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(c) Satisfying judgments for malpractice awards by a reserve fund administered by Health and Human Services, thus making the U.S. Government the insuror with a vastly larger statistical group; and

(d) Self-insurance by groups of hospitals (as is now the case of five Connecticut hospitals and organized by the Yale University Medical Center).



BEDSIDE MANNER I have interviewed a trial lawyer in Connecticut who is active in the field of malpractice cases. The views are pertinent to this Committee's concern with controlling Medicare Part B costs.

The lawyer : described interviews with over 60 clients who were contemplating legal action for malpractice. In a surprisingly large number of cases, the client specified that the attending physician was not to be sued because he was a long-time and respected family doctor and friend. In many of the other cases Dr. Arterton persuaded the client to drop any plans for litigation because of the poor chance of recovery from the hospital involved.

The lesson to physicians is clear. Re-establish the good bedside manner of your predecessors.

In only a single case (Saint Raphael's Hospital) did a client show the same personal friendship for a hospital. In the case of this hospital, an extraordinarily good public-relations effort has brought close friendship with the community.

The conclusion is clear. The Congress and the Administration must find means of diminishing the devastating threat of malpractice claims.

3 Janet B. Arterton, Esq., a partner in the firm of Garrison, Kahn, Crane, and Silbert, located in New Haven, Conn.


(By J. Joel May and Jeffrey Wasserman)



After providing a brief description of how the DRG reimbursement program operates in New Jersey, the authors present

overview of the findings from a comprehensive evaluation of the system. The discussion focuses on aspects of the system's design, the effect of DRGs on hospital operations, the economic and financial impact, and the system's political evolution. The authors conclude that, although the evaluation is still in progress, it appears that the system has led to improvements in hospital management which may ultimately imply cost savings.


Since 1980, 26 hospitals in New Jersey have been exposed

to a unique and innovative method of reimbursement aimed at re

ducing health care expenditures.

The new program, which currently

applies to all of the state's acute care general hospitals and

all classes of payers, is based on the use of Diagnosis Related

Groups (DRGs).

In essence,

a DRG is a homogeneous grouping of

patients who, in the opinion of physicians, require roughly

equivalent regimens of care and hence are believed to consume

similar amounts of hospital resources.

They are asserted to

have the property of being "medically meaningful" in that phy

sicians are able to distinguish between them on the basis of

their clinical attributes and associate particular patient

management processes with them.

Under this system, hospitals receive a prospectively

determined, DRG-specific rate for each case treated.

The precise

means by which these rates are calculated is explained below.


all there are 467 groups (although initially there were but 383),

each with a corresponding rate.

Hospitals are paid these

rates regardless of the costs they incur in treating patients.

They either retain the differences, or make up for the losses

between the fixed DRG payments and the costs of rendering care;

so a clear incentive exists for administrators to minimize costs.

As a result, this system is viewed as a logical strategy for

stemming the rise in hospital care costs.

The appeal of the system has recently received recognition

on the federal level through Secretary of Health and Human Ser

vices Schweiker's proposed plan to reimburse hospitals for trea

ting Medicare patients on the basis of DRGS.

Although the de

tails of the proposal have yet to be unfurled, it differs from

the New Jersey system in two important respects.

First, while in

New Jersey 100 percent of the patients are covered by the system,

it will typically be the case that some 25 percent or less of the

patients nationwide are covered by Medicare.

Since gearing up

for the system frequently involves rather significant expendi

tures on data processing equipment, administrator time,


tion of reports, monitoring of data quality, and, most impor

tantly, communicating with physicians, it is not at all obvious

that it will be "worth it" when only a fraction of the patients

are covered.

The second, and perhaps more significant diffe

rence, is that the New Jersey system requires approximately equal

payment from all payers which, in turn, precludes cost shifts

between payers.

In most other states, if the approved price for

a particular kind of case paid by Medicare is below the actual

costs of caring for that case, the hospital will simply shift the

unpaid costs to the commercial and self-paid business (and in

some states to Blue Cross).

Thus, the incentive to reduce costs,

improve efficiency, shorten lengths of stay, etc., which are present in New Jersey will be substantially weakened elsewhere.

Nevertheless, many of the lessons learned from New Jersey's

experience with DRG-based reimbursement are applicable to the

contemplated reimbursement program for Medicare patients, particularly if this new method of reimbursing hospitals for the

treatment of such patients prompts states to adopt a comprehen

sive DRG reimbursement program similar to the New Jersey one.


Prior to discussing the results of our evaluation of the New

Jersey DRG system, it is appropriate to describe exactly how DRG

rates are formulated.

Briefly, the DRG rate-setting process

begins for hospitals with the establishment of a preliminary cost

base (PCB).

The PCB is an estimate of the allowable annual

expenses, and other financial items, for which the hospital may

seek reimbursement from patients and third-party payers for the services they provide in the coming year. This estimate is

derived by the New Jersey State Department of Health from pre

viously reported (actual) hospital financial and case-mix data.

For example, for the 26 hospitals that started the program in

1980, 1978 data were used to arrive at the 1980 rates.


specific financial elements included in the PCB are:


patient care costs, indirect costs, provisions for the replace

ment of capital facilities, uncompensated care (i.e., bad debt

and charity care), and working capital. Net income from other sources and grants for the medically indigent are later deducted.

The calculation of the direct care costs component of the

PCB is relatively complex.

By far, the bulk of these costs are

attributable to treating inpatients who, as noted above, are

assigned to DRGS.

The process of determining the direct patient

care costs from the current year's cost base (again, for develop

ing the 1980 PCB, 1978 was the "current" year), relies on various

"measures of resource use" (MRUS).

Given the problems associated

with determining the true cost of treatment, MRUS serve as

proxies for actual resource consumption.

For instance, patient

days are presently used to estimate nursing costs, the assumption

being that equal amounts of nursing resources are consumed daily

regardless of diagnosis, age, or other factors. [1]

MRUS can therefore be used to indicate the cost of services

supplied by hospital cost centers to each DRG, and ultimately DRG

rates per case.

This is accomplished by first computing the

ratio of MRUS consumed by all patients within a given DRG to the

total number of MRUS provided by the cost center.

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ratio is multiplied by the total cost of operating the center in

question to obtain the total cost associated with caring for

patients in the DRG.

The result is then divided by the number of

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