Processing costed inpatient episodes to cost weights for inlier equivalent separations: the ends should fit the means

Introduction A principal reason for investing in case mix as a tool for hospital administration is that it allows the value of production embodied in an episode of care to be different from the cost of that episode. Useful case-mix evaluation retains a statistical nexus between value and cost of production. The value placed on a hospital system’s output should fit with the aggregate cost of the episodes used to make that evaluation. This should apply at the case-type level. Case-mix funding and evaluation are seldom based on average cost of episodes within the same DRG. They are supplemented with risk sharing between funder and provider, and with compensatory factors for structural differences. Risk and structure are modelled. A standard value (cost weight) is assigned to each DRG. The value is related to the system-wide average cost of a LOS inlier (corrected for structural factors) in that DRG. The notion is that except for a constant multiplicative factor, the cost weight for a DRG is the expected cost of a LOS inlier episode in that DRG across the hospital system (after removing structural effects). Once risk and structure are accounted for, the fit between DRG level aggregate cost and value is harder to maintain. Almost invariably, the relative values assigned to different DRGs are distorted. The contention of this article is that if a collection of activity-based costing data has provided costs by DRG for a number of hospitals, then the result of applying any inlier equivalent cost weights generated from the data should return the system-wide cost of each DRG. The contribution of this article is an example and methodology to achieve this when the modelling of inlier equivalent separations includes policy, as well as data determined structure and parameters.