HOSPITAL ACQUISITION OF

COMPUTER SOFTWARE PROGRAMS

UNDER THE PROSPECTIVE PAYMENT

SYSTEM

EFFECT ON CASE MIX INDEX 
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OFFICE OF INSPECTOR GENERAL 
OFFICE OF ANALYSIS AND INSPECTIONS 
JANUARY 1990  HOSPITAL ACQUISITION OF

COMPUTER SOFTWARE PROGRAMS

UNDER THE PROSPECTIVE

PAYMENT SYSTEM

EFFECT ON CASE MIX INDEX 
Richard P. Kusserow 
INSPECTOR GENERAL 
OAI-02-801310  JANUARY 1990  EXECUTIVE SUMMARY 
PURPOSE 
This inspection assesses the possible impact of computer software used in medical records 
deparents on Medcare reimbursement 
BACKGROUND 
With the advent of the Prospective Payment System (PPS), hospitals began using computer 
softwar program to improve the accuracy of their codg of medcal records and to 
anticipate the amount of reimburement they would receive. Two tyes of software ar being 
used: the fist, caled encoders, assists hospita sta in translating medical record 
documentation into International Classifcation of Diseases - 9th Revision - Clinical 
Modfication (ICD- CM) diagnosis and procedur codes; the second, caled groupers, makes 
diagnosis-related group (DRG) assignments based on these codes. The softwar packages 
may contan a feature, caled an optizer, which presents compartive analyses of DRGs and 
may also resequence codes independent of the rules of codng. 
Hospitals submit these ICD- CM codes to their Medcare fiscal intennediares who convert 
them into the appropriate DRG for payment. Each DRG is assigned a numerical weight 
relative costliness of providing care. To provide a compartive measure of the 
reflectig the 
aggregate mi of patient DRGs among hospitals, a hospital-specifc case mix index (CMI) is 
computed. The CMI is the weighted average ofDRGs for that hospita' s Medicare discharges. 
The Prospective Payment Assessment Commssion (PoPAC), a congressionally-established 
mi 
indices to increase over time due to 
group responsible for evaluating PPS, expects case 
changes in medical practice and in the inpatient population. However, PPS is not intended to 
pay for higher-weighted DRGs resulting from improvements in coding practices. In its June 
1989 report to Congress, ProPAC estiates the cumulative increase in the per-case payment 
rates for the fIrst six year of PPS was 42.6 percent. 
ProPAC' s 1986 infonnal survey, which measured the extent of medical record coding changes 
and the impact of encoder and grouper software on codg, concluded that codg practices 
are changing in response to PPS incentives. However, no quantifcation could be made of the 
mi 
extent of coding change nor the amount of case  change attrbutable to changes in coding 
practices. 
Under contract to the Offce of Inspector General, the American Medical Record Association 
convened a conference in June 1988 of admnistrators of medical record deparents on the 
proper use of softwar as well as possible abuses. The conferees ' major rmding was the belief 
that misuse of optimizers, that is, maximization, was rae.  METHODOLOGY 
A strtifIed, two-stage, random sample of 250 hospitals was sureyed for infonnation about 
grouper and encoder softwar acquisitions between Januar 1982 and June 1988. Data were 
analyzed to determe whether any relationship exists between acquisition of a grouper or 
encoder and changes in a hospital' s CMI durng the months following acquisition. 
FINDING 
Software Did Not Affect Case Mix Index 
This analysis of software acquisition and Medicare case mix index data found that the 
presence of a grouper, an encoder, or both, did not have an independent effect on a hospita' 
CM!. This leads to the conclusion that the observed increases in CM! since the inception of 
PPS cannot be attbuted to the acquisition of software by hospitals. 
This rmding supports the views and experiences of the admnistrtors of medical record 
deparents expressed at the American Medical Record Association conference discussed 
earlier.  ..... .... .... .... ... ..... ... ...  .............................................. .... .... ................ .........  ........... ...... ... ...... ... .. ....... .........  ........ ... .......... 
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TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
N ... .... ...... 
NTRO D UCTIO 
E....... ..... 
PU RPOS  .......... ..... ....1 
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U N D 
BACKG RO 
................................................................. 3 
SCOPE AND METHODOLOGY 
FI N DI NG 

