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Medicare short-stay hospital services by diagnosis-related groups.

The 1983 amendments to the Social Security Act (Public Law 98-21) provided for a prospective payment system (PPS), effective October 1, 1983, for most short-stay hospitals certified to provide inpatient services to Medicare beneficiaries. A brief description of the assignment process for diagnosis-related groups (DRGs) is presented, because assigning a DRG code to a short-stay hospital discharge record is tantamount to the Medicare prospective payment to the hospital, subject to certain statutory adjustments. Shifts in the distribution of the discharges and average length of stay among the DRGs since 1983 reflect the adaptation of hospitals to the incentives embedded in PPS and the ongoing refinements in the methods of assigning DRGs to discharges from short-stay hospitals. Interpretation of the shifts is based on a consideration of the significant refinements in the medical coding system, the technological and scientific advances in the practice of medicine, the effect of shifting patient treatment to alternative sites, policy or legislative changes affecting Medicare coverage, and the annual recalibration of the DRG weights.


Introduction
In this article, we present Medicare data and selected highlights on diagnosis-related groups (DRGs) for Medicare beneficiaries discharged from short-stay hospitals during calendar years 1983, 1985, and 1988. The discussion of the data highlights changes in the number of discharges and average length of stay (ALOS) among the DRGs. The discussion underscores refinements in the methods of DRG assignment over the study period, as well as the incentives that are embedded in the prospective payment system (PPS) that was instituted based on DRGs.
The most dramatic shifts in the DRG data appear, as would be expected, in the period 1983-85-the first 2 years of the Medicare PPS-and generally are considered to reflect responses to the introduction of the PPS: Among the cause of such shifts are the financial incentives inherent in PPS, the advantages of improved medical reporting and coding practices, and the shift of inpatient services to alternative outpatient treatment sites. Many of these specific DRG shifts were designed to affect program payments in ways that could either widen or lessen the distance between revenue and costs. The shifts that have taken place since 1985 reflect further refinements in medical coding, the coverage of formerly PPS-excluded hospitals and units, and advances in medical technology.
For calendar years 1983, 1985, and 1988, the number of discharges, DRG rank order, and average total days of care per discharge are shown in Table 1. The DRG relative weights (fiscal years 1983, 1985, and 1988) and average program payments per discharge (1988 only) are shown in Table 2. The 1988 payment data in Table 2 should not be construed as providing definitive estimates of total program payments being made under PPS. The payment data are presented solely for comparing differences in the average amounts that Medicare paid for inpatient services among the different DRGs. The average program payments shown in Table 2 were calculated following the deletion of all records that showed a total of zero reimbursements; that is, only the records that show Medicare as the primary payer were included.

