Computational Characteristics of Dubais

Inpatient IR-DRG Payment System

Michael Trisolini, PhD, MBA

Nicole Coomer, PhD
Mahmoud Taha, MSc, MBA

1 RTI International is a registered trademark and a trade name of Research Triangle Institute. www.rti.org
Agenda

1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses
8. Monitoring
2 9. Projected Timeline
DHA Project Overview

Phase I Timeline February 2015 to July 2016

Current Situation Analysis
Planning Phase Round Table Meeting
Implementation Plan

Implementation
Planning Five-year Plan for 2016 to 2020

9
 DHA Project Overview (cont.)

Phase II Timeline August 2016 to July 2018

Dubai Health Care Cost Index
IR-DRGs IR-DRG Parameters &
Implementation

IR-DRG Monitoring Indicators

Monitoring, Policy,
Training Policy Briefs
Training for DHA Staff

10
 Five Year Blueprint for Phased Implementation

Step 1: Initial
IR-DRG Step 3:
implementa- Additional
tion and payment
operations Step 2:
Enhancing models
IR-DRG
implementa-
tion

Implementation in phases promotes success for all stakeholders and

minimizes change fatigue by providing time for needed adjustments to
11 systems, staff, and operations.
Options for Bundling Inpatient Hospital Services

Hospital per service or per-

Hospital per-day reimbursement
procedure payment

Hospital per-admission
DRGs bundled with physician
reimbursement: diagnosis-related
reimbursement (Dubai IR-DRGs)
groups (DRGs)

Paying for quality, pay for Episode payments for hospital,

performance (P4P), and value- physician, and post-acute care for
based purchasing (VBP) an illness episode (often 90 days)

Capitated payment for all health

care services provided per patient
per year

6
Agenda

1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses
8. Monitoring
7
9. Projected Timeline
Introduction to DRGs

Diagnosis-related groups (DRGs) bundle, or combine, inpatient

hospital services into a single group for each inpatient stay
The hospital services included in each DRG bundle represent the
typical services provided across all hospitals for patients with the
same reason for admission (principal diagnosis or complex
procedure)
Each inpatient hospital stay is assigned to one and only one DRG
based on the patients age, sex, diagnoses, procedures provided to
the patient, and sometimes other factors

8
What do DRGs Cover?

Physician care
Nursing care
Technician services
Therapies
Types of services covered by a Radiology
DRG payment include: Laboratory
Pharmaceuticals
Room
Meals
Etc.

9
 Characteristics of DRGs

DRGs are:
Cost homogenous
Patients in each DRG have similar patterns of hospital resource use, and
each DRG has one payment level

Clinically coherent, with similar clinical characteristics such as

organ system, etiology, or specialty

Mutually exclusive
Each inpatient hospital stay is assigned to only one DRG

10
 DRGs as Hospital Casemix Measurement

DRGs are a way of measuring the casemix or relative severity of

illness and cost of the different types of inpatient stays or products
provided by a hospital

DRGs adjust hospital prices and payments by measuring the

casemix of patients treated by a hospital

DRGs can group together different kinds of patients including

clinically similar ICD-10 diagnosis codes, as long as they are also
similar in cost or hospital resource use

11
 DRGs as Hospital Casemix Measurement (cont.)

DRGs enable hospitals to be paid more if they treat sicker patients

(more severely ill casemix of patients), rather than being paid more
due to the reputation or name of the hospital

Some DRG systems, including IR-DRGs, further sub-classify hospital

stays by the severity of the patients illness
The reason is that higher severity of illness means higher costs to the
hospital which means higher payments are needed for the hospital

12
 Severity Levels

IR-DRG Severity of Illness (SOI) Classifications Based on

Secondary Diagnoses:
1) Minor (1) e.g., uncomplicated diabetes, difficulty breathing,
hypertrophy of kidney
2) Moderate (2) e.g., diabetes with renal complications,
emphysema, chronic renal failure
3) Major (3) e.g., diabetes with ketoacidosis, respiratory failure,
acute renal failure
These SOI levels turn 1 IR-DRG into 3 IR-DRGs with 3 different
payment levels depending on the patients severity of illness

13
 History of DRGs
DRGs were first developed in the 1970s and first used for hospital payment
by the U.S. Medicare system in 1983 and are now used in many high income
countries
A number of different DRG systems have been developed:

Original Yale DRGs (1970's)

Medicare HCFA/CMS DRGs (1983)

All Patient DRGs (AP-DRG)

Yale Refined DRGs (RDRGs)