X A. ... .... .... ......... .... ... ....... ..... .....  ....... A - 1

APP EN DI 

American Medical Record Association Conference Report  INTRODUCTION

PURPOSE 
The purose of this inspection is to assess the possible impact of computer software used in 
medical records deparents on Medcar reimburement. 
BACKGROUND 
Hospita are reimbursed under the Prospective Payment System (PPS) based on the 
diagnosis-related group (DRG) into which a patient s medical condition is classifed, with 
varg 
payment  widely among 477 DRG classifcation categories. The PPS, admnistered by 
the Health Care Financing Admnistrtion (HCFA), results in payments to hospitals of more 
than $30 bilion a year. 
little fIancial incentive to review medical records and code 
Pror to PPS, hospitas had 
of medical record 
descrptive biling infonnation accurtely or completely. Translation 
priary 
descriptions of diagnoses and medical procedures into numeric codes was done  for 
statistical puroses unrelated to reimburement. Under PPS, hospitals now have rmancial 
incentives to more exhaustively abstract medical record data. 
DRG assignment is guided by the identification and codg of the pricipal diagnosis and up 
to four secondar diagnoses indicating medical complications and comorbidities. Additionally, 
up to thre procedures can be identifIed and sequenced based upon established rules of 
codng. Hospitals submit these International ClassifIcation of Diseases - 9th Revision 
Clinical ModfIcation (ICD- CM) codes to their Medicare fiscal intennediares who convert 
them into a DRG for payment. In practice, however, most hospitas also independently 
identiy the DRG. 
Although such codng and sequencing can be done manually, hospitas have increasingly gone 
to computerization of the DRG assignment process. Numerous consulting organizations, 
accounting fIrms and computer companies have developed two main tyes of softwar: the 
fIrst, called encoders, assists hospita staf in translating medical record documentation into 
ICD diagnosis and procedure codes; the second, called groupers, makes DRG assignments 
based on these codes. 
Competition among vendors has produced a wide aray of DRG software packages. The DRG 
modules may be independent systems or may operate as par of a hospital-wide infonnation 
management system. They may contan featurs to track admssion, intennediate, and final 
DRGs; to assist in quality assurance and utilzation review functions; and to collect case mix 
data. Another feature, called an optimizer, queries the user for the presence of other diagnoses  or procedurs, which could lead to a higher-weighted DRG. This prompts the user to explore 
patients ' char for the presence of additional evidence or to seek clarfIcation from physicians. 
Optimizers may also resequence diagnoses and proedure codes independent of the rules of 
codng and produce alternative DRGs. They may thus be used to produce either a more 
accurate DRG or a DRG which inappropriately maimizes reimbursement. 
-Each DRG is assigned a numerical weight reflecting relative hospital
The Case Mix Index 

use of resoures and thus the costliness of providing care. To indicate the compartive 
intensity of the aggregate mi of patient DRGs in a given hospita, HCFA computes a 
mi index (CMI, which is the weighted average of DRGs for a 
hospita-specific case 
hospital' s Medicare discharges. Increases in the CM!, or higher compartive CMIs among 
hospitals, indicate higher average payments per discharged patient. 
-The Prospective Payment Assessment
The Prospective Payment Assessment Commission 