Diagnosis-related group assignment
Medicare has the legal responsibility, while the hospitals have a financial incentive, to continually refine the methods by which the DRG assignment is made because the DRG assignment, to a large degree, determines the Medicare payment to hospitals under PPS. If the hospital spends more on the care of the patient than is reimbursed under PPS, it suffers a financial loss. Conversely, the hospital profits when the inpatient care is delivered at a cost that is less than the amount reimbursed by Medicare.
The assignment of a DRG code for a Medicare claim begins with the patient's discharge from the hospital. Following the discharge, the attending physician first prepares a narrative on the principal diagnosis, secondary diagnoses, and any surgical procedures; and second, signs an attestation certifying the correctness of these statements. The principal diagnosis is defined in the Uniform Hospital Discharge Data Set as the "condition established after study to be chiefly responsible for occasioning the admission of the patient to the hospital for care." Using the International Classification of Diseases, 9th Revision, Clinical Modification (ICD-9-CM), the hospital's medical coding staff then enters the ICD-9-CM codes for as many as five diagnoses and three procedures for each claim. The ICD-9-CM uses a three-to-five-digit code to classify diseases by diagnosis and a two-to-fourdigit code to describe surgical procedures.
Next, the fiscal intermediary chosen by the hospital reviews and approves the claim and uses the ICD-9-CM codes to assign a DRG code. As described in the Federal Register (1987a), "The intermediary enters the information into its claims system and subjects it to a series of automated screens called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before classification into a DRG can be accomplished. After screening through the MCE and any further development of the claims, cases are classified by a computer program called the Grouper into the appropriate DRG." To determine DRG assignment under PPS, each principal diagnosis is first classified into one of the 23 mutually exclusive major diagnostic categories (MDCs) defined in the ICD-9-CM. (Because of the small number of discharges and the lack of general applicability to the Medicare population, MDC 15 (Newborns and other neonates with conditions originating in perinatal period) has been eliminated from the tables in this article). The MDCs are related to one or more of the human body systems, with the exception of MDC 23. MDC 23 includes principal diagnoses for factors influencing health status and other contacts with health services (such as ill-defined medical conditions like edema, pallor, and debility), annual physical examinations, and the administration of vaccines. MDCs related to more than one body system are MDC 18 (Infections and parasitic diseases, systemic or unspecified sites) and MDC 22 (Burns).
A physician panel developed MDCs to ensure that DRGs are clinically coherent. For example, principal diagnoses denoting heart diseases or conditions are generally assigned to MDC 5 (Diseases and disorders of the circulatory system), which encompasses DRGs 103-145. An exception to a normal MDC 5 coding classification, however, could be a record showing a principal diagnosis of heart failure and a surgical procedure of cholecystectomy. Because the cholecystectomy is unrelated to the principal diagnosis, the record will be assigned to DRG 468 (Operating room procedure unrelated to principal diagnosis).
Most of the MDCs are partitioned into surgical (operating room procedures) or medical categories because this partition captures clinical differences that translate into significant resource use differences (Table 1). In classifying Medicare patient cases, the Grouper uses clinical diagnoses, major medical or surgical procedures, demographic data, complications or comorbidity, and status at discharge.
Although there is some variation among patients within a DRG, there should be an overall similarity across patients in the same DRG. The DRG system, therefore, should provide equitable payments, in that comparable resource consumption should be comparably reimbursed.
In terms of characteristics and objectives, the DRG system was designed according to the following criteria: • The DRG must be medically interpretable and clinically sensible. • The DRG should be delineated by using variables that are easily obtained from hospital abstracts. • DRGs should be a manageable number of groups (no more than 500) that are both exhaustive and mutually exclusive. • DRGs should consist of patients who use a similar type and amount of hospital resources. Once a particular DRG is assigned to the discharge record, that DRG is assigned a relative weight that reflects the intensity of hospital resources used for the average patient in that DRG. The intensity factor is reduced to a cost factor. Thus, cases with a relative weight of 2.0 would, on average, cost twice as much to treat as the average case for the average hospital. For example, in fiscal year 1988, DRG 103 (Heart transplant) had a higher relative weight (11.9225) than did any other DRG.
DRG relative weights are calculated by analyzing the most current applicable Medicare charge data. The Secretary of Health and Human Services was mandated by Congress in the Omnibus Budget Reconciliation Act of 1986 (Public Law 99-509) to annually adjust the DRG weights to reflect changes in factors that affect the intensity of hospital resource utilization. The Prospective Payment Assessment Commission was established by Congress to consult with the Secretary, to make recommendations on the need for adjustments to the Medicare DRGs, and to report to Congress on its evaluation of adjustments made by the Secretary.
The DRG system is, therefore, a fluid system. As more data are collected and as medical technology advances, the DRGs will be reviewed and revised as mandated by Congress. There were 470 DRGs in fiscal year 1983 and 477 DRGs in fiscal year 1988. More detailed information on DRG development can be found in Diagnosis Related Groups, Fourth Revision, Definitions Manual 1988. Not all DRGs are applicable to Medicare patients, and such DRGs are excluded from Tables 1 and 2. In addition, for purposes of this article, DRGs with fewer than 50 cases in each of the study years were excluded from the tables. Therefore, a total of 44 DRGs are excluded. As stated previously, MDC 15 has been eliminated in its entirety.
• The standardized payment amount is the national average hospital cost per Medicare discharge standardized for urban and rural differences. • Outlier payment adjustments are made for cases that involve extraordinarily long hospital stays or very high costs relative to the average for a particular DRG. • The hospital adjustments reflect factors such as indirect medical education and disproportionate share of lowincome patients and are specific to each hospital.

