Paying More for Less: How DRGs Hurt Patients

It’s no secret: health insurance has made everything more complicated
and more expensive. Most of the time, we just pay our deductibles and
our co-pays and let the insurance take care of the rest. But behind the
scenes, a whole host of tricks and tactics take place between health
insurers and providers that most of us don’t even think about.

One such arrangement is the use of the contractual DRG, or the
“Diagnosis Related Group.” The DRG was originally developed by Medicare
in an effort to simplify payments and – supposedly – to make
reimbursement more fair. It works like this: instead of counting up all
of the individual pieces of treatment, equipment used, and medication
administered to a patient, Medicare figured out the average cost to
treat each patient with the same condition. For instance, for any
patient with the flu, Medicare figured out the average amount of money
it costs to take care of a flu patient. Then, it decided to pay
hospitals that same amount for each flu patient it treated – regardless
of how much the hospital actually spent on that patient’s care. This
means that, if a hospital could take care of a flu patient for less than
the average cost, it made a profit. On the flip side, if the patient
was “more expensive” than the average patient – that is, if he or she
required more advanced treatment or a longer hospital stay – then the
hospital had to eat any extra cost above and beyond the payment it
received.

There are two problems with this model. The first is obvious: it
encourages hospital to devote as few resources as possible to any given
patient. If the hospital is getting paid $3,000.00 to take care of a
patient, but can get away with releasing her after only $1,500.00 worth
of treatment – why wouldn’t it take advantage of that? Under this model,
it’s easy to see how hospitals can become too intent on maximizing
profit in exchange for doing the bare minimum to treat their patients.
The second potential problem is a little less obvious, but it is
something that we have started seeing in our line of work. Let’s say
you’re hurt in a car accident and you need an MRI that costs $1,500.00,
but you have no health insurance. You are going to be on the hook for
that $1,500.00, unless you can negotiate some kind of discount with the
hospital directly. If you later get a settlement from the accident, you
are simply getting reimbursed for what you’ve already paid out.

Now, imagine you’re hurt in a car accident and you need that same
MRI, but you do have health insurance. You pay your co-pay or
deductible, and your health insurance takes care of the rest. If you
later get a settlement from the accident, you may have to pay back your
health insurance for what they paid out. In most cases, an insurer has
an agreement with a hospital to pay a percentage of the overall cost of a
treatment. So, in most cases, your insurer would pay maybe $750.00 for
that MRI, so you’d owe them $750.00 out of your settlement. It’s one of
the reasons you have insurance, right? You consistently pay your
premiums so that you pay less for actual treatment when the need arises.

Not so with DRGs. Take this scenario: you’re hurt in a car accident,
you need a $1,500.00 MRI, but hey, it’s cool because you have health
insurance like you’re supposed to, right? Not so fast. If your health
insurance company has a DRG relationship with the hospital, it might be
contractually obligated to pay $3,000.00 for an MRI that only costs
$1,500.00. And you can bet they are going to come after you for the full
$3,000.00 when you settle your car accident case. You end up paying
more than the treatment actually cost – sometimes a lot more – just
because of some agreement your insurance company entered into with the
hospital that you know nothing about. You end up paying more than you
would have paid if you didn’t have insurance in the first place.

Fortunately, you won’t run into this situation unless you get a
settlement as the result of the injury you were treated for. But if you
are hurt in an accident, isn’t it bad enough that your whole life has
been turned upside down without your own insurance company trying to
make you pay twice as much as your medical bills actually cost? It’s
time for health insurers to take a long hard look at DRGs and ask
whether they truly serve their original purpose – fairness.