DRG strategies from the Big 8 Essay

The furor aroused by introduction of prospective payment forMedicare patients is finally beginning to abate. Hospitals and theirlaboratories are settling down to the business of refitting theiroperations to DRG economics. And business is quite literally what it is.

More detailed profitand loss statements, data management systems that reveal pertinent newtrends, productivity studies, aggressive marketing efforts, jointventures–in short, the standard management tools of corporateAmerica–are the order of the day at many medical institutions. Nowhere are such developments more evident than in the stepped-uphealth care planning activities of the nation’s Big 8 accountingfirms. Hospitals are turning to these experts and others like them forhelp in coping with prospective payment. Consultations range fromassessments of current practices to recommendations for completereorganization.

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To find out what efforts are under way, which techniques haveproved the most successful, MLO interviewed key executives in the healthcare planning divisions of the Big 8. Here’s the lineup: Cletus J.Moll, a partner in the health care division of Arthur Andersen &Co.

; Neal F. Bermas, national director of health care planning andproductivity services for Arthur Young & Co.; Julie A. Micheletti,manager of national health care practice for Coopers & Lybrand;Albert A. Cardone, national director for health care services atDeloitte Haskins & Sells; John Nackel, a partner in the nationalhealth care practice division of Ernst & Whinney; John Mertens, thepartner responsible for reimbursement in the health care group of PeatMarwick Mitchell; Jack Buelt, a partner at Price Waterhouse and chairmanof the firm’s hospital and medical services group; and Doug Newton,a partner and director of the health care consulting services of the NewJersey office of Touche Ross. According to these experts, after the initial shock of going on aninflexible budget, the majority of hospitals discovered that prospectivepayment wasn’t quite as painful as they had feared.

That’s notto say it was easy–in fact, it required a complete rethinking of theway almost every department was run. “After all,” Jack Buelt (Price Waterhouse) explains,”DRGs are the biggest revolution in health care since the originalMedicare regulations. Under the old system, you didn’t want to letpatients go too quickly; now that philosophy has undergone a completeturnaround. “We’ve seen a big increase in our hospital business sinceprospective payment. All of a sudden, they’re interested in ourbusiness services: cost accounting, productivity studies, staffingassessments, and information systems. There’s also overall higherinterest in how to make better use of discharge planning and home healthcare.” These observations are echoed by all the other consultants we spokewith. John Nackel (Ernst & Whinney) says his firm is being askedfor much more operations management advice than in the past.

The fourareas included in the firm’s operations appraisal are staffing,scheduling, organization, and policies and procedures. Doug Newton (Touche Ross) reports his hospital clients look forservices that are oriented toward increasing productivity and supportingeconomic decisions. “Hospitals are bringing us in when they havequestions about how a proposal will affect them economically. In dataprocessing, for example, they’re focusing more on the cost/benefitrelationship instead of just throwing money at the problem.” Julie Micheletti (Coopers ; Lybrand) identifies three majorareas of study as operational and system management review, productivitystudies, and cost containment.

One thing these studies show hostapils: Application of goodbusiness techniques can result in economies that don’t appreciably diminish the quality of patient care. “All you have to do to knowhow inefficient a hospital might be is to be a patient there,”Buelt says. “Inefficiency used to be the burden of the patient andthe payer alone. Now, if a hospital can speed up diagnosis, reporting,and treatment, it can cut length of stay and improve its financialpicture.” The clinical laboratory can contribute directly to shorter staysthrough preadmission testing and what Micheletti characterizes asreflexive testing–an automatic follow-up procedure after an abnormalresult.

For example, the laboratory may set a policy that a BUNsignificantly outside normal limits be automatically followed by acreatinine level. “If the attending physician were notified of theresult, he or she would likely order the second test anyway, so why notdo it immediately instead of letting all that extra timeelapse?”‘ Micheletti observes. “If there’s any one area where cost can be mostcontrolled,” Nackel says in a similar vein, “it’s ingetting the patient out of the hospital as soon as possible.” Soimportant is the laboratory’s contribution to this effort thatCletus Moll (Arthur Andersen & Co.) calls increased preadmissiontesting “our primary recommendation” to clients.

Beyond savings per DRG, a less obvious advantage of shorter staysis pointed out by Newton: “In an institution that’s veryheavily utilized (high occupancy rate), you can increase your admissioncapacity if you reduce your length of stay through preadmissiontesting.” He adds that the same does not hold true for a hospital with a lowoccupancy rate. “In a hospital with low utilization, you have toassume that they won’t be able to make use of that extra patientday. In that case, what they have to do is manage costs.” Micheletti suggests other moves the laboratory might make to cutcosts.

“Review all standing orders. For example, some labs cancelstanding orders after three days, subject to the physician reordering the test.” She also recommends flagging standing orders that yieldnormal values for, say, two days in a row and bringing them to theattention of the attending physician. She cites another area ripe for improvement: “Particularly inlarger facilities, it’s not uncommon to have a physician, aconsultant, and a resident all working on the same patient. Sometimesthis leads to duplicate ordering of tests. You can catch this in thelaboratory after requisitions are batched by having someone audit theserial orders.” This may imply that physicians are insensitive to costconsiderations.

