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Economic Grand Rounds: Inpatient and Partial Hospital Care Under Medicare
Lloyd I. Sederer, M.D.
Psychiatric Services 2001; doi: 10.1176/appi.ps.52.8.1023

Although private-sector managed care has received much attention in recent years, we should not lose sight of the fact that federal and state governments pay for about half of health care in the United States. Programs for the disabled, the poor, and the elderly are especially affected by government funding.

Medicare and Medicaid were established in 1965 by legislation that profoundly changed Social Security in this country. Medicare covers persons who are over 65 years of age as well as disabled persons under 65 whose employment history makes them eligible for Social Security Disability Income. Medicare part A, funded by taxes, pays for hospital treatment. Medicare part B, funded in part by beneficiaries, covers physician payments, among other services. Medicaid is a joint program of the federal government and the states; federal contributions average about half of total contributions, but state contributions vary (1,2).

Psychiatric services in hospitals, clinics, partial hospital programs, and physicians' offices are often highly reliant on federal funding through Medicare and Medicaid. An upcoming major change in Medicare part A hospital payment and ongoing difficulties with Medicare part A funding—and utilization review—of partial hospital psychiatric care warrant our attention and have been areas of work by the American Psychiatric Association (APA) through its components—committees, councils, and task forces—and its staff. In this column I briefly review the APA's activities in the areas of inpatient and partial hospitalization services. A future column will discuss Medicare utlilization review and reimbursement for outpatient care provided by physicians.

By virtue of sound scientific argument and advocacy by the APA in the early 1980s, inpatient psychiatric services were not brought under the prospective episode-of-care payment system based on diagnosis-related groups that was created for other medical specialties. The classification system was not believed to accurately differentiate among groups of psychiatric patients or their use of resources. With some exceptions, payment for inpatient psychiatric services has occurred through a system of cost-based reimbursement, which has played an important role in protecting hospital care for psychiatric patients (3).

However, the Balanced Budget Act of 1997 mandated that inpatient psychiatric services move to a system of prospective payment by October 2002 or soon thereafter. Although payment would not cover an episode of care, as with the system of diagnosis-related groups, a method would have to be developed for paying hospitals a fixed amount—but not the cost—for each day of necessary and appropriate care. Such an approach is called prospective per diem payment. The Health Care Financing Administration (HCFA), a division of the U.S. Department of Health and Human Services, was charged with developing and implementing a prospective payment system for psychiatric services.

The potential impact of changes in reimbursement for inpatient psychiatric services under Medicare part A is profound. The past 15 years have been extremely difficult for inpatient psychiatry as managed care has cut payments drastically and added great administrative burdens. Some changes in Medicare part A that were introduced immediately by the Balanced Budget Act of 1997 further compromised funding for many facilities. The effect of all the administrative and financial changes, both private and public, on inpatient programs over the past decade is that this country now has an overly managed, financially squeezed, and clinically precarious system of inpatient psychiatric services (4,5,6). Care must be taken to protect this system lest further economic impingement and administrative burden push it into an abyss of inadequate access and insufficient quality for patients who need hospital care.

Last year, the APA constituted a committee chaired by Joseph T. English, M.D., and cochaired by Steven S. Sharfstein, M.D., to focus exclusively on prospective payment. In conjunction with the APA offices of Healthcare Systems and Financing and the Division of Government Relations, this committee has initiated a variety of activities to advocate for our patients and our profession. We began by meeting with senior HCFA officials who were charged with developing and introducing a prospective payment system. We learned that two general methods—not mutually exclusive—would inform HCFA's efforts to reliably and accurately predict the use of clinical resources—and hence the cost—associated with an inpatient day, which is what prospective payment would require.

The first method, mandated by law, is a patient classification system, since the diagnosis-related groups that were introduced for other medical specialties still did not apply to psychiatry. The second method is a payment system based on predictors—other than patient classification—of resource use and costs. Under this method economic modeling based on other variables—such as type of facility, phase of inpatient stay (initial, middle, or end), base rates with supplemental service payment, and service intensity payment—could be used.