3M APR DRGs

MS-DRGs
1970 1980 1990 2000 2010
Source: American Health Information Management Association. "Evolution of DRGs (Updated)." Journal of AHIMA (Updated April 2010)

14
 Country-Specific DRGs

U.S. Medicare DRGs

U.S. All Payer DRGs
Swiss DRGs
Germany G-DRGs
NordDRGs Scandinavia and Estonia
IR-DRGs used in several countries and in the Emirate of Abu Dhabi,
and are planned for Dubai starting in 2017

15
 Number of DRGs

The number of DRGs varies across the different DRG systems

The first DRG system used in the U.S. Medicare system had 476
DRGs
Some DRG systems now have over 1,000 DRGs, due to different
classification systems and splitting some DRGs by severity of illness
levels
Adding more DRGs increases specificity, but also increases the
complexity of the DRG system and the management resources
required to implement and maintain the DRG system

16
 IR-DRGs

IR-DRGs were developed by the 3M company

Similar in concept to other DRG systems

IR-DRGs group each hospital stay into only one DRG for casemix
classification and payment purposes
Same methods used for calculating DRG payment rates, including one
base rate and relative weights for each DRG

17
 IR-DRGs (cont.)

IR-DRGs are also somewhat different from other DRG systems in

several ways:
Designed to encompass both inpatient and outpatient care, but can be
used for inpatient care only as in Abu Dhabi, and as also planned for Dubai
Based mainly on procedure codes rather than on diagnosis codes as in
other DRG systems
IR-DRGs can include three levels of severity of illness using the most
severe secondary diagnosis on the claim

18
 Agenda

1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses
8. Monitoring
19
9. Projected Timeline
 Goals of DRG Payment

Goals of Bundling Services in DRGs for Hospital Inpatient Pricing and

Payment
Remove incentives for overtreatment or increasing volumes of care
laboratory tests, radiology, length of stay (LOS) in hospital that exist in
fee-for-service pricing and payment
Financial rewards for efficient hospitals providing care that is less costly
than the fixed DRG payment per inpatient stay
Shift risk for the costs of overtreatment to the hospital
Simplify hospital billing by reducing the number of units of service billed

20
 Goals of DRG Payment (cont.)

Simplify utilization review and medical necessity review by health

insurance companies by reducing the number of units of service billed
Allows flexibility for adding on paying for quality incentives
Allows flexibility for negotiations on DRG prices between health insurance
companies and hospitals
Capital costs can be passed-through to avoid discouraging investors
Assist hospitals with internal planning and budgeting by defining the
products of the hospital

21
 How is DRG Payment Determined?

At the most basic level the DRG payment is a multiplication of two

factors:
Base Rate
An amount representing the
average payment per admission
for all hospitals in the base year.
One base rate for all hospitals.
Sometimes referred to as a
standardized amount
Relative Weight
A unique relative weight is
assigned to each DRG to reflect
the average level of resources
for an average patient in a DRG,
relative to the average level of
resources for all patients.

DRG Payment = Base Rate x Relative Weight

22
 Calculating DRG Payments to Hospitals
Examples of calculating DRG payments based on the U.S. Medicare system:

Base Rate = $5,370

1) Normal newborn birth (DRG 795)

Relative Weight = 0.1656
Payment = $5,370 x 0.1656 = $889

2) Heart transplant with Major Complications or Comorbidities

Relative Weight = 24.2794
Payment = $5,370 x 24.2794 = $130,380

23
 Agenda

1. Introduction to DRGs
2. Payment with Inpatient DRGs
3. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers

4. Adjusting DRG Payments

5. Implementing DRGs
6. Sensitivity Analyses
7. Monitoring
8. Projected Timeline
24
 DRG Base Rate and Relative Weights

Terminology
Costs Charges Payments
The amount that a The amount that a hospital The amount that a patient
hospital expends to bills a patient or insurer for or insurer pays to the
provide care for a patient. providing care. hospital for providing care.
Typically greater than Typically greater than
costs. costs and less than
May or may not be charges.
correlated to costs.

