRG-based payments also disadvantage hospitals with more ADL-dependent patients, whose care costs are higher than their diagnosis alone would indicate, concludes Kenneth E. Covinsky, M.D., M.P.H., of the University of California, San Francisco. In a study supported in part by the Agency for Healthcare Research and Quality (K02 HS00006), Dr. Covinsky and his colleagues used a cost management information system to determine the cost of hospital care for 1,612 patients aged 70 and older.
Hospital costs were higher in patients dependent in ADLs on admission than in patients independent in ADLS on admission ($5,300 vs. $4,060). Mean hospital costs remained higher in ADL-dependent patients than in ADL-independent patients in an analysis that adjusted for DRG ($5,240 vs. $4,140) and in multivariate analyses adjusting for age, race, sex, clinical factors, and admission from a nursing home, as well as for DRG ($5,200 vs. $4,220).
See "Diagnosis-related group-adjusted hospital costs are higher in older medical patients with lower functional status," by Kenneth H. Chuang, M.D., Dr. Covinsky, Laura P. Sands, Ph.D., and others, in the December 2003 Journal of the American Geriatrics Society 51, p. 1729-1734.