APA efforts to date have proceeded along multiple paths. We have reviewed classification efforts and economic models since the introduction of diagnosis-related groups and have summarized our findings in a report we provided to HCFA. We conducted a series of focus groups and telephone interviews of clinicians who were actively involved with inpatient care—APA members as well as nurses, psychologists, and social workers—to solicit their views about predictors of service use, per diem costs, and some existing patient classification instruments. We will be bringing this information to HCFA as well.

With the assistance of the Greater New York Hospital Association, we have begun a quantitative analysis of past and present Medicare payment systems. When we know more about the payment models that HCFA is considering, we plan to conduct economic simulations to try to determine the potential effect of these models on payments and services across the country. We have also contacted the Medicare Payment Advisory Commission, a congressionally mandated watchdog organization that serves the public interest regarding Medicare. In addition, we have been in touch with various other professional associations to try to coordinate and enhance our collective efforts.

Prospective payment will introduce considerable change and risk for psychiatric inpatient care. We cannot reverse the law. Our job will be to clinically inform the implementation of the law and to continuously assess and optimize its effects.

In 1987, through the Omnibus Budget Reconciliation Act, Congress extended Medicare coverage to psychiatric partial hospitalization as an outpatient benefit for the treatment of serious mental disorders. Partial hospitalization programs were initially covered in hospitals; in 1991 community mental health centers were also covered for this level of care (7).

The fundamental criterion for patient eligibility for this Medicare benefit was that patients would receive partial hospital care in lieu of inpatient care. In other words, partial hospitalization programs would have to abbreviate or prevent inpatient stays. Physician authority for admission as well as for continued care was established by requiring a physician to certify that the patient would need inpatient care if he or she were not partially hospitalized and mandating that the patient be under the care of a physician who would be responsible for establishing and periodically reviewing an individualized written treatment plan.

HCFA published a variety of regulations and memoranda over the ensuing years that were intended to clarify the partial hospitalization benefit and to establish review criteria. However, HCFA did not establish a "final rule" for these services. The effect of this omission was that in 1997 a group of private insurance companies that administered the Medicare benefit in various regions of the country issued a "model" local medical review policy for partial hospital services. In the absence of an HCFA national policy about what was covered by this benefit, other local review policies emerged across the nation. Unfortunately, the model local medical review policy in particular and other local policies in general depart significantly from the law that created the partial hospitalization benefit and from the HCFA regulations and memoranda that were subsequently issued.

The APA office of Healthcare Systems and Financing examined 28 sets of review criteria from Medicare fiscal intermediaries (which review partial hospitalization programs in hospitals) and carriers (which review partial hospitalization programs in community mental health centers). Widespread inconsistencies were found among these contractors in their policies, procedures, and coverage decisions. A result of these variations in—and even outright departures from—the law and HCFA memoranda has been pervasive denials of patient care. Too many patients have not been able to appropriately access the federal program services to which they are entitled by statute.

Although many service systems have successfully overturned denials by both fiscal intermediaries and carriers through administrative appeals, supporting the contention that benefits were not properly reviewed and administered, the appeal process is protracted, highly burdensome, and expensive. The adversity of the environment of Medicare reviews by intermediaries and carriers has also resulted in hospitals' and community mental health centers' closing partial hospitalization programs, cutting back services, or not developing partial hospitalization programs when the need exists.

In response to this troubling clinical problem of beneficiaries not having appropriate access to care—and these patients include persons with severe and persistent mental illness as well as geriatric Medicare populations—the APA formed a task force of member experts on partial hospitalization programs, of which I was chair while I chaired the Council on Healthcare Systems and Financing. This group worked closely with the APA office of Healthcare Systems and Financing to write draft review policies that we brought to HCFA to exemplify professionally developed national standards that are consistent with the laws and regulations and that are also clinically meaningful and programmatically feasible.

APA staff have begun a regular series of meetings with senior HCFA officials to seek remedies for the clinically inappropriate and highly varied review practices that are provided by Medicare intermediaries and carriers across the country. Our goal is to ensure proper access to partial hospitalization programs for patients in need as well as a fair and consistent review process for these programs. So far HCFA has welcomed our involvement as a constructive approach for beneficiaries, intermediaries, and carriers.

