Medicare Reimbursement Basics

Reimbursement for chronic hemodialysis and kidney transplantation was scarce until the mid-1960s and haphazard until 1972, when Congress amended the Social Security Act to include coverage for end-stage renal disease for qualified patients. Because the amendment made Medicare the primary kidney transplantation insurer for more than 90% of the United States population, it was Congress and the U.S. Department of Health and Human Services, rather than the commercial health insurance industry, that wrote the rules and accounting practices for kidney transplantation. As transplantation of heart, lung, liver, pancreas, and intestine evolved, the rules and accounting practices applicable to the kidney were extended to other transplantable organs.

For a hospital to bill Medicare for transplant services, it must first apply for certification for each organ it proposes to transplant. If approved, the hospital then becomes a certified transplant center for those organs. Medicare reimbursement occurs through three main channels: diagnostic related groups (DRGs) paid to the hospital, organ acquisition cost centers (OACC) paid to the hospital, and physician reimbursement.

Diagnostic Related Groups

Diagnostic related groups (DRGs) define the payment a hospital receives for the organ transplant itself. First implemented in 1983 in a federal attempt to control escalating Medicare costs, DRGs were used to categorize patients for billing purposes. The introduction of DRGs marked the shift from a reimbursement system based on retrospective charges (after the delivery of care) to one based on "prospective" payment. This meant that hospitals would receive compensation for a patient's care based on the qualifying DRG instead of services provided. In other words, Medicare provides the same reimbursement for each diagnosis regardless of how complex the case or high-risk the patient.

Based on a patient's primary and secondary diagnoses, primary and secondary procedures, age, and length of stay, DRGs are used to determine compensation for all acute care, nonspecialty hospitals in the United States. With a uniform cost established for each category, each DRG is one of about 500 possible classifications in which patients with similar lengths of stay and resource use are grouped together. DRGs set the maximum amount that Medicare will pay for a patient's care, motivating hospitals and healthcare providers to keep costs down, as they profit only if their costs for providing a patient's care are less than the amount indicated by the DRG category.

Total DRG payment is derived from a calculation involving several factors: a national standard amount, a local wage index, and DRG weight, which weighs diagnoses against each other in terms of resource consumption. For example, a DRG with a weight of 3 would be expected to consume twice the resources of one at 1.5. The national standard amount is divided into a labor-related portion and a nonlabor portion, and a formula exists for annual inflation index adjustment.

A sample DRG payment for a patient admitted to a hospital in Madison, Wisconsin for a kidney transplant would be calculated as follows: Payment = [(labor amount x wage index) + nonlabor amount] x DRG relative weight. The national standardized amount for large urban areas for labor-related costs is $3,022.60 and $1,228.60 for nonlabor-related costs. The wage index for Madison is 1.0467, and the relative weight of the DRG for kidney transplants is 3.3000. Therefore, payment = [(3022.60 x 1.0467) + 1228.60] x 3.3 = $14,494.77. Table 19.1 shows an example of relative organ transplant DRG-based payments.

Only one DRG is assigned per patient admission, but certain circumstances or institutions may be eligible for rate adjustments or new DRGs. For instance, additional costs for managing complications during the initial hospitalization are expected to be covered by the DRG payment. If the patient is discharged and readmitted because of a medical problem such as rejection, the hospital is assigned a new DRG for the patient. Some transplant centers may be eligible for potential adjustments to DRG payment rates if they are part of a teaching hospital, where payments may consider factors such as graduate medical education (GME) costs and indirect medical education (IME) costs. Certain teaching institutions also may be eligible for disproportionate share (DSH) adjustments, which approximate the higher costs associated with treating indigent patients, the special need for translators, social services, higher security costs, and other related

Table 19.1. Approximate organ transplant DRG-based payments
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