The impact of DRGs after year 1: First steps toward greater lab
It has been a year now since Medicare began to implement DRG-based
prospective payment for most of the nation’s hospitals. How have
clinical laboratories fared under the reimbursement revolution? At this
early stage, the answer seems to be: It depends.
The extent of DRG shock waves is linked to a host of hospital
variables, from local economic conditions to the institution’s
corporate philosophy. That’s one of the chief findings of
MLO’s latest survey of our Professional Advisory Panel. Further
complicating the search for trends is the fact that many respondents have not been working under DRG payment long enough to draw decisive
conclusions on its impact. Nevertheless, at a significant proportion of
labs the controversial system appears to be shifting operations into a
more cost-effective gear, without damage to patient care.
Laboratory management is coming to grips with a new set of
priorities, but not at the cost of quality service–not yet, anyway.
Severe cutbacks in budget and staff, widely feared when the system
began, have failed to materialize in many panelists’ labs. Others
have avoided layoffs and hardships through inventive scheduling, cost
containment, and other strategies.
Census and length of stay are down in many hospitals, and growth in
test volume is slowing somewhat in 1984. Over the long term, it
isn’t yet clear whether test volume will climb or gradually
decline. It is apparent that patterns of test ordering and information
delivery are undergoing major, and probably permanent, changes.
In this article, we’ll examine the initial effects of
prospective payment on institutions represented by our survey group,
which was composed of 122 laboratorians at the supervisory level or
higher. (All tabulated responses were from hospitals on prospective
payment. A roundup of comments from panelists in non-DRG laboratories
appears on page 34.) In Part II, which follows, we’ll take a closer
look at how laboratory management is responding to the challenge.
A laboratory’s fiscal health under prospective payment is the
product of a complex equation involving not only internal factors but
also the hospital’s case mix, occupancy rates, length of stay, and
the medical staff’s pattern of practice. Many of those
institutional elements began changing before 1983 in anticipation of a
Medicare overhaul, although almost three-quarters of the surveyed labs
didn’t even begin phasing in DRGs until sometime this year.
(Affected hospitals began receiving payment under the new rates at the
start of their first fiscal year after Oct. 1, 1983.)
Naturally, hospitals with a heavy Medicare caseload stand to lose
the most from payment rates that are expected to tighten further over
the next three years. The average proportion of Medicare patients in
our respondents’ hospitals was 44 per cent of total caseload.
While it’s likely that other third-party payers will eventually
adopt some version of prospective payment to avoid cost shifting by
hospitals, only 22 per cent of the panel reported that non-Medicare
government or private payers in their area have adopted a DRG system.
Fifty-six per cent reported that DRGs haven’t spread yet, while 22
per cent didn’t know what other insurers were doing.
Are DRGs helping to limit consumption of inpatient services, as
Federal planners hope? Hospital census and length of stay indicate that
they have, as Figure I shows. According to our panel, slightly more
hospital beds are going empty, and patients are occupying them for
shorter periods. The average occupancy rate at panelists’
hospitals dropped from 74 per cent in 1982 to 73 per cent in 1983. This
year, with introduction of prospective payment, occupancy fell still
further to 69 per cent.
Length of stay provides even clearer evidence that the incentive
system of per-case payment is working. In 1982, the average reported
patient stay was 7.5 days; in 1983, 7.1 days; and in 1984 to date, 6.5
days. The current average length of stay breaks down into 5.6 days at
hospitals with fewer than 300 beds, 7.6 days at larger hospitals.
So far, neither of these trends threatens widespread financial
losses among the surveyed institutions. We asked panelists if their
hospitals anticipated a positive financial margin for this crucial year
(Figure II). More than 80 per cent said yes, with those from large and
small hospitals responding similarly.
Test volume increased at 63 per cent of the respondents’
laboratories in 1983. It decreased for 24 per cent and remained stable
for 13 per cent. In labs where volume changed, the average rise or fall
hovered around 13 per cent.
The picture altered when we asked panelists what direction test
volume has taken in 1984. This year, only 32 per cent see volume
rising, while 44 per cent report a drop. A quarter expect the same
volume as in 1983. Figure III traces the changing volume outlook.
Of course, Government health care payments are only one of many
factors affecting the growth of test ordering. For this reason, we
asked whether volume changes were directly related to implementation of
DRGs. Almost half the panel said yes; 39 per cent said no; and 14 per
cent didn’t know whether a cause-and-effect relationship existed or
The shifting balance between inpatient and outpatient testing makes
volume predictions even more complex. In 1983, overall testing rose by
10 per cent at 150-bed Community General Hospital in Sterling, Ill.,
according to Susan Frost, administrative director of laboratories; this
year, however, she expects volume to drop by 5 per cent. “Our test
mix has changed,’ she explains. “These days, only the more
serious cases are admitted, and they usually require a considerable
amount of lab work. And, while inpatient volume is running a little
below budget, outpatient testing has risen 12 per cent since the
hospital went on DRGs last May.’
Various financial motives influence changing in-house test volume.
By sending out more testing, hospitals may save on labor, disposables,
and other costs. But by pursuing outpatient business or consolidating
services with other labs, they can perform more of a particular kind of
test in-house, exploit economies of scale, and get the most out of
As Figure IV illustrates, a quarter of the surveyed laboratories
have added to their in-house test menus since DRGs. Test availability
remains unchanged for 59 per cent, while 16 per cent have cut their
menus. Thirty-two per cent of the hospitals with fewer than 300 beds
are offering expanded menus, versus 18 per cent of the larger hospitals.
Shifting this balance requires careful preparation. About three
years ago, the laboratory at 168-bed Tift General Hospital, Tifton, Ga.,
analyzed every test on its menu for cost-effectiveness. Donna Clair
Schwekendiek, laboratory manager, notes: “Of course, we kept all
absolutely necessary tests in-house, whether they were cost-effective or
not. For others, we found out whether we could get faster and less
costly results from a reference lab.’
