HCM 345 Module 4 Prospective Payment Case Analysis example

One Hip Fracture, Three Ways to Pay: Applying Medicare's Inpatient Prospective Payment System to a Case

[Student Name]

Southern New Hampshire University

HCM 345: Healthcare Reimbursement

Module Four Assignment

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

One Hip Fracture, Three Ways to Pay: Applying Medicare's Inpatient Prospective Payment System to a Case

From Paying Costs to Paying Per Case

Until 1983, Medicare paid hospitals retrospectively for the reasonable costs they reported. The more a hospital spent, the more it received, and Medicare's hospital spending grew faster than the economy year after year. Facing the program's potential insolvency, Congress adopted a system that had been studied extensively and tested in New Jersey: prospective payment based on diagnosis-related groups, under which each admission is paid a predetermined rate according to the patient's diagnosis rather than the hospital's costs (Mayes, 2007). The change reversed the hospital's incentive. Under cost reimbursement, an extra day or test added revenue; under prospective payment, it adds cost to a fixed payment. Today's version, the Medicare severity diagnosis related group system, divides inpatient cases into several hundred groups, many split into three severity levels according to whether secondary diagnoses on the claim rank as a CC, a complication or comorbidity, or an MCC, a major one, (Centers for Medicare & Medicaid Services [CMS], 2024).

The Case

A composite 79-year-old man with type 2 diabetes trips on a rug at home and cannot stand. At the emergency department of a regional hospital, imaging shows an intertrochanteric fracture of the left femur. He is admitted, and the next morning an orthopedic surgeon repairs the fracture with an intramedullary nail. On the first postoperative day his hemoglobin falls from 12.8 to 8.1 grams per deciliter, the surgeon documents acute blood loss anemia, and he receives one unit of blood. He begins physical therapy, and on the fifth day he is discharged to a skilled nursing facility for rehabilitation.

Assigning the MS-DRG

The principal diagnosis is the intertrochanteric fracture, and the principal procedure is internal fixation of the femur with an intramedullary device. Because the fracture was fixed rather than treated by replacing the joint, the case falls in the family of hip and femur procedures except major joint, MS-DRGs 480 through 482. The secondary diagnoses then decide the severity level. Type 2 diabetes without complications does not qualify as a CC. Acute blood loss anemia, documented by the surgeon and supported by the drop in hemoglobin and the transfusion, is a CC. The case therefore groups to MS-DRG 481, hip and femur procedures except major joint with CC. Had the surgeon written only postoperative anemia or not documented the anemia at all, the case would have grouped to MS-DRG 482, without CC or MCC, and paid less. Had the patient developed a condition classed as an MCC, such as acute respiratory failure, the case would have moved to MS-DRG 480. The procedure chose the family; the documentation of one complication chose the payment within it.

Calculating the Payment

Medicare's operating payment for the case is the standardized amount, adjusted for local labor costs through the hospital's wage index, multiplied by the relative weight of the MS-DRG. Table 1 works through the calculation with illustrative figures chosen to show the method; actual rates and weights are updated each fiscal year in the inpatient payment rule.

Table 1

Illustrative Medicare Operating Payment for the Hip Fracture Case

Note. Figures are illustrative and rounded to the dollar. Capital payments and add-ons for teaching, disproportionate share and outliers are omitted.

Payment Compared With Cost

The hospital's cost accounting system estimates the cost of this stay at 11,200 dollars, including the operating room, the implant, five nursing days, therapy, laboratory work and the transfusion. Against the illustrative payment of 9,329 dollars, the hospital loses about 1,871 dollars on the case. The loss is not unusual for older patients with complications, and it shows where a manager can act under prospective payment. The implant and operating room time are largely fixed once surgery is chosen. The length of stay is not: had the patient been ready for discharge on the fourth day, the hospital would have saved a day of nursing and overhead without any change in payment. Medicare also limits how much a hospital gains from early discharge; when a patient in many groups leaves for post-acute care earlier than the group's average stay, the transfer policy can reduce the payment.

The Same Case Under a Commercial Per Diem

Suppose the patient were 62 and covered by a commercial insurer whose contract with the hospital pays a per diem of 2,950 dollars for surgical days. Five days would produce 14,750 dollars, more than the cost of the stay, and a sixth day would add another 2,950 dollars. Under this contract the incentive runs in the opposite direction: every additional day increases revenue, so the insurer protects itself through utilization review and denial of days it considers unnecessary. Some commercial contracts instead pay by case rates or a percentage of Medicare, which recreate the incentives of prospective payment.

What the Comparison Teaches

The same patient, the same surgery and the same five days produce a loss under one payment method and a surplus under another. For managers, the lesson is that the payment method, not only the price, shapes the right operational response. Under diagnosis-based payment, efficiency, accurate documentation of complications and well-planned discharge determine the margin. Under per diem, the margin depends on defending each day against denial. A hospital with a mix of both must run its case management and documentation programs to serve each contract, and it should analyze profitability by payer and by group rather than by department alone (Casto & White, 2021). For this hospital, the practical steps are to begin discharge planning on the day of surgery for hip fracture patients, to confirm skilled nursing bed availability before the patient is medically ready, and to review every hip fracture case for complete documentation of complications before the claim is sent. Each step either shortens the stay or makes sure the payment reflects the patient's real severity, and neither conflicts with good care.

References

Casto, A. B., & White, S. (2021). Principles of healthcare reimbursement and revenue cycle management (7th ed.). AHIMA Press.

Centers for Medicare & Medicaid Services. (2024). Acute inpatient PPS. https://www.cms.gov/medicare/payment/prospective-payment-systems/acute-inpatient-pps

Mayes, R. (2007). The origins, development, and passage of Medicare's revolutionary prospective payment system. Journal of the History of Medicine and Allied Sciences, 62(1), 21-55. https://doi.org/10.1093/jhmas/jrj038