Not so, the consultants state. “Germany to what alot of people thought, physicians want to know what services cost,”Nackel says. “That information wasn’t available to thembefore.

We’re finding that physicians are concerned about the costof care. Seeing this kind of information allows them to make betterdecisions.” “Physicians are definitely interested,” John Mertens(Peat Marwick Mitchell), confirms, but he cautions that the wayinformation is presented may be the key to acceptance.

“If youjust talk to them about coding, they’re not that interested. Butif you explain that steps they take to correct their coding will meananother $1,000 in the hospital’s coffers, you make it veryrelevant. They’re willing to listen, at least on the firstgo-round, if you explain that the money lifeline of the institution isdirectly affected when they don’t complete a chart properly or ontime.” According to Neal bermas (Arthur Young & Co.), physicianunderstanding and cooperation in efforts to cut costs and increasevolume are central to hospital success under prospective payment.

“In order to survive, that’s going to be the name of the game.Hospitals and doctors have to work together rather than compete or havean adversarial relationship.” One approach all the Big 8 firms advocate in the physicianeducation process is generation of computerized reports. Most of thecompanies license or sell software for this purpose.

At Ernst &Whinney, for example, Nackel recommends a system that merges medicalrecords, billing, and cost information to produce profit and lossstatements by DRG classification, physician, or payer type. “Welook at volume of service and delivery patterns by individual DRGs. Thenwe walk through those reports with physicians and work with them onmanaging costs.” Case-mix management systems are described in all kinds ofliterature put out by the Big 8. Albert Cardone summarizes part of thecase-mix discussion in a 62-page Deloitte Haskins & Sells bookletfor hospital clients: “The cost of the specific service must becomputed before a hospital can determine teh relative profit or losscontributions of various diagnoses or services.

” Fortunately, hospitals don’t have to determine the cost foreach of the 468 DRGs. Most hospitals treat no more than 50 differentdiagnoses, with 25 of those representing the majority of cases, DeloitteHaskins ; Sells notes. Commenting on the computer’s expanding role, Newton says:”There’s a tremendous amount of data needed just to respond tothe Federal system from a statutory standpoint.

In addition,there’s a big increase in the amount of information necessary tomanage under the system. For example, we need detailed information onunit costs and what it costs to treat a particular DRG. Those needscreate accelerating demands on data processing. Hospitals are realizingthat the only way to manage aggressively in the future is to enhancetheir data processing capabilities.” Once computerized systems are in place, they can be used on aday-to-day basis to cut costs. “Suppose that the lab and pharmacyare computerized and coordinated with one another,” Michelettisays.

“In that case, if there are three alterantive drugs of choicefor a particular infection, the lab report that is printed out for thephysician will include not only the MIC, but the cost of each of thosedrugs. The physician can then make a decision based not only on thedrug, but on the cost as well.” Cost-cutting measures in the laboratory can range from the simpleexpedient of group purchasing to analysis of individual tests. “Weencourage labs to look very closely at low-volume, high-cost tests anddetermine if there’s a more economical way to do them,” Newtonsays.

“We explore instrument changes, as well as the classicbusiness evaluation of make-or-buy. Should you really be doing a testinternally?” Micheletti likewise sees hospital laboratories evaluating greateruse of reference labs. “There may be a trade-off in terms oflonger turnaround time. On the other hand, sending out the work may beles costly–you have to balance your choices.” She also urges labsto evaluate interchangeable illness-specific lab tests to discover whichare the most cost-effective. Cost control is the tightening side of hospital operations.Marketing is the expanding side. “Hospitals are really gettinginto marketing their businesses now,” Bermas says.

“Eventraditional strategic planning is taking on a much more market-drivendimension.” “Marketing is one of the areas where we have seen the mostactivity,” Nackel affirms. “You pick up a newspaper or listento the radio, and there are ads for hospitals–preferred providerorganizations in particular. There’s one here in Cleveland thatadvertises in the Sunday paper every week and runs ads constantly.They’re pretty aggressive in terms of promoting their product.Their pitch is to employers who want to reduce their medical costs andstill get quality care on a local level.

” By the same token, hospital laboratories are beginning to pursueoutside business aggressively. Many are exploring the possibility ofcompeting locally with reference laboratories for physicians’office testing. Micheletti also reports that hospital labs are tryingto attract corporate business for employee and executive testing. “Larger hospitals compete effectively with independentlabs,” Moll says. “They’re only looking at incrementalcosts since they already have the equipment and staff.” In New Jersey, Newton has seen a substantial increase in the numberof labs seeking outside revenue.

