Comprehensive Transfer DRG Vulnerability Index – Available Immediately

QUESTIONS AND ANSWERS --- THE FINANCIAL IMPACT OF CMS “TRANSFER DRGS” ON HOSPITAL PROFITS IN FY 2006

1. What are “Transfer DRGs”? CMS developed “Transfer DRGs” and began its postacute care transfer policy because it felt many hospitals were getting paid twice for the same patient. This federal policy change reduces hospital payments for short-stay Medicare patients who are transferred to a nursing home, home health, or rehab hospital. On October 1, 2005, CMS expanded the number of DRGs subject to its postacute care transfer policy from 30 to 182 which creates clinical and managerial challenges for hospitals.
2. Why are Transfer DRGs important to equity analysts, hedge fund managers, and hospital executives? The new Transfer DRGs directly, immediately, and adversely impact every hospital’s revenue and bottom line. CMS has estimated an overall reduction in payments of 0.9% in FY2006. The effects will vary greatly from hospital to hospital, depending on their casemix, treatment protocols, and other factors. Hospital equity analysts and hedge fund managers are now preoccupied with the financial damage from Hurricane Katrina. The Transfer DRGs will definitely get their attention in hospitals’ Q4-CY05 and Q1-CY06 earnings reports, even though it’s not yet on their radar screens.
3. What is a simple, concrete example for a single Medicare patient? Show me the money. Suppose a hospital treated a Medicare patient in September, 2005 (FY2005) in DRG 148 (“Major Bowel Procedures”) and discharged that patient to a rehab unit after a 5-day length of stay. A typical hospital would be paid $18,420 in FY05. A hospital treating that patient in October, 2005 (FY06) would be paid 40% less for this case—only $12,384.
4. How would I estimate the financial impact of the new Transfer DRGs on a hospital or hospital system? To estimate the financial hit a hospital will suffer in FY2006, an extensive analysis is required on the 2004 MedPAR, a database of 12,000,000+ Medicare hospitalizations. We applied the new payment rules and assumed each hospital’s mix of patients will not change. This involved studying more than 5,000 hospitals’ Medicare admissions. We have the results for each hospital (for-profit and not-for-profit) and for 7 hospital systems (HCA, Triad, Tenet, Universal Health Services, etc.).
5. What is any one hospital’s TRANSFER DRG VULNERABILITY INDEX? What is the TDVI for an INVESTOR-OWNED HOSPITAL CORPORATION? Our analysis showed that the impact of the Transfer DRGs differs for each hospital, and a hospital’s financial pain depends on 4 factors:
   • Its mix of patients, i.e., the proportion of patients they treat that are in a Transfer DRG. Hospitals with a heavy surgical mix are more likely to be adversely affected.
   • Its current treatment patterns. Hospitals with clinical pathways that often results in discharges to a nursing home or rehab hospital will be hurt worse.
   • Its frequency of early discharges. Hospitals with higher-than-average rates of early discharges will suffer financially. Our results quantify these results, for each DRG, for each major diagnostic category, and each hospital.
   • How a hospital is likely manage Medicare patients in FY06. It is well known that changing physicians’ treatment patterns takes time and effort. Our model takes this factor into account, based on how quickly a hospital responded to previous CMS financial incentives for Transfer DRG.
   We have translated all of the above factors into a comprehensive “Transfer DRG Vulnerability Index” for each hospital, depending on its relative casemix, physicians’ discharge patterns, early discharge rates and management responsiveness. Our research suggests the higher a hospital’s TDVI, the greater the financial hit a hospital will suffer.
6. What changes can I expect in FY 2007? Currently there are 182 Transfer DRGs. We believe CMS has conservatively estimated its savings from its new payment rule. We think CMS is likely to extend this policy to more DRGs in FY07, since there are 500+ DRGs, and CMS needs to find other savings to strengthen the financial future of the Medicare program. Managed care plans may follow CMS’s lead.