MSDRGs: Pitfalls and Opportunities
Ernest Glad, president of Cortell Health, Dallas, Texas, sees the 2007 CMS restructuring of the DRGs used in the inpatient prospective-payment system as an opportunity that many hospitals are currently squandering. The restructuring adjusts DRG weights based on the severity of a patient’s condition to improve the system’s ability to account for the impact of comorbidities on hospitals’ resource consumption. The old system, which included 538 DRGs, was replaced with a new system of 745 Medicare Severity DRGs (MSDRGs).
“It’s a really good refinement,” Glad says. “What’s important is understanding how the DRGs consume resources, and there should be a better understanding since the system was refined. In the United States, however, hospitals seem to have a poor understanding of the resources required to deliver a particular DRG.” This includes the lack of a thorough understanding, for example, of the imaging procedures that may be necessary for a particular DRG. 
Ernest Glad Cortell Health’s focus includes the statistical number-crunching necessary to refine hospital financial management, and Glad recommends that hospitals take an analytical approach to understanding resource consumption better as it relates to MSDRGs. “If hospitals were to analyze the resources required to deliver every DRG and create a benchmark—we call it a financial protocol, very similar to a clinical protocol—then they could understand what would be required if a course of treatment went according to plan,” he explains. “If those units of resources are exceeded, that might be because of poor performance by a physician, or complicating factors like medical or surgical errors.” This gives hospitals the opportunity to see whether their cost management is out of line—and, perhaps more important, to identify and address the causes of inefficiency. “If you’re focused on radiology, you can evaluate whether your radiology department is effective or not by taking it in the context of a particular DRG,” Glad says. “When you compare or benchmark your radiology services, you see if they’re in line, in terms of units of consumption.” If the cost per imaging unit is too high or too low, any number of problems could be to blame, including utilization of staff, equipment, or radiologists. “When you compare costs per unit, you see whether a department is ineffective, and that gives an indication of how well it is run,” Glad says. “When you drill down further—for example, into the radiology department—there are a number of factors to be analyzed.” When attempting to understand the costs associated with a particular MSDRG, however, there are certain pitfalls to be avoided. The first is cross-subsidization. “Let’s say you have DRG 1, which is very profitable, and DRG 2, which is not,” Glad says. “If you don’t know which is which, the first will subsidize the second. Hospitals often expand because they are delivering this service at a cost that’s below other hospitals’, but they’re actually losing money on it. When you cross-subsidize, you attract more patients for your loss-making DRGs.” A corollary issue is the illusion that all DRGs are similar in cost. “If you don’t understand the cost of your DRGs, you’re never going to benchmark them, and you won’t know if your costs are going up or down,” Glad explains. “Most hospitals use RVUs and relative cost-to-charge ratios, which can lead to the illusion that all DRGs are similar, which is never true.” Glad sees the revised MSDRG system as a call to arms for clinical and financial managers to become more collaborative. “What I have seen, in the United States, is that the finance managers hardly ever talk to the case managers,” he notes. “The two should be working together very closely. A case manager should also be analyzing a case from a financial perspective, and a financial manager should work with the clinical analysts to focus on cases where costs are out of line. This collaboration will help reduce operating costs and improve quality of care.”
Ernest Glad Cortell Health’s focus includes the statistical number-crunching necessary to refine hospital financial management, and Glad recommends that hospitals take an analytical approach to understanding resource consumption better as it relates to MSDRGs. “If hospitals were to analyze the resources required to deliver every DRG and create a benchmark—we call it a financial protocol, very similar to a clinical protocol—then they could understand what would be required if a course of treatment went according to plan,” he explains. “If those units of resources are exceeded, that might be because of poor performance by a physician, or complicating factors like medical or surgical errors.” This gives hospitals the opportunity to see whether their cost management is out of line—and, perhaps more important, to identify and address the causes of inefficiency. “If you’re focused on radiology, you can evaluate whether your radiology department is effective or not by taking it in the context of a particular DRG,” Glad says. “When you compare or benchmark your radiology services, you see if they’re in line, in terms of units of consumption.” If the cost per imaging unit is too high or too low, any number of problems could be to blame, including utilization of staff, equipment, or radiologists. “When you compare costs per unit, you see whether a department is ineffective, and that gives an indication of how well it is run,” Glad says. “When you drill down further—for example, into the radiology department—there are a number of factors to be analyzed.” When attempting to understand the costs associated with a particular MSDRG, however, there are certain pitfalls to be avoided. The first is cross-subsidization. “Let’s say you have DRG 1, which is very profitable, and DRG 2, which is not,” Glad says. “If you don’t know which is which, the first will subsidize the second. Hospitals often expand because they are delivering this service at a cost that’s below other hospitals’, but they’re actually losing money on it. When you cross-subsidize, you attract more patients for your loss-making DRGs.” A corollary issue is the illusion that all DRGs are similar in cost. “If you don’t understand the cost of your DRGs, you’re never going to benchmark them, and you won’t know if your costs are going up or down,” Glad explains. “Most hospitals use RVUs and relative cost-to-charge ratios, which can lead to the illusion that all DRGs are similar, which is never true.” Glad sees the revised MSDRG system as a call to arms for clinical and financial managers to become more collaborative. “What I have seen, in the United States, is that the finance managers hardly ever talk to the case managers,” he notes. “The two should be working together very closely. A case manager should also be analyzing a case from a financial perspective, and a financial manager should work with the clinical analysts to focus on cases where costs are out of line. This collaboration will help reduce operating costs and improve quality of care.”