The impact of DRGs after year 1: first steps toward greater lab efficiency Essay

The impact of DRGs after year 1: First steps toward greater labefficiency It has been a year now since Medicare began to implement DRG-basedprospective payment for most of the nation’s hospitals. How haveclinical laboratories fared under the reimbursement revolution? At thisearly stage, the answer seems to be: It depends. The extent of DRG shock waves is linked to a host of hospitalvariables, from local economic conditions to the institution’scorporate philosophy. That’s one of the chief findings ofMLO’s latest survey of our Professional Advisory Panel.

Furthercomplicating the search for trends is the fact that many respondents have not been working under DRG payment long enough to draw decisiveconclusions on its impact. Nevertheless, at a significant proportion oflabs the controversial system appears to be shifting operations into amore cost-effective gear, without damage to patient care. Laboratory management is coming to grips with a new set ofpriorities, but not at the cost of quality service–not yet, anyway.Severe cutbacks in budget and staff, widely feared when the systembegan, have failed to materialize in many panelists’ labs. Othershave avoided layoffs and hardships through inventive scheduling, costcontainment, and other strategies. Census and length of stay are down in many hospitals, and growth intest volume is slowing somewhat in 1984.

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Over the long term, itisn’t yet clear whether test volume will climb or graduallydecline. It is apparent that patterns of test ordering and informationdelivery are undergoing major, and probably permanent, changes. In this article, we’ll examine the initial effects ofprospective payment on institutions represented by our survey group,which was composed of 122 laboratorians at the supervisory level orhigher. (All tabulated responses were from hospitals on prospectivepayment.

A roundup of comments from panelists in non-DRG laboratoriesappears on page 34.) In Part II, which follows, we’ll take a closerlook at how laboratory management is responding to the challenge. A laboratory’s fiscal health under prospective payment is theproduct of a complex equation involving not only internal factors butalso the hospital’s case mix, occupancy rates, length of stay, andthe medical staff’s pattern of practice. Many of thoseinstitutional elements began changing before 1983 in anticipation of aMedicare overhaul, although almost three-quarters of the surveyed labsdidn’t even begin phasing in DRGs until sometime this year.

(Affected hospitals began receiving payment under the new rates at thestart of their first fiscal year after Oct. 1, 1983.) Naturally, hospitals with a heavy Medicare caseload stand to losethe most from payment rates that are expected to tighten further overthe next three years. The average proportion of Medicare patients inour respondents’ hospitals was 44 per cent of total caseload.

While it’s likely that other third-party payers will eventuallyadopt some version of prospective payment to avoid cost shifting byhospitals, only 22 per cent of the panel reported that non-Medicaregovernment or private payers in their area have adopted a DRG system.Fifty-six per cent reported that DRGs haven’t spread yet, while 22per cent didn’t know what other insurers were doing. Are DRGs helping to limit consumption of inpatient services, asFederal planners hope? Hospital census and length of stay indicate thatthey have, as Figure I shows.

According to our panel, slightly morehospital beds are going empty, and patients are occupying them forshorter periods. The average occupancy rate at panelists’hospitals dropped from 74 per cent in 1982 to 73 per cent in 1983. Thisyear, with introduction of prospective payment, occupancy fell stillfurther to 69 per cent. Length of stay provides even clearer evidence that the incentivesystem of per-case payment is working. In 1982, the average reportedpatient stay was 7.

5 days; in 1983, 7.1 days; and in 1984 to date, 6.5days. The current average length of stay breaks down into 5.

6 days athospitals with fewer than 300 beds, 7.6 days at larger hospitals. So far, neither of these trends threatens widespread financiallosses among the surveyed institutions. We asked panelists if theirhospitals anticipated a positive financial margin for this crucial year(Figure II).

More than 80 per cent said yes, with those from large andsmall hospitals responding similarly. Test volume increased at 63 per cent of the respondents’laboratories in 1983. It decreased for 24 per cent and remained stablefor 13 per cent. In labs where volume changed, the average rise or fallhovered around 13 per cent. The picture altered when we asked panelists what direction testvolume has taken in 1984. This year, only 32 per cent see volumerising, while 44 per cent report a drop.

A quarter expect the samevolume as in 1983. Figure III traces the changing volume outlook. Of course, Government health care payments are only one of manyfactors affecting the growth of test ordering.

For this reason, weasked whether volume changes were directly related to implementation ofDRGs. Almost half the panel said yes; 39 per cent said no; and 14 percent didn’t know whether a cause-and-effect relationship existed ornot. The shifting balance between inpatient and outpatient testing makesvolume predictions even more complex. In 1983, overall testing rose by10 per cent at 150-bed Community General Hospital in Sterling, Ill.,according to Susan Frost, administrative director of laboratories; thisyear, however, she expects volume to drop by 5 per cent.

“Our testmix has changed,’ she explains. “These days, only the moreserious cases are admitted, and they usually require a considerableamount of lab work. And, while inpatient volume is running a littlebelow budget, outpatient testing has risen 12 per cent since thehospital 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 consolidatingservices with other labs, they can perform more of a particular kind oftest in-house, exploit economies of scale, and get the most out ofhigh-throughput instruments. As Figure IV illustrates, a quarter of the surveyed laboratorieshave added to their in-house test menus since DRGs. Test availabilityremains unchanged for 59 per cent, while 16 per cent have cut theirmenus. Thirty-two per cent of the hospitals with fewer than 300 bedsare offering expanded menus, versus 18 per cent of the larger hospitals.

