Cover: Evaluation of Alternative Methods to Establish DRG Relative Weights

Evaluation of Alternative Methods to Establish DRG Relative Weights

Published Apr 16, 2008

by Barbara O. Wynn, Molly M. Scott

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This working paper relies on quantitative analyses to evaluate different methods to establish the relative weights used in Medicare's prospective payment system for hospital inpatient services to adjust for average cost differences across diagnosis-related groups (DRGs)of patients. The alternatives use different methods to estimate case-level costs and/or to standardize for systematic differences in hospital costs. Analyses comparing each alternative set of relative weights to weights constructed using the current method found substantial differences in the weights across the alternative methods in specific DRGs and large redistributions across hospitals. However, regression analyses found none of the alternative weight methodologies improve payment accuracy. After data become available that reflect the implementation of severity-adjusted DRGs effective October 1, 2007, consideration should be given to accounting for systematic differences across hospitals in overall charging practices and in refining the standardization method that uses the hospital payment factors to account for systematic cost differences.

The research described in this report was prepared for the Centers for Medicare and Medicaid Services and was conducted within RAND Health, a division of the RAND Corporation.

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