The laboratory never felt bound by the prestige of performing as
many tests in-house as possible, Schwekendiek says. “We got out of
the ego business, cut down much of our esoteric testing–and saved a lot
Other hospitals have enlarged their test menus to attract
outpatient referral business. In the following article, we’ll
examine some of these marketing efforts.
More than half the surveyed hospital laboratories send out as many
tests to reference labs since going on DRGs as they did before (Figure
IV). A quarter of the large hospitals increased send-outs, while only
15 per cent of the smaller hospitals did so.
Despite cost containment efforts, quality control activity has
remained stable for almost 80 per cent of the panel since the onset of
prospective payment. Only 17 per cent of the surveyed labs cut QC
procedures–and generally only those considered unnecessary after
Overall, our panel reports that fears of eroding lab service
quality were largely unfounded as of mid-1984. Quality was deemed
unchanged at 61 per cent of the surveyed labs, and it actually improved
for 7 per cent. Another 17 per cent of the panel had not been on the
system long enough to gauge the impact of DRGs on service. The
remaining 15 per cent cited a variety of isolated service problems
arising from DRGs, such as decreased staffing, more errors, longer
turnaround time, and lower morale.
At the outset of the DRG system, it wasn’t surprising that
many laboratory professionals worried about quality. Many anticipated
deep budget cuts when their labs turned from profit generators to cost
centers. After year one, however, no clear trend emerges from our
survey to confirm or dispel those fears. The panel split into roughly
equal thirds among those whose laboratory budgets grew, shrank, or
stayed the same (Figure V).
Budget worries often focus on the availability of capital equipment
funds, especially since Congress has yet to decide how to provide for
such purchases under DRGs. But the majority of the panel hasn’t
experienced a problem in this area. Sixty per cent of the surveyed labs
were not denied any capital expenditure requests since going onto the
DRG system; 40 per cent had requests turned down.
Instrument manufacturers are sharpening the competition for
hard-pressed customers. In this contest, the laboratory is the winner.
Almost 80 per cent of the panel said that manufacturers have made more
attractive sales offers since the start of DRGs, including
“free’ instruments with reagent purchase agreements and other
Unfortunately, labor costs are less responsive to market pressure.
Our panelists confirm that there will indeed be fewer laboratorians
doing more work under DRGs. More than half have seen their staffs
shrink since the introduction of prospective payment, as Figure VI
shows. Staff size has remained the same at 39 per cent and risen at
only 4 per cent of the surveyed laboratories. Large and small hospitals
differed little in this regard.
This news is not all grim. In 77 per cent of the laboratories
where staffing decreased, normal attrition accounted for at least some
of the cuts. Layoffs by job classification were reported by 23 per cent
of the labs that reduced their staffs, and across-the-board layoffs
reported by a mere 3 per cent.
Those who remain in the lab are as productive as ever or even
better. Productivity improved in 42 per cent of panelists’ labs,
and stayed the same in 46 per cent. Only 12 per cent of the panel
reported that productivity dropped since DRGs took effect.
More than half the panelists (53 per cent) report that overtime has
gone down since prospective payment. By contrast, hours of available
lab service appear largely unaffected by DRGs so far. Lab hours
remained the same in 86 per cent of the panelists’ institutions.
Only 10 per cent added extra hours of service, while 4 per cent cut
As laboratory staffs grow leaner, teamwork becomes more crucial.
Panelists have tried various ways to keep staff members informed of the
complex changes affecting their work lives.
Honesty has proved to be the best policy at 230-bed Holy Family
Hospital in Spokane, Wash., laboratory director Michael Sinclair reports. “We have been very open and receptive, keeping everyone
informed of what’s happening financially, and administration helps
by making frequent visits to the lab. We combat rumors through
information sharing and group meetings, and encourage participation in
local professional societies.’
Meetings are the most popular format for DRG education, used by 35
per cent of the respondents; 21 per cent have used in-service sessions
for this purpose. Another 12 per cent have relied on seminars and
lectures, and 9 per cent on memos, articles, and other literature.
Finally, we asked the panel to name the biggest problems they face
as a result of DRGs. The most frequent answer: staff cuts and
overwork, cited by 33 per cent. Cost containment and budget cuts came
next, a major hurdle for 26 per cent, followed by quality and
productivity problems, mentioned by 25 per cent. Other difficulties
mentioned were capital funding cuts (14 per cent); physician awareness
of and compliance with test ordering policies (12 per cent); and lower
test volume (11 per cent).
It’s encouraging that flagging morale is toward the bottom of
the list of DRG woes, cited by only 10 per cent of the respondents.
Some panelists were downright optimistic. “For us, the changes
have been positive,’ panelist Linda Roney reports. She’s
laboratory manager at 330-bed High Point (N.C.) Memorial Hospital, and
she notes: “A lot depends on the lab manager’s attitude. I
think a lot of people are really afraid of change, and fear gets in the
way of recognizing opportunities. There are a lot of ideas out there at
the bench level that can help us cope.’
In the following article, we’ll examine a number of those
ideas in detail.
Table: The downward trend in hospital census
Table: . . . and length of stay
Table: The bottom line
Does your hospital anticipate a positive financial margin in 1984?
Table: Figure III How did test volume change in 1983?
Table: How will ’84 volume compare to ’83?
Is this change directly due to DRGs?
Table: Figure IV In-house testing vs. send-outs
Table: Figure V How does the lab’s ’84 budget compare
Table: Since DRGs, has a capital request been rejected?
Table: Have instrument manufacturers made better offers?
Table: Figure VI How staffing has changed since DRGs