Hospital financing and accounting

Each week during the summer, summaries of chapters from the book Diagnosis Related Groups in Europe, available HERE, will be presented.

In the past, cost accounting in hospitals was recorded in different systems that were incompatible with each other. Hospital financing was handled through global bundles rather than through accurate cost estimation. This was changed by the DRG system, which it was quickly realised that in order to be able to set financial rates for individual groups, it needed to have cost accounting included in it. So the DRG system and cost accounting gradually began to be linked. Therefore, DRG started to put more weight on hospital billing, which also had the benefit of greater transparency and the possibility of benchmarking between hospitals. However, cost reallocation itself is a more complicated process and is divided into several parts.

There are 4 different methods to calculate these costs, differing in accuracy and difficulty of calculation. They are divided into so-called "top-down" methods, which look at the average cost per patient, "bottom-up" methods per individual patient, and they are also divided into "micro-costing", which looks in more detail at all procedures, versus "gross-costing", which looks only at the main ones. The most accurate combination is "bottom-up micro-costing", which is also the most used in the EU.

Almost every country has its own unique data collection system, tailored to the needs of hospitals. For example, some countries are obliged to use a cost accounting system (England, Portugal), most countries have defined guidelines that should be followed when recording this data. Most countries use DRGs to finance hospitals only partially, but the percentages vary - for example, in Germany and Portugal, DRG financing accounts for up to 75-80% of costs, in other countries the percentage is usually lower. Each country has its own rules on how this funding works and most countries, for example, exclude some hospital services from DRG funding and fund them in other ways. These are mostly services where there would be a strong tendency on the part of hospitals to shorten the length of stay, it would be difficult to estimate the costliness of a case due to the small statistical sample, or in cases where diagnosis is not a good main predictor of cost and on length of hospital stay (for example, in psychiatric care).

Thanks to cost accounting, the DRG was able to determine the degree of homogeneity of individual cases, identify outliers and so on. On the other hand, DRGs help cost accounting, as the existence of the DRG system has created the need to collect this data, thus contributing to greater transparency and the possibility of benchmarking in hospital costing. Thus, these systems are mutually supportive. On the other hand, however, both systems need to be developed separately so that they can complement and control each other.

Funding hospitals through data that hospitals themselves fill out and influence can lead to both desired and undesired consequences of how hospitals fill out this data, and it can also change their overall strategy for treating patients. We will look at some of the implications and tendencies that hospitals may be driven to due to the DRG system.

The assessment of costing varies from country to country, but there are 3 ways of determining costs for DRG groups. Using relative weights constructed from the average cost of each group, or "raw tariffs", which work similarly to weights, but unlike weights, differences in cost-effectiveness are expressed directly in monetary terms. A third method is the so-called "score", used in Austria and Poland, where individual cases are scored by a number of points - unlike the other methods, these points are not directly derived from the average cost of the group.

But there are differences in the systems in other areas too, for example, some countries have different weights for different counties, or have hospitals grouped according to how big a hospital's costs are. Also, some countries have a different approach to private and another to public hospitals.

As for the distribution of the DRG-based funding itself, hospitals can receive funding specifically from DRGs based on individual patient data, or they can receive a package from the state based on historical data and therefore their expected costs for the next year. The setup of the system then determines how the hospital will behave and whether it will try to spend this allocated package (in case it has to return the unspent amount) or whether it will save more (if it can keep it or if there is a set penalty for exceeding the package).

Hospitals face 3 main trends based on funding through DRGs:

Fortunately, most of the negative consequences can be and are limited in practice - for example, prolonged treatment time is penalised by setting an upper limit of treatment time for each DRG group in the system, and when the patient exceeds it, the hospital receives a lower contribution for the patient. There is also a long-term effort to make the DRG groups more precise, so that the groups are more homogeneous and thus their costliness more similar. Many countries have defined so-called "add-on items", which include costly procedures that are not necessary for every patient in a given DRG, but would overly affect the difference in cost between patients for whom it was necessary and others. The tendency to incorrectly code and assign patients to higher-cost DRGs is being addressed by controls at the hospital level and also by states. Such irregular checks encourage hospitals to be fair and reputable. In the long run, misclassification also does not pay off, as if enough hospitals misclassify patients into a different group, the regular recalculation of the weights will then change the weight of that group and thus make that group cost-ineffective in the future.

Despite all this, it is clear from the experience of these countries that the implementation of a DRG system is beneficial for the functioning of the hospital payment system if the process is gradual and if the DRG-based financing of hospitals is initially a smaller share of the total funding.