Commssion (ProPAC) is a congrssionally- established group responsible for monitoring and 
Secrta 
makng recommendations to the  and Congrss on ways to 
evaluatig PPS and 
improve it. ProPAC expects case mix indices to increase over time due to changes in medical 
practice and the changing charcteristics of the inpatient population. These changes should be 
priary 
due to practice trnds such as (1) new and more costly technology causing cases to 
move to higher- weighted DRGs; and (2) PPS-induced movement of patients to outpatient 
care (reimbured on the basis of reasonable cost) for potentially less-complex, low-weighted 
DRG cases. These constitute legitimate or "real case mix change. " The PPS is intended to 
include compensation for this incrased use of hospita resources on more complicated cases. 
Other factors influencing the case mix index ar observed improvements in medical record 
documentation by physicians and changes in codng practices of medical record deparment 
staffs. However, PPS is not intended to pay for higher-weighted DRGs resulting from 
codg 
improvements in  practices, since such improvements do not reflect increases in 
resoures used in trating patients. 
The ProPAC June 1989 report to Congress estimates the cumulative increase in per-case 
payment rates for the fIrst six year of PPS was 42. 6 percent. This incrase (since 1983) 
attrbutable to PPS payment policy decisions and to the assignment of patient discharges over 
these year to higher- weighted DRGs. Changes to higher-weighted DRGs account for 28.4 
percent of the incrase, or twice as much as the 14.2 percent increase (simulated) due to policy 
decisions. An example of the latter was the trsition frm a combination of hospital-specifIc 
and national rates to entirely national average rates. 
The Commission has continuously addressed CM! increases in its studies and 
recommendations on maintaining and updating PPS. Each year it has acknowledged a lack of 
dermitiveness" in its estimates of real case mix change and of PPS coding-induced case mix 
change. Its 1986 infonnal surey, which measurd the extent of medical record coding 
changes and the impact of encoder and  that coding 
gruper softwar on codng, concluded 
practices ar changing in response to PPS incentives. However, no quantification could be  ...
made of the extent of codg change nor the amunt of case mix change attrbutable to 
changes in codng practices. 
- Under contrct to the Offce of Inspector
The American Medical Record Association 

General, the American Medcal Record Association (AMRA) convened a conference in June 
1988 of admnistrtors of medcal record deparents on the proper use of softwar as well as 
on possible abuses. The conferes' major rmdig was: "  the belief that misuse of optimizers, 
that is, maximization, was ra in practice; where mamition appears to have taen place, 
the cause most often is lack of knowledge or understadig of codng conventions and 
priciples resultig in inaccurate codng." They reommended that to eliminate 
maximization, codg accurcy must be strssed. And, while they believe many safeguards 
are in place which contrbute to accurcy, they identified severa studies which can furher 
enhance codg accurcy. 
The executive summar of AMR' s conference report appear as the Appendix. 
SCOPE AND METHODOLOGY 
A radom sample of 257 hospitals (stratified by bed size of less than 100 beds, 100-299 beds 
and 300 or more beds) was selected Each hospita was reuested to provide infonnation 
about grouper and encoder software acquisitions between Januar 1982 and June 1988. All 
hospitals, except seven which had closed, provided infonnation on dates of purhase or lease, 
obtaed. 
the name of vendors and the 
tyes of softwar packages 
The data from these 250 hospitas were analyze to determne whether any relationship 
existed between acquisition of a  and changes in a hospita' s CM!. For 
gruper or encoder 
each hospita included in the sample, a monthly CM! was calculated based on all PPS 
maitaed by HCFA as of September 30, 1988. Independent 
discharges recorded on fies 
cofactors were developed that classifed each hospita as to its geographic status (urban vs.
ru),  be 
teaching status (teaching vs. non-teaching), and  size. Along with these thee 
cofactors, the tota number of cases contrbutig to the constrction of the CMI was included 
tie 
series analysis. This time series analysis took the form of a regression model where 
in a 
the errr term is an autoregrssive process. That is, the value of the CM! for any month may 
imedately 
be explained by the severa independent cofactors as well as values of the CMI 
precedg the curnt value. A full model was constrcted which included al of the possible 
interaction tenns among the independent varables. The result of such an analysis is to 
estimate coefficients for each cofactor, and any interaction terms crated frm the cofactors, in 
an equation, and then to test whether these coeffcients differ signifIcantly from zero.  FINDING 
Software Did Not Affect Case Mix Index 
This analysis of softare acquisition and Medcare case mi index data found that the 
presence of a grouper, an encoder, or both