Shifting this balance requires careful preparation. About threeyears ago, the laboratory at 168-bed Tift General Hospital, Tifton, Ga.,analyzed every test on its menu for cost-effectiveness.

Donna ClairSchwekendiek, laboratory manager, notes: “Of course, we kept allabsolutely necessary tests in-house, whether they were cost-effective ornot. For others, we found out whether we could get faster and lesscostly results from a reference lab.’ The laboratory never felt bound by the prestige of performing asmany tests in-house as possible, Schwekendiek says. “We got out ofthe ego business, cut down much of our esoteric testing–and saved a lotof money.

‘ Other hospitals have enlarged their test menus to attractoutpatient referral business. In the following article, we’llexamine some of these marketing efforts. More than half the surveyed hospital laboratories send out as manytests to reference labs since going on DRGs as they did before (FigureIV).

A quarter of the large hospitals increased send-outs, while only15 per cent of the smaller hospitals did so. Despite cost containment efforts, quality control activity hasremained stable for almost 80 per cent of the panel since the onset ofprospective payment. Only 17 per cent of the surveyed labs cut QCprocedures–and generally only those considered unnecessary aftercareful evaluation. Overall, our panel reports that fears of eroding lab servicequality were largely unfounded as of mid-1984. Quality was deemedunchanged at 61 per cent of the surveyed labs, and it actually improvedfor 7 per cent.

Another 17 per cent of the panel had not been on thesystem long enough to gauge the impact of DRGs on service. Theremaining 15 per cent cited a variety of isolated service problemsarising from DRGs, such as decreased staffing, more errors, longerturnaround time, and lower morale. At the outset of the DRG system, it wasn’t surprising thatmany laboratory professionals worried about quality. Many anticipateddeep budget cuts when their labs turned from profit generators to costcenters. After year one, however, no clear trend emerges from oursurvey to confirm or dispel those fears. The panel split into roughlyequal thirds among those whose laboratory budgets grew, shrank, orstayed the same (Figure V). Budget worries often focus on the availability of capital equipmentfunds, especially since Congress has yet to decide how to provide forsuch purchases under DRGs. But the majority of the panel hasn’texperienced a problem in this area.

Sixty per cent of the surveyed labswere not denied any capital expenditure requests since going onto theDRG system; 40 per cent had requests turned down. Instrument manufacturers are sharpening the competition forhard-pressed customers. In this contest, the laboratory is the winner.Almost 80 per cent of the panel said that manufacturers have made moreattractive sales offers since the start of DRGs, including”free’ instruments with reagent purchase agreements and othergenerous options. Unfortunately, labor costs are less responsive to market pressure.Our panelists confirm that there will indeed be fewer laboratoriansdoing more work under DRGs. More than half have seen their staffsshrink since the introduction of prospective payment, as Figure VIshows.

Staff size has remained the same at 39 per cent and risen atonly 4 per cent of the surveyed laboratories. Large and small hospitalsdiffered little in this regard. This news is not all grim. In 77 per cent of the laboratorieswhere staffing decreased, normal attrition accounted for at least someof the cuts.

Layoffs by job classification were reported by 23 per centof the labs that reduced their staffs, and across-the-board layoffsreported by a mere 3 per cent. Those who remain in the lab are as productive as ever or evenbetter. Productivity improved in 42 per cent of panelists’ labs,and stayed the same in 46 per cent. Only 12 per cent of the panelreported that productivity dropped since DRGs took effect. More than half the panelists (53 per cent) report that overtime hasgone down since prospective payment. By contrast, hours of availablelab service appear largely unaffected by DRGs so far. Lab hoursremained the same in 86 per cent of the panelists’ institutions.

Only 10 per cent added extra hours of service, while 4 per cent cuthours. As laboratory staffs grow leaner, teamwork becomes more crucial.Panelists have tried various ways to keep staff members informed of thecomplex changes affecting their work lives.

Honesty has proved to be the best policy at 230-bed Holy FamilyHospital in Spokane, Wash., laboratory director Michael Sinclair reports. “We have been very open and receptive, keeping everyoneinformed of what’s happening financially, and administration helpsby making frequent visits to the lab.

We combat rumors throughinformation sharing and group meetings, and encourage participation inlocal professional societies.’ Meetings are the most popular format for DRG education, used by 35per cent of the respondents; 21 per cent have used in-service sessionsfor this purpose. Another 12 per cent have relied on seminars andlectures, and 9 per cent on memos, articles, and other literature. Finally, we asked the panel to name the biggest problems they faceas a result of DRGs. The most frequent answer: staff cuts andoverwork, cited by 33 per cent. Cost containment and budget cuts camenext, a major hurdle for 26 per cent, followed by quality andproductivity problems, mentioned by 25 per cent.

Other difficultiesmentioned were capital funding cuts (14 per cent); physician awarenessof and compliance with test ordering policies (12 per cent); and lowertest volume (11 per cent). It’s encouraging that flagging morale is toward the bottom ofthe list of DRG woes, cited by only 10 per cent of the respondents.Some panelists were downright optimistic.

“For us, the changeshave been positive,’ panelist Linda Roney reports. She’slaboratory manager at 330-bed High Point (N.C.) Memorial Hospital, andshe notes: “A lot depends on the lab manager’s attitude. Ithink a lot of people are really afraid of change, and fear gets in theway of recognizing opportunities.

There are a lot of ideas out there atthe bench level that can help us cope.’ In the following article, we’ll examine a number of thoseideas 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 comparewith ’83? 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


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