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HOPSITALS: Is there a built in profit in DRGs?

I got this random question and I didn’t know the answer, so I’m doing an “ask the audience” hoping that some geek smart on Medicare is reading.

Is there a pre-defined profit margin built into DRG payments when they are set? Obviously some DRGs are profitable and other less so, but does CMS set a defined rate for “profit” or “margin” within DRGs?

Please put your thoughts in the comments.

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BJoAnne AllenMalayTom Leith Recent comment authors
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Has anyone heard about possible changes in the FY07 proposed Medicare inpatient rule, i.e. rebasing DRGs on costs instead of the current system of charges?

JoAnne Allen
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JoAnne Allen

Medicare payment rates are not intended to provide a profit margin, even though MedPac monitors hospital margins to assess payment adequacy. The goal of the inpatient and outpatient prospective payment systems is to reimburse hospitals for costs incurred in caring for Medicare patients. Since reimbursing hospitals retrospectively provided no incentive to control costs, Congress and CMS have developed systems designed to pre-determined rates based on the data reported by all participating hospitals on their cost reports. The inpatient DRG payment rates (not the weights) are based on average costs for providing inpatient care, and the outpatient APC rates are based… Read more »

Tom Leith
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Tom Leith

Charges are never reflective of actual costs, except perhaps occasionally, by accident. This “Ratio of Cost to Charges” methodology imputes costs to cases through fantasy charges. It truly is amazing. Even more amazing, some hospitals try to manage internal operations by using RCC. The regression analysis takes costs from the cost report and charges both into account. There is a tie to overall costs, but what share of the overall costs is said to be associated with a particular case is allocated through charges. But Malay is quite right: there is no guarantee that the hospital makes money on a… Read more »

Malay
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Malay

A pre-defined margin would imply a “Cost-Plus” payment contract in which CMS would pay the hospital actual cost plus a margin or profit. The DRG system is a prospective payment system (PPS), it sets payments before any service is delivered and does not use the actual cost incurred by the hospital (except in the case where the charges are excessively high). Therefore, CMS cannot set a margin because they do not know how much the service will actually cost the hospital to deliver. The reason for using a PPS is to shift some of the risk for treating patients to… Read more »

Tom Leith
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Tom Leith

As best I can tell, the answer to the question you pose is “no”. But… In the instructions for FORM HCFA-2552-92, you can see a methodology for computing something like “total equity capital employed” and then according to titles V and XIX, there is an allowable return on equity. In this sense, and with respect to that portion of their operations that takes care of Medicare patients, healthcare providers are regulated with respect to the return on equity measures as utilities (telephone, power, etc) are. So under this definition of “profit” (return on equity), then “profit” figures in to the… Read more »