Summary of short-stay hospital utilization
For short-stay hospital inpatient services rendered to Medicare beneficiaries, data presented in Table 1 provide a means of comparing changes during the study period in the number of discharges, rank order, and ALOS. Data are arranged by DRG within MDC, providing a base for measuring and analyzing the impact of PPS as related to shifts in DRG and MDC assignment and utilization. MDC 15 has been excluded from the study (see Table 1 footnotes).
Utilization trends and patterns in Medicare short-stay hospital inpatient services have shown substantial changes since the implementation of PPS. Coinciding with the introduction of PPS, the number of short-stay hospital discharges declined for the first time in the history of the Medicare program. There was a 10.5 percent decline in the number of annual discharges from 1983 (11.55 million) to 1985 (10.33 million). From 1985 to 1988, the number of discharges declined further (0.8 percent), dropping to 10.26 million discharges.
The reasons for the shifts in the DRG data in Tables 1  and 2 are often complex and difficult to interpret. For example, the shifts within a single DRG or MDC may be attributed solely to one factor or to a combination of several factors that are not always readily apparent. To illustrate, the ICD-9-CM procedure codes that are taken from one DRG and transferred into another DRG will cause a decrease in the number of discharges for the one DRG and a corresponding increase in discharges for the DRG(s) into which the procedure codes are finally established.
In addition, about 185 (39 percent) of the 477 DRGs for 1988 were redefined solely by the removal of age restrictions, such as "under age 70" or "over age 69". Certainly this refinement (by removal of age factors) will affect the number of cases shifting from one DRG to another.
Advancement in medical or scientific technology is another factor that can influence the shifts in the DRGs. As advances in medical technology are made and accepted as good medical practice, the technology is considered for coverage under Medicare. Some of these Medicare-approved technologies, the DRGs affected by the new coverage, and the corresponding effective dates of coverage are: • Heart transplants (DRG 103); October 17, 1986. • Extracorporeal shock wave lithotripsy (DRGs 323 and 324); March 15, 1985.
• Ambulatory or 24-hour electroencephalographic monitoring (DRGs 24,25,26,et al.); June 12, 1984. • Serologic testing for acquired immunodeficiency syndrome (could be in any of several DRGs, depending on the principal diagnosis); August 12, 1987. • Automatic cardiodefibrillators (DRGs 104 and 105); January 24, 1986. • 24-hour ambulatory esophageal pH monitoring (probably will not affect any specific DRG); June 11, 1985. • Intraoperative ventricular mapping (probably will not affect any specific DRG); October 29, 1984. The differences in the assignment of DRGs from one year to the next may best be identified and interpreted through information presented in the Federal Register. In any given year of publication (approximately September 1), the section of the Register is titled "Medicare Program: Changes in the DRG Classification System."

Specific to major diagnostic categories
Among the 22 MDCs included in this article, 12 MDCs experienced a decline in the number of discharges reported during the study period 1983-88. The most notable decline (83 percent) in the number of discharges was recorded for MDC 2 (Diseases and disorders of the eye), which dropped from 554,475 discharges in 1983 to 94,440 in 1988.
Within MDC 2, the greatest decline was shown for DRG 39 (Lens procedures with or without vitrectomy). The number of discharges for DRG 39 dropped 94 percent from 1983 through 1988, declining from 438,675 to 26,655. DRG 47 (Other disorders of the eye, over age 17, without CC-meaning complication or comorbidity) also experienced a very large relative decline (91 percent) from 1983 (33,680 discharges) to 1988 (2,975 discharges). Some of these declines may be the result of shifts in the site of treatment; for example, by treating more patients on an outpatient basis.
On the other hand, MDC 20 (Alcohol/drug use and alcohol/drug induced organic mental disorders) displayed a very large increase (342 percent) in the number of discharges reported in 1983 (12,220) and 1988 (54,065 began to be covered under PPS. The huge increases shown in the 1988 data for MDC 20 reflect this new coverage and the reconfiguration of MDC 20 (Alcohol/ drug use and alcohol/drug induced mental disorders). (Federal Register, 1987b.)