25
 DRG Base Rate and Relative Weights (cont.)

The DRG base rate and the relative weights for each DRG are
intended to reflect the costs of providing care
Using costs for calculating the parameters requires accurate and timely
cost reporting from hospitals to DHA to determine DRG level costs

In the absence of DRG level costs, the parameters can be based on

recent charges and fee-for-service hospital payments
Recent charges should reflect, in part, the resources needed to treat a
patient
Recent fee-for-service payments should on average cover all of a
hospitals costs
A transition to costs can occur in the long term

26
 Calculating DRG Relative Weights

The IR-DRG relative weights for Dubai will be calculated by 3M

Relative weights are calculated as the average charges for cases in

each DRG divided by average charges for all cases
The relative weights are intended to account for cost variations between
DRGs that represent different types of patients and treatments (differences
in casemix)

The more costly DRGs, the DRGs for the more severely ill or complex
patients, are assigned higher DRG relative weights and thus receive higher
payments

27
 Calculating DRG Relative Weights An Example
Fee-for-Service
Case DRG Charges (FFS) Payment
1 001 12,000 AED 10,000 AED
2 001 14,000 AED 12,000 AED
3 001 17,000 AED 10,500 AED
4 001 13,500 AED 13,000 AED
5 002 20,500 AED 20,000 AED
6 002 28,000 AED 25,000 AED
7 002 19,000 AED 18,500 AED
8 002 23,000AED 22,500 AED
9 002 40,000 AED 23,500 AED
28 *For illustrative purposes only, values are hypothetical.
 Calculating DRG Relative Weights An Example (cont.)

Total Average
Number Payments Average Payments
DRG of Cases Total Charges (FFS) Charges (FFS)

001 4 56,500 AED 45,500 AED 14,125 AED 11,375 AED

002 5 130,500 AED 109,500 AED 26,100 AED 21,900 AED

Total 9 187,000 AED 155,000 AED 20,778 AED 17,222 AED

29 *For illustrative purposes only, values are hypothetical.

 Calculating DRG Relative Weights An Example (cont.)

Average
DRG Charges Relative Weight Formula Relative Weight
14,125 AED
001 14,125 AED = 0.68
20,778 AED

002 26,100 AED 26,100 AED

= 1.26
20,778 AED

Average Charges for All DRGs (001, 002) : 20,778 AED

30 *For illustrative purposes only, values are hypothetical.

 Updating DRG Relative Weights

The relative weights are adjusted or updated periodically (e.g. once

per year) to account for changes in hospital costs

Relative weights are updated using new charge data that becomes
available.
Collected on the claims as done currently with FFS claims

Changes in relative charges reflect changes in the relative costs of

providing care.

31
 DRG Base Rate and Relative Weights

The base rate is set equal to the total payments for inpatient cases
divided by the total number of inpatient cases for all hospitals

All DRGs (001, 002) FFS Payment

Number
Total of Cases Average
155,000 AED
155,000 AED 9 =17,222 AED Base Rate
9

32 *For illustrative purposes only, values are hypothetical.

 Calculating DRG Payments to Hospitals
Examples of calculating DRG payments based on hypothetical DRGs:

Base Rate = 17,222 AED

Relative
DRG Weight DRG Payment Formula DRG Payment

001 0.68 17,222 AED * 0.68 = 11,708 AED

002 1.26 17,222 AED x 1.26 = 21,634 AED

DRG Payment = Base Rate x Relative Weight

33 *For illustrative purposes only, values are hypothetical.
 Updating the Base Rate

The base rate is adjusted or updated periodically (e.g. once per year) to
account for changes in hospital costs using an update factor

The update factor in its simplest form is a cost index

A market basket index measures the changes in cost, over time, of the
same mix of goods and services purchased by hospitals
These are prices paid by hospitals to suppliers of goods and services and
thus the costs to the hospitals
Sometimes called a price index
Sometimes called a cost index

DHA and DSC are establishing a healthcare cost index for Dubai

34
 Updating the Base Rate - Example

Base Rate = 17,222 AED in Year 1

Update Factor = 3% for Year 2

Base Rate for Year 2

17,222 AED X 1.03
= 17,739 AED

35
 Outlier DRG Payment Adjustments
Outlier payments are extra payments to hospitals, above the regular
DRG payment, for hospital stays that incur unusually high costs
Rare occurrences

In a cost-based DRG system, to qualify for an outlier payment, a

hospital stay must have costs above a very high, fixed threshold cost
level
If this cost threshold is exceeded, then an extra payment is made to the
hospital at usually 80% of the amount by which the hospitals costs exceed
the outlier threshold of cost for that DRG

In a non-cost-based DRG system length of stay is often used and a

per diem amount can be paid for each day beyond the outlier
threshold length of stay
36
 Agenda

1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses
8. Monitoring
37
9. Projected Timeline
 Quality Adjustments to DRGs

DRG payments can be also be adjusted to increase payments or

decrease payments for measured quality of care levels
Can use a hospitals scores on several individual quality measures
Can use an overall hospital quality score with scores on multiple quality measures
added together
An extra payment for high quality or payment penalty for low quality can be built
into the DRG payment model
Quality of care scores and payment adjustments can also be a tool for negotiation
between hospitals and health insurance companies