“Some of the edge is taken off bythe reimbursement rules for outpatient labs. However, if your marginalrevenues are greater than your marginal costs, it’s a good thing todo because it gives you some additional coverage of overhead.” All of the consultants stress that careful study should precede amarketing decision. Newton warns of the pitfalls. “Where mosthospitals run into trouble is a failure to understand what it takes tocompete in a commercial environment. There are a lot of logistical requirements, such as computerization of results and pickup ofspecimens, that you need to look after if you are going to compete.Labs that are doing well are taking a very aggressive and thoroughbusiness approach.” What it takes to compete–at least in southern California–may bedeluxe treatment, according to an example offered by Bermas.

“There’s a hospital here that’s trying to make itsoutpatient services, including the laboratory, more palatable byoffering patients valet parking and a separate, easily accessibleentrance to the outpatient department! “Although that sounds comical, it’s the right thing todo. People never went to hospitals for outpatient lab work if theycould avoid it because it was such a pain in the neck. It was easy toget lost in the institution, and they usually had to wait a long time toget anything done. Now, they can drive right up, walk in, and gethandled quickly, efficiently, and pleasantly. All the incentives arethere.

” This high-powered marketing approach to health care often demands anew kind of executive to run the hospital itself and oversee majordepartments. According to the experts we talked with, though, this isjust part of a natural progression. “It might temporarily speedthings up,” explains Mertens, “but requirements for chiefexecutive officers and chief financial officers have been steadilychanging ever since Medicare was introduced. What’s happening isthat the hospital administration is becoming a true management teamrather than just a caretaker.” The result is a hospital administration comfortable with exploringnew business options.

Moll reports that a number of his firm’sclients are exploring joint venture arrangements with pathologists,either on or off site. For the most part, however, such set-ups are more talk today thanaction. Bermas was highly enthusiastic about the idea. He feels thatcreative joint ventures are of the utmost importance and thatlaboratories are perfectly suited for such an arrangement.

The kind of joint venture he envisions would exclude investment bypathologists. “You need incentives to induce doctors to use yourlaboratory rather than someone else for their outpatient work,” hesays. “That’s why the joint venture should include a numberof your key physicians as investors. Then all concerned have aninterest in seeing the venture succeed. Pathologists’ revenuesincrease as use of their services grows, while the hospital and otherphysicians as investors maximixe their position.

In this arrangement,everyone benefits.” Of course, some hospitals will be better able than others to adjustto prospective payment. As Buelt sees it: “Those with low cost andhigh volume are doing very well because the DRGs are based on averages.We just did a study for a hospital in Oklahoma.

It’s a good areabecause the volume is going up and they have low regional costs.They’re going to do very well under prospective payment. Lowoccupancy, on the other hand, realy hurts a hospital, even fi they keeptheir costs down.” “Small community hospitals that are not part of a health caresystem may have more problems than large institutions that are,”Moll says. He also predicts difficulties for northern institutions(because of higher regional costs) and for teaching programs. So doesNewton: “Teaching programs will not go unaffected by the pressures onhealth care costs.

Although they’re relatively stable so far, Idon’t see that continuing. The Feds are scrutinizing teachingprograms to determine whether it’s appropriate for Medicare tocontinue funding them. As they pursue that line of questioning,they’ll find ways to reduce the premium that hospitals now get tocontinue teaching programs.” Other predictions for the future of prospective payment vary, butall the consultants we interviewed agreed on one thing: Prospectivepayment in here to stay, although some fine-tuning will take place overthe next few years.

Mertens and Micheletti, for example, think thesystem will have to change to take into account the acuity level withina particular DRG. Mertens also reports a great deal of interest in prospectivepayment on the part of other third-party payers. “We haveperformed studies for Blue Cross plans across the country. As theFederal Government stabilizes its prices, they will be even moreinterested. Economically, they won’t be able to ignore it.” Bermas goes even further: “My own view is that prospectivepayment under the Feds is kid stuff compared to what private payers aregoing to begin to come up with.

We’re already seeing fairlyaggressive attempts from the business community in certain parts of thecountry to demand cost containment–either directly from providers orthrough intermediate payers.” Cardone’s firm, too, is cautioning clients not to limit theirplanning to a Medicare-only system: “Some states and Blue Crossplans are already planning to implement prospective payment systemsbased on DRGs. It is rapidly becoming clear that hospitals must planahead, identify their management needs, and make every effort to insurethat they can adapt quickly to the changing environment.” The question is, will hospitals and laboratories have the time theyneed to make the necessary changes? As Bermas points out, “It tookthe auto industry 10 to 11 years to get their cost accounting systemsinto shape; hospitals are trying to do it in three years (the Medicareprospective payment phase-in period). The hospital adjustmentswe’re talking about are just the beginning stages here. I thinkquite a few institutions aren’t even doing this much.

“Predictions are that 2,000 hospitals will close because theywon’t be able to function under prospective payment. You canalready start to get an idea of which hospitals are endangered, based ona lack of activity. On the other hand, we are helping many of ourclients to become more aggressive and creative in operating in this newenvironment.”


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