Use of Risk Adjustment Models for Provider Reimbursements

Introduction

In this chapter, we will focus on the use of patient severity indices to determine the reimbursement to healthcare providers. In order to do this, we must first examine the standard practice of reimbursing hospitals for specific DRG codes, and for reimbursing other providers based upon a point system that designates the level of service. We especially want to investigate the problem of upcoding, or “gaming” in more detailto determine if it can be detected and corrected, so that providers are reimbursed based upon the actual level of care, and not upon better coding practices.

Each hospital has a contract with a healthcare provider that designates the level of reimbursement. The reimbursement is based upon a general formula, with consideration of locat costs. However, these formulas are linear, suggesting that the standard assumption is made that the patient costs are normally distributed. As discussed in Chapter 3, this assumption is not valid. Therefore, we will also examine the issue of reimbursement based upon the normal distribution to determine whether such reimbursements are reasonable, or whether providers are losing money because of the need to treat patients who need extraordinary care. Unfortunately, regression assumes that the relationship of cost to need is linear; if the distribution is gamma or exponential, the relationship will not be linear and the cost will be skewed. Therefore, fewer patients are identified as extraordinary if the assumption of normality is made, and there will be a group of patients who require costly treatment, but for whom providers will only receive standard reimbursement. Approximately 5% are identified as outliers when the proportion of outliers is more in the neighborhood of 10-15%.