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in prices in the hospital sector in those states with mandatory

cost containment programs is clear and encouraging.


Attachment A).

New Jersey is one of those states with a mandatory cost

containment program in place.

A budget review per diem

system (Standard Hospital and Rate Evaluation) went into

effect in 1975.

At the outset we believed that to

contain hospital costs, it was necessary to reach the true

resource consumer, the physician.

Thus, the system had to

be clincial in nature and take into account the differences

in hospital case-mix.

In 1976 work began

on developing a

prospective payment system based on Diagnosis Related Groups


In 1980, twenty-six of New Jersey's acute care general

hospitals implemented the DRG system.

In 1981, thirty-five

more implemented and by December 1 1982, all 99 acute care

general hospitals in New Jersey had implemented DRGS.

The heart of the New Jersey system is the ability of

the Department of Health to actually calculate the cost

of treating patients for a specific illness and treatment.

The patient's bills, medical discharge abstracts and the hospital cost reports are used to calculate a direct patient care portion of the rate for each DRG. The direct patient

care portion (which are those services such as nursing and

ancillary services and medical supplies) is adjusted by factors

for labor market area, urban-rural setting and teaching status. A hospital specific mark-up factor is applied to the direct patient care portion to cover the hospital's indirect costs (which are those costs such as the debt service costs and

administrative overhead).

At the time of hospital billing of

a DRG, a payer factor, which covers a portion of the hospital's indigent care costs, is applied.

In summary, a patient in New Jersey is billed:

Direct patient care rate

X mark-up factor

X payer factor

z total bill (DRG payment rate).

The DRG payment rate is the average amount of resources consumed in a hospital to treat a patient within a given DRG.

We feel that the DRG system has the following benefits:

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resources consumed are equitably distributed and based on specific procedures DRGs. Hospitals are reimbursed according

to their case mix and the volume of each case, not by the number

of patient days. The 467 DRGs reflect the range of illnesses and injuries among the patients and the DRGs are meaningful clinically and financially.

(2) Hospitals are encouraged to use resources in an

efficient manner.

There is an incentive for hospitals to

decrease expenditures through more effective clinical and financial management. This encourages dialogue among the administration, medical staff and hospital departments to

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in the country to cover discounts and uncompensated care does

not occur in New Jersey.

(4) Uncompensated care, which primarily includes indigent care, is one of the hospital's financial elements. By including uncompensated care as an element of cost, well managed inner city hospitals can concertrate on effectively providing quality medical care to all patients regardless of

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The DRGs used in New Jersey are the set of 467 DRGs developed by Yale University. Yale set up a National Steering Committee in 1979, and over the next two years the committee constructed a new set of DRGs, based directly on International Classification of

Disease, 9th Edition, Clinical Modification (ICD-9-CM) codes.

A numeric code for every diagnosis and procedure is contained

in three ICD-9-CM volumes.

Every patient who is admitted to a

hospital has a PRINCIPAL DIAGNOSIS, "the reason, after study, for

admission". The principal diagnosis is used to group patients into broad categories called Major Diagnostic Categories (MDCs). The MDCs, for the 467 DRGs are arranged by organ system. For example, MDC01 is Diseases and Disorders of the Nervous System, MDC 02 is Diseases and Disorders of the Eye. Because a physician's practice is based upon organ systems, the physicians on the National Steering Committee felt that grouping diagnoses by organ system best reflects medical practice.

Each MDC was subdivided into DRGs based on variables, such

as age, sex, secondary diagnoses, procedures and discharge status, which made a significant difference in the length of stay (LOS)

of patients. Length of stay is usually used as a surrogate for resource consumption.

In constructing the 467 DRGs, Yale used a nationwide sample

of 1.4 million medical discharge abstract records plus 330

thousand New Jersey records which contained cost data as well as

medical information,

Cost data was used to confirm the relation

ship between length of stay and resource consumption. If resource consumption correlated with LOS for a DRG, there was no modification

of the DRG.

If resource consumption did not correlate, then

modifications were made to the DRG.

The National Steering Committee was composed of representatives

from Yale, New Jersey, HCFA, the Commission on Professional

and Hospital Activities (CPHA), Public Health Service, and Johns Hopkins University. This committee membership was half physicians. In addition, a separate review structure was set up in New Jersey composed of physicians, medical record professionals, and other

individuals with DRG expertise. The New Jersey group reviewed all decisions made by the Steering Committee and made recommendations

based upon their experience with DRGs.

The resulting MDCs and

DRGs are contained in a computer program called "GROUPER". There was a great deal of clinical input, as well as cost data correlation. Hence, the DRGs are meaningful in terms of actual clinical

practice and "real life" experience.



Even with a sophisticated patient classification scheme such

as DRGs, there are still those patients who are truly unique and

cannot be compared to other cases.

Those patients, because of their

condition or treatment, have atypical resource consumption, and

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stay, high length of stay, patients admitted and discharged the

same date, patients who died, patients who left against medical

advice, clinical outliers and low volume outliers.

Each DRG has a range of days that a typical patient would


The first day of the range is the "low trim" point, the

last day of the range is the "high trim" point.

Patients whose

LOS is shorter than the low trim point are low length of stay

outliers; patients whose los is longer than the high trim point are

high length of stay outliers.

Patients who were admitted and

discharged on the same date, who died or who left against medical

advise are considered atypical in terms of resource consumption

in an acute care inpatient hospital setting.

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