Discharges specific to diagnosis-related groups
During the selected calendar years (1983, 1985, and 1988), 5 DRGs consistently appeared in the 10 most frequently reported DRGs and accounted for about 14 to 18 percent of all Medicare discharges (Table 1 The most notable decline in the number of discharges during the study period 1983-88 was recorded for DRG 467 (Other factors influencing health status). DRG 467 dropped in rank order from 16th position in 1983 (150,035 discharges) to 252nd position in 1988 (5,365 discharges). These changes reflect improvement in the medical coding specificity and the annual recalibration of DRG weights. For example, only about 50 of the nearly 450 diagnoses listed for DRG 467 are considered by the Health Care Financing Administration (HCFA) to be appropriate choices as a principal diagnosis, yet the inappropriate codes continued to be used by hospitals.
To emphasize the importance of medical coding specificity, HCFA changed the Grouper edits to reject the inappropriate principal diagnoses, provided to the hospitals additional medical coding advice and instruction on specificity, initiated a 100-percent review by the peer review organizations, and lowered significantly the relative weight for DRG 467 (Table 2). Consequently, many cases that previously had been assigned to DRG 467 shifted to an unknown number of alternative DRGs, taking from DRG 467 those cases that are more resource-intensive and that translate into financial gain for the hospitals.
On the other hand, PPS has affected the inpatient hospital industry by making it apparent that a more prudent use of hospital resources could be accomplished by treating many patients on an outpatient basis. Some DRGs that were probably affected by moving the locus of treatment from the inpatient to the outpatient setting were: • DRG 39-Lens procedures with or without vitrectomy-decreased 93.9 percent (dropping from 3rd position in DRG rank order in 1983, to 94th position in 1988) from 438,675 to 26,655 discharges, respectively.
• DRG 47-Other disorders of the eye, over age 17, without CC-decreased 91.2 percent, with discharges numbering 33,680 in 1983 and 2,975 in 1988. • DRG 6-Carpal tunnel release-dropped from 13,700 discharges in 1983 to 1,555 in 1988, a decrease of 88.6 percent. • DRG 187-Dental extractions and restorationsdropped 78.0 percent (from 7,765 discharges in 1983 to 1,690 in 1988). In contrast, the largest increase (14,144 percent) in the number of discharges (rising from 180 in 1983 to 27,775 in 1988) was recorded for DRG 359 (Uterine and adnexal procedure for non-malignancy without CC). The rank order of frequency of discharges for DRG 359 changed significantly, rising from 404th position in 1983 to 88th in 1988.
The shifts in DRG 359 may be attributed to a combination of factors: DRG 359 had been redefined four times since 1983, and 57 additional ICD-9-CM procedures were shifted into DRG 359. Also, the four ICD-9-CM procedures that had been listed originally for DRG 359 were shifted into other DRGs (Federal Register, 1986).

Major diagnostic categories
Among the 22 MDCs shown in Table 1, 20 showed a drop in ALOS during the study period. The largest decline in ALOS between 1983 and 1988 was registered for MDC 12 (Diseases and disorders of the male reproductive system) and MDC 17 (Myeloproliferative diseases and disorders, and poorly differentiated neoplasms). For MDC 12, the ALOS dropped from 8.3 days in 1983 to 6.0 days in 1988, a decline of 27.7 percent. Similarly, the ALOS for MDC 17 dropped from 9.7 days to 6.8 days, a decline of 29.9 percent.
Within MDC 12, the greatest drop in the ALOS was noted for DRG 347 (Malignancy, male reproductive system, without CC) and DRG 349 (Benign prostate hypertrophy without CC), which dropped by 62.7 percent (5.3 days) and 49.7 percent (2.9 days), respectively.
For MDC 17, the largest decline in the ALOS was shown for DRG 407 (Other myeloproliferative disorders or poorly differentiated neoplasms without CC) and DRG 411 (History of malignancy without endoscopy), which declined by 50.1 percent (8.0 days) and 47.5 percent (3.5 days), respectively.