The now limited number of inpatient psychiatric beds and facilities, dramatic declines in average lengths of stay, and the stunted growth in spending on mental health and substance abuse treatment all point to an overly managed system of care whose future is precarious.

Partial hospitalization services, especially those that are federally funded, were covered by Medicare to replace inpatient days with medically appropriate partial hospital days. However, Medicare fiscal intermediaries and carriers, operating without a national review standard that is consistent with law and regulation, have seriously impeded the provision of medically necessary partial hospital care. Taken together, inpatient and partial hospital services have been imperiled by extrinsic, intrusive, and overly aggressive management processes. Because of the critical interrelationship between inpatient care and partial hospital care, further financial losses or greater administrative burdens in either one of these components of care will likely jeopardize the other.

This column has described the work under way by the APA, focusing on inpatient reimbursement and partial hospitalization review processes. Outpatient Medicare payment and review represent another critical area for patients and clinicians but warrant a separate discussion, as does Medicaid. The APA's activities in the areas of inpatient and partial hospitalization services are extensive but slow. Only a sustained, collaborative effort that is clinically and scientifically based will be heard. That effort has begun, and initial contact is promising. In the meantime, we urge all clinicians to continue to assertively advocate for their patients on a case-by-case basis.

Dr. Sederer is director of the division of clinical services of the American Psychiatric Association in Washington, D.C., and associate clinical professor of psychiatry at Harvard Medical School in Boston. Send correspondence to him at the American Psychiatric Association, 1400 K Street, N.W., Washington, D.C. 20005 (e-mail, lsederer@psych.org). Steven S. Sharfstein, M.D., is editor of this column.

Cano C, Hennessey KD, Warren JL, et al: Medicare part A utilization and expenditures for psychiatric services:1995. Health Care Financing Review 18(3):177-193,  1997
 
Rosenbach M, Ammering C: Trends in Medicare part B mental health utilization and expenditures:1987-1992. Health Care Financing Review 18(3):19-42,  1997
 
English JT, Sharfstein SS, Scherl DJ, et al: Diagnosis-related groups and general hospital psychiatry: the APA study. American Journal of Psychiatry 143:131-139,  1986
[PubMed]
 
Health Care Plan Design and Cost Trends:1988 Through 1997. Arlington, Va, Hay Group,  1997
 
Berman HJ, Kukla SF, Weeks LE: The Financial Management of Hospitals, 8th ed. Ann Arbor, Mich, Health Administration Press, 1994
 
Dickey B, Sederer LI: A Commitment to Quality: Concepts and Case Examples. Washington, DC, American Psychiatric Press, in press
 
Health Care Financing Administration: Review of the Medicare Partial Hospital Benefit. HCFA working paper OSP-00-1. Baltimore, HCFA Office of Strategic Planning, Feb 2000
 
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References

Cano C, Hennessey KD, Warren JL, et al: Medicare part A utilization and expenditures for psychiatric services:1995. Health Care Financing Review 18(3):177-193,  1997
 
Rosenbach M, Ammering C: Trends in Medicare part B mental health utilization and expenditures:1987-1992. Health Care Financing Review 18(3):19-42,  1997
 
English JT, Sharfstein SS, Scherl DJ, et al: Diagnosis-related groups and general hospital psychiatry: the APA study. American Journal of Psychiatry 143:131-139,  1986
[PubMed]
 
Health Care Plan Design and Cost Trends:1988 Through 1997. Arlington, Va, Hay Group,  1997
 
Berman HJ, Kukla SF, Weeks LE: The Financial Management of Hospitals, 8th ed. Ann Arbor, Mich, Health Administration Press, 1994
 
Dickey B, Sederer LI: A Commitment to Quality: Concepts and Case Examples. Washington, DC, American Psychiatric Press, in press
 
Health Care Financing Administration: Review of the Medicare Partial Hospital Benefit. HCFA working paper OSP-00-1. Baltimore, HCFA Office of Strategic Planning, Feb 2000
 
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