38
 Quality Adjustments to DRGs Examples

Germany penalty for not submitting quality data

France extra payments for quality improvements (e.g. reducing MRSA
infections)
England up to 1.5% penalty if quality standards not met; no extra payment
if the patient is readmitted within 30 days
U.S. Medicare
Penalty for excess readmissions for acute myocardial infarctions, heart
failure, and pneumonia
Value-based purchasing incentive for higher quality performance scores
Penalty for hospital acquired conditions (HACs)
Penalty for not using an electronic health record (EHR)

39
 Paying for Quality Formula for Inpatient Payment

Prior to Pay for Quality the IR-DRG formula is:

Pay for Quality adds an additional multiplier:

< 0 if the hospital has low quality (Q) relative to others, quality
adjustment decreases payment
= 0 if the hospital has average quality (Q) relative to others, no quality
adjustment
> 0 if the hospital has high quality (Q) relative to others, quality
adjustment increases payment
51
 Paying for Quality Example

Range of
Possible Effects
of Quality on
Inpatient
Payment

BaseRate=8,000 AED, RelativeWeight=3.267

52 *For illustrative purposes only, values are hypothetical.
 Negotiation and DRGs

Negotiation of DRG payments between hospitals and health

insurance companies is possible under a DRG system
Used in Abu Dhabi
Reduces the need to implement complex DRG payment adjustments and
some pass-throughs
Relative weights remain fixed
Different base rates are established for different hospitals through hospital
and health insurance company negotiations
Negotiations can be limited to a range of possible base rates by DHA

42
 Negotiation Sensitivity Analyses
To assess the system for biases and understand the potential effects
of allowing a negotiation band on the Dubai health care system.
Conducted at the hospital, insurer, and healthcare sector levels
Using the EClaim Link data and the relative weights, base rate, and
outliers developed to reflect the unique system that exists in Dubai
Simulated negotiation in the market
All hospitals receive minimum payment in band
All hospitals receive maximum payment in band
Distribution of payments based on current ratio of payments to charges in the
EClaim Link data

Similar to sensitivity analyses discussed above

53
 Agenda

1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses
8. Monitoring
44
9. Projected Timeline
 Implementing DRGs

ICD-10 and CPT coding A DRG system crucially depends upon

accurate coding of inpatient hospital stays, so hospital coding needs
to be first reviewed and upgraded if needed
Standardizing terminology Defining key measures of hospital use
and cost
It is important to define what constitutes an inpatient stay
Is one overnight in the hospital required to define an inpatient stay?
What about patients kept overnight for observation?

45
 Implementing DRGs

Phase-in Transition Period Experience other countries strongly

suggests a DRG transition period of 2-3 years or more.
Start with shadow budgeting -- Include DRGs on claims for information only and
not for payment for 9-18 months or more, while continuing fee-for-service
payment to hospitals
DRG payment to hospitals phased in as 50% or less of total payment to hospitals
initially, while the rest of the hospital payment remains fee-for-service
DRG payment to hospitals increased to 100% of total payment to hospitals only
after shadow budgeting and percentage of total payment phase-in
Phased implementation allows hospitals, insurance companies and other
stakeholders time to understand the details and impact of the new payment
system on them, and time to adjust their systems, staff, and operations.

46
 Three Tools for Quality Improvement in Dubai

1. Information 2. Public 3. Pay for

only reporting quality

Start with information

Next develop public Then add paying for
only, confidential
reporting of quality quality, where quality
feedback of quality
measurement results with measurement results
measurement results to
public comparison of affect payment levels for
hospitals and clinics, with
hospitals and clinics to hospitals and clinics
blinded comparisons to
peers
peers

57
 Quality Measurement Phase 1

Begin quality measurement for information only using 3M

quality measures

Include measures focused on patient safety and hospital

readmissions, since IR-DRGs provide financial incentives to
increase hospital admissions and reduce quality

Potentially preventable complications (PPCs)

Potentially preventable hospital readmissions (PPRs)

58
 Quality Measurement Phase 2

59
1. Background
2. Introduction to DRGs
3. Payment with Inpatient DRGs
4. Calculating DRG Parameters
a. Relative Weights (3M)
b. Base Rate
c. Outliers
5. Adjusting DRG Payments
6. Implementing DRGs
7. Sensitivity Analyses Altijani H Hussin
8. Monitoring Health Economics Consultant
9. Projected Timeline Dubai Health Authority

50
Sensitivity Analyses

To assess the Dubai IR-DRG system for biases and understand the potential effects of
the IR-DRG implementation on the Dubai health care system.