Diagnosis-related group-specific shifts
Approximately one-tenth of all Medicare DRGs shown in Table 1 experienced an increase in the ALOS during the period 1983-85. From 1985 through 1988, however, approximately one-half of the DRGs showed an increase in the ALOS, reflecting the slight increase in the national ALOS for the same period. DRGs with large relative increases in the ALOS during the study period included: • DRG 437-Alcohol and drug abuse or dependency, combined rehabilitation and detoxification therapy (10.6 days, or 156 percent).
• DRG 7-Peripheral and cranial nerve and other operating room nervous system procedures with CC (13.5 days, or 113 percent). In contrast, notable decreases in the ALOS among the DRGs were reported during the period 1983-88 for the following: • DRG 384-Other antepartum diagnoses without medical complications (9.5 days, or 76 percent

Relative weights and average program payments
Congress has mandated that the DRG relative weights be recalculated annually to account for changes in resource consumption. Each DRG weight, thereby, represents the most current average resource consumption per case for a particular DRG, relative to the national average resource consumption per case.
The formula used to calculate the PPS payment for a specific case, as described previously in the article, takes the national standardized average cost per case and multiplies it by the weight of the DRG to which the case is assigned. Therefore, the higher or lower the relative weight of the DRG, the higher or lower the PPS payment.
As shown in Table 2, the relative weights among the DRGs varied substantially, ranging from a low of 0.18 for DRG 382 (False labor) to a high of 11.92 for DRG 103 (Heart transplant). For these DRGs, the average program payment per discharge in 1988 was $361 and $56,077, respectively, reflecting tremendous differences in resource consumption.
Other DRGs with large relative weights and corresponding high average program payments per discharge in 1988 were: • DRG 474-Respiratory system diagnosis with tracheostomy (11.88 and $48,567).

Sources and limitations of data
The data were derived from the short-stay hospital Medicare Provider Analysis and Review (MEDPAR) inpatient stay record file maintained by HCFA. The MEDPAR file is generated by linking information from three HCFA master program files: the utilization bill file, the health insurance entitlement file, and the provider of services file. The statistical stay record, thereby, provides information on the patient, the hospital, and the hospitalization.
Certain types of limitations should be considered when analyzing the data shown in the tables: sampling variability, administrative time lag, and errors in the diagnostic and DRG coding. These are described below.
First, the data are based on a 20-percent sample of short-stay hospital records (which includes both PPS and non-PPS patient bills) contained in the inpatient stay record file. Therefore, the data are subject to sampling variability. Sample counts were multiplied by a factor of 5 to estimate population totals.
The second data limitation is the incompleteness of the stay record files used to produce the data in this report. This is a result of the administrative time lag between the time when a bill (HCFA-1450) is submitted for payment and when it is posted to central records. The processing cutoff date for the data was December of each of the study years. Therefore, discharge bills received and recorded after this date were not included. It is estimated that the file, therefore, is only about 98 percent complete. The shortfall described, however, should not affect the validity of the estimates for percentages and average program payments per discharge.
The third limitation is associated with coding the principal and secondary diagnoses, surgical procedures, and the eventual assignment of the DRG code. The diagnostic information used to generate the DRG codes was classified according to the ICD-9-CM. For each sample bill record, a unique three-, four-, or five-digit code was assigned for the principal and secondary diagnoses. Similarly, a unique two-, three-, or four-digit code was assigned for each surgical procedure. DRG assignment errors, essentially, result from errors in selecting and coding the diagnoses and procedures, problems with precision and clarity of the DRG definitions, and difficulties in comprehending and adhering to HCFA coding guidelines and regulations. Based on a report (Hsia et al., 1988) concerning the accuracy of diagnostic coding, an error rate of 20.8 percent in DRG coding was reported for the period October 1984 through March 1985. Errors were distributed equally between physicians and hospitals. Small hospitals had significantly higher error rates. Previous studies had found that errors occurred randomly, so that one-half the errors benefited the hospital financially and one-half penalized the hospital. The present study found that a statistically significant 61.7 percent of coding errors favored the hospital. The study concluded that "creep" does occur in the coding of DRGs, resulting in overpayment to hospitals for patients covered by Medicare (Hsia et al., 1988).
The significant medical coding changes coinciding with the implementation of PPS make analysis of shifts in DRG utilization extremely difficult. Therefore, the data in this article should be used with caution.