ENT OF CHARLES PIERCE, DEPUTY COMMISSIONER, NEW JERSEY HEALTH, SUBMITTED FOR THE RECORD BY FAITH GOLDSCHMIDT

colleagues on this committee are faced

task, one on which the future well-being
ions of Americans will depend. In this
health resources, it is imperative that
ices be provided in the most efficient

ner possible. But cost containment efforts,
haste and without adequate foresight, can
pair the ability of many of our sickest
eedy citizens to receive vitally necessary
and substantially damage, if not destroy,
t valued social institutions, such as urban
cal school teaching hospitals, and certainly
as well as some rural hospitals that

1 prices in the hospital sector in those states with mandatory ost containment programs is clear and encouraging.

tachment A).

(See

New Jersey is one of those states with a mandatory cost ontainment program in place. A budget review per diem ystem (Standard Hospital and Rate Evaluation) went into Efect in 1975. At the outset we believed that to

ontain hospital costs, it was necessary to reach the true esource consumer, the physician. Thus, the system had to

è clincial in nature and take into account the differences hospital case-mix. In 1976 work began on developing a cospective payment system based on Diagnosis Related Groups ORGS). In 1980, twenty-six of New Jersey's acute care general ospitals implemented the DRG system. In 1981, thirty-five

ore implemented and by December 1, 1982, all 99 acute care eneral hospitals in New Jersey had implemented DRGs.

The heart of the New Jersey system is the ability of he Department of Health to actually calculate the cost E treating patients for a specific illness and treatment. he patient's bills, medical discharge abstracts and the ospital cost reports are used to calculate a direct patient are portion of the rate for each DRG. The direct patient are portion (which are those services such as nursing and cillary services and medical supplies) is adjusted by factors or labor market area, urban-rural setting and teaching status.

mtice is based upon o

ermine how to manage more effectively.

The system is

spective so hospitals will know their revenues in advance

can plan their expenditures accordingly.

ers.

(3) In New Jersey, there is equity across all Therefore, the massive cost shifting that occurs elsewhere the country to cover discounts and uncompensated care does occur in New Jersey.

(4) Uncompensated care, which primarily includes igent care, is one of the hospital's financial elements. including uncompensated care as an element of cost, well aged inner city hospitals can concentrate on effectively viding quality medical care to all patients regardless of ial or economic status.

CONSTRUCTION

BASIC CONSTRUCTION

The DRGs used in New Jersey are the set of 467 DRGs developed Yale University. Yale set up a National Steering Committee in 9, and over the next two years the committee constructed a new of DRGs, based directly on International Classification of ease, 9th Edition, Clinical Modification (ICD-9-CM) codes.

A numeric code for every diagnosis and procedure is contained three ICD-9-CM volumes. Every patient who is admitted to a pital has a PRINCIPAL DIAGNOSIS, "the reason, after study, for ission". The principal diagnosis is used to group patients into ad categories called Major Diagnostic Categories (MDCs). MDCs, for the 467 DRGs are arranged by organ system. For mple, MDC 01 is Diseases and Disorders of the Nervous System, 02 is Diseases and Disorders of the Eye. Because a physician's

Steering Committee felt

est reflects medical p

Each MDC was subdi is age, sex, secondary viich made a significan patients. Length of resource consumption.

In constructing th
f1.4 million medical
Thousand New Jersey re
medical information.
ship between length of
Consumption correlated

of the DRG. If resour
modifications were mad

The National Stee
from Yale, New Jersey
and Hospital Activiti
Hopkins University.

In addition, a separa Composed of physician individuals with DRG decisions made by the

based upon their exp

upon organ systems, the physicians on the National ee felt that grouping diagnoses by organ system

dical practice.

s subdivided into DRGs based on variables, such condary diagnoses, procedures and discharge status,

gnificant difference in the length of stay (LOS) ength of stay is usually used as a surrogate for ption.

cting the 467 DRGs, Yale used a nationwide sample medical discharge abstract records plus 330

rsey records which contained cost data as well as tion. Cost data was used to confirm the relationength of stay and resource consumption. If resource

rrelated with LOS for a DRG, there was no modification f resource consumption did not correlate, then were made to the DRG.

onal Steering Committee was composed of representatives Jersey, HCFA, the Commission on Professional Activities (CPHA), Public Health Service, and Johns rsity. This committee membership was half physicians. a separate review structure was set up in New Jersey hysicians, medical record professionals, and other ith DRG expertise. The New Jersey group reviewed all le by the Steering Committee and made recommendations eir experience with DRGs. The resulting MDCS and