Conducted at the hospital, insurer, IR-DRG, and healthcare sector levels

Using the EClaim Link data and the relative weights, base rate, and outliers developed
to reflect the unique system that exists in Dubai

Additional analyses will examine the effects of a negotiating band (discussed later)

51
Sensitivity Analyses (cont.)
Overall System
Compare overall total
payments made to all
hospitals in Dubai under the
current fee-for-service (FFS)
discounted charges payment
system to overall total
payments that all hospitals
would receive using the IR-
DRG system.
Geographic Areas
Compare overall total
payments made to all
hospitals in different
geographic areas of Dubai
(e.g. Jumeirah Vs. Karama)
under the current FFS
payment system and under
the IR-DRG payment system.
Selected with the DHA.
52
Sensitivity Analyses (cont.)
IR-DRG
Compare overall payments and
per admission payments made
by IR-DRG under the current
FFS system and under the
proposed IR-DRG system.
If specific IR-DRGs have very large
increases or decreases in payments
made between the two different
payment systems, then further
analyze those IR-DRGs.
Hospital
Compare overall payments and
per admission IR-DRG
payments made to individual
hospitals in Dubai by hospital
under the current FFS payment
system and under the IR-DRG
system.
If specific hospitals are seeing large
gains or decreases in total payments
under the IR-DRG system then
perform further analyses of the
EClaim Link data at the hospital level
examining the case-mix of the
hospital.
53
Sensitivity Analyses (cont.)

Insurer
Compare overall payments made to
hospitals in Dubai and overall and per
admission IR-DRG payments made by
health insurance company under both
the current FFS payment system and
under the IR-DRG system.
If specific insurers are seeing large increases or
decreases in payments they make to hospitals
under the IR-DRG system then perform further
analysis at the individual health insurance
company level to determine the cause of the
large differences.

54
Sensitivity Analyses An Example

Compare overall total payments made to all hospitals in Dubai under the
current fee-for-service (FFS) discounted charges payment system to
overall total payments that all hospitals would receive using the IR-DRG
system.

Number Total FFS Total DRG Difference

DRG DRG Rate
of Cases Payments Payments (DRG-FFS)

001 4 45,500 AED 11,708 AED 46,832 AED 1,332 AED

002 5 109,500 AED 21,634 AED 108,168 AED -1,332 AED

All 9 155,000 AED n/a 155,000 AED 0 AED

55
Need for Monitoring IR-DRGs by DHA

Incentives for increasing the number of hospital admissions to increase hospital

revenue from additional IR-DRG payments
Incentives for decreasing services and quality of care for patients to reduce hospital
costs per admissions to increase profits in relation to the fixed IR-DRG payment per
admission
Incentives for upcoding procedure codes and diagnosis codes in hospital claims to
insurance companies to move to IR-DRG with higher payment rate (increase severity
adjuster)

56
Types of Monitoring

All hospitals
Individual Individual
Dubai health
hospitals IR-DRGs
sector-wide

57
Monitoring 1 All Hospitals, Dubai Health Sector-wide

Trends over time hospital admissions, readmissions, average length of stay,

transfers of patients to other hospitals
New hospital openings, hospital closures
Patient safety events hospital acquired conditions (HACs), patient safety indicators
(PSIs), never events, hospital acquired infections (HAIs)
Changes in procedure codes, diagnosis codes, average case-mix
Medical records audits of procedure codes, diagnosis codes

58
Monitoring 2 Individual Hospitals

Trends over time individual hospital payments, individual hospital case-mix,

individual hospital occupancy rate, average length of stay, number of ICU days
Starting or stopping admissions for specific IR-DRGs
Changes in numbers of outpatient procedures, outpatient visits, ED visits
Medical records audits of procedure codes, diagnosis codes, that are included
in the claims data and used to assign IR-DRGs and severity of illness (SOI) levels
for payment

59
Monitoring 3 Individual IR-DRGs

Trends over time

Number of times billed per month overall for high volume IR-DRGs,
Number of times billed per month by each individual hospital for high volume
IR-DRGs,
Changes in severity of illness levels (SOI) billed for high volume DRGs
Starting or stopping billing for specific IR-DRGs

60
Projected Timeline

1st, Feb, Shadow Billing Phase I

2017 DRG codes on eClaimLink
Shadow Billing Phase II
1st, July, Estimated DRG price added to
2017 claims
Not affecting payments

1st, April, DRG Prices Phase

2018 Affecting hospital payments

61