Utilizing hospitals’ internal cost data could improve accuracy of new payment models

In an attempt to obtain greater accuracy on cost estimates, hospitals have developed their own internal systems to identify services with high and low profit margins and control spending. If what they’ve come up with is more detailed than what CMS uses, shouldn’t CMS be using that data?

That’s the question posed by Stanford University professor Merle Ederhof, PhD, and University of Southern California health policy professor Paul Ginsburg, PhD, in an article published in the New England Journal of Medicine.  

The pair wrote that while Medicare shifts to new payment models like bundles and accountable care organizations, payment rates based off Medicare severity diagnosis-related groups (MS-DRG) continue to be the “building blocks” of reimbursement. So if those rates are mispriced, hospitals will still have incentive to favor services with higher profit margins.

To improve how Medicare pays for inpatient care, Ederhof and Ginsburg argued CMS should take advantage of the internal cost data hospitals have been using.

“In addition to yielding more accurate payment rates, this arrangement would synchronize the cost data used by hospitals and those available to CMS, thereby eliminating any possibility for hospitals to use their superior data to cherry-pick the most profitable services,” they wrote. “As a result, the overall efficiency of the healthcare system would be increased. The wide adoption of internal cost-measurement systems in recent years would allow for fairly rapid implementation of this model.”

The internal data is more granular than the aggregated data CMS currently use, Ederhof and Ginsburg wrote. They estimated 37 percent of hospitals which are “included in the Medicare payment-rate estimation have adopted a granular internal cost-measurement approach.”

Utilizing the data collected by hospitals wouldn’t mean adding additional reporting requirements, but CMS could provide subsidies to offset the costs of compiling the data, as well as make sure the data is kept confidential.

“We believe that by drawing on the systems that many U.S. hospitals have adopted, CMS could substantially increase the accuracy of the Medicare payment rates currently used for inpatient hospital care and, by extension, the accuracy of new payment models such as ACOs and bundled payment,” Ederhof and Ginsburg concluded. “Building new payment models on a foundation that makes all MS-DRGs equally profitable and that fosters the development of a high-quality cost-measurement and cost-management infrastructure will increase the likelihood that providers will respond to the broader incentives in these new models.”