Medicare Severity-Refined DRGs: An Improved System

By Steven Harris
President, IRP, Inc.

For several years the Health Care Financing Administration (HCFA) has been researching a major refinement of the DRG classification system to more fairly compensate hospitals for treating severely ill Medicare inpatients. These refinements based on severity of illness create additional DRGs for cases involving very ill patients who consume far more resources than do other patients in the same DRG in the current system. HCFA has completed the preliminary work and released a paper for public comment describing the proposed severity-refined DRG (SRDRG) classification system.

In designing the SRDRG system, HCFA was careful to balance the goals of improving the precision of the existing DRG system with ensuring that implementation and administrative costs would be reasonable. Data collection and implementation costs are significant considerations; for example, one state is estimated to spend $10.00 per case to collect and monitor severity data for its system.

To incorporate a severity of illness measure in the SRDRG classification system, HCFA expanded the existing Complications and Comorbidities (CCs) to include the concept of a Major CC.  Major CCs are diagnoses present on a case that significantly increase the expected resource consumption beyond that of the same case with a CC under the current Medicare definition. 

The presence of a CC or MCC in a particular DRG does not always mean an increase in resource consumption. Simply creating 2 or 3 additional CC/MCC related DRGs for each existing base (non-CC) DRG would create many extra DRG categories that may not be different from each other on either a clinical or resource usage basis. In addition, a profusion of DRG categories results in many DRGs with so few cases nationally (less than 30 cases/year) that the relative weights calculated from the average charges are unreliable.

To properly address these issues, HCFA did extensive data and clinical analysis. Each possible CC/MCC DRG was examined to see if there was a significant resource-based or clinical reason and enough case volume (500+ cases/year) to create a unique SRDRG category for it. A new SRDRG classification (CC/MCC dependence) was created only when justified by these criteria.

To further "collapse" potential SRDRG categories, combinations of CC/MCC diagnoses were also analyzed. The result is that SRDRG categories can be split in the following ways (depending on the particular base SRDRG):

    Base SRDRG Only (no related CC or MCC SRDRGs)

  SDRG with CC

  SDRG with MCC

    SRDRG with either CC or MCC

    SRDRG without CC or without MCC

For example,

  current DRG 302 (Kidney Transplant) becomes a Base SRDRG,    with no related CC/MCC SRDRGs;

  current DRG 303 (Kidney, Ureter & Major Bladder Proc. for

  Neoplasm) becomes three SRDRGs: one With MCC, one With CC,       and one Without CC. In this case, the weight of the SRDRG

  With CC is equivalent to the original DRG 303.

  current DRGs 292 (Other Endocrine, Nutrit & Metab O.R. Proc

  With CC) and 293 (... Without CC) become two SRDRGs: one         With MCC, one Without MCC. The weight of the SRDRG With MCC      is almost twice that of DRG 292.

A total of only 652 SRDRG classifications is needed.  This enormously simplifies the resulting SRDRG system compared to other severity adjusted systems that have 1,200 to 1,400 DRGs or classifications.

Since HCFA's new SRDRG system has fewer than 999 DRGs and uses only claims data that is currently submitted to Medicare by hospitals, the new system should be easy to implement and require no major computer system changes. In addition, the SRDRG classification scheme is a direct outgrowth of the MDC-driven DRG system currently in use. It will be readily understandable by personnel familiar with current DRGs, minimizing training costs.

HCFA will separately supplement Medicare beneficiary data with additional data to improve the classification of potential SRDRGs that apply primarily to a non-Medicare population, such as newborns, children, and maternity patients. The current plan is to use SRDRG classifications for these categories similar to DRGs in use for New York and CHAMPUS cases.

There will be an impact on reimbursement to individual hospitals. Payment by DRG is an "averaging process". As long as all hospitals are treating the same "average" mix of cases in a particular DRG their per-case payments are not biased favorably or unfavorably by severity of illness considerations. However, under the current system if Hospital A treats 25 less severely ill and 5 more severely ill patients in DRG X, and Hospital B treats 5 less severely ill and 25 more severely ill patients in the same DRG, Hospital B is being under-reimbursed compared to Hospital A. Each is paid the same per case, but Hospital B's cases are more expensive on average because they treat a higher percentage of more severely ill patients. Any severity-based refinement of the DRG system seeks to correct this imbalance by paying Hospital A somewhat less and Hospital B somewhat more.

According to HCFA's impact analysis, the proposed SRDRG system will result in a small reduction in payments to hospitals treating less severe cases (generally rural and small urban hospitals) and a corresponding increase in payments to hospitals treating more severe cases (generally large urban hospitals).  This payment change is, on average, less than the annual inflation adjustment factor. However, this will vary depending on your hospital's particular circumstances. HCFA has calculated an SRDRG case mix index for every Medicare provider using existing hospital claim data re-grouped under the proposed SRDRG system. This SRDRG case mix index is directly comparable to your current 10/1/93-9/30/94 case mix index from HCFA. It should be your starting point to determine how much of an impact the SRDRG system may have on your hospital.

HCFA has released the Severity Refined DRG study early to allow sufficient time for the hospital industry to evaluate and submit comments on the proposed classification system. Medicare SRDRGs could be effective as early as October 1, 1995.

HCFA has done a thorough, careful job in developing a refinement of the current DRG system to include a severity of illness measure that significantly improves payment equity, while ensuring that the revised system can be implemented easily and at low cost by hospitals and fiscal intermediaries. The HCFA SRDRG system will also provide a good base for other reimbursement programs, such as Medicaid in individual states, because of its improved handling of non-Medicare DRGs, and its severity adjustment. For these reasons, we expect the HCFA SRDRG system to be widely adopted within the next 18-24 months.

You can obtain an SRDRG grouper program that conforms to the proposed HCFA Severity-Refined DRG proposal for a nominal fee from IRP Systems, Inc.

Copies of the complete Severity Refinement DRG study may be obtained directly from HCFA. An abridged copy (including the SRDRG case mix index tables) is available free of charge from IRP Systems, Inc. Phone your request to their Medicare Research Group at 1-617-938-6444 x249, or FAX 1-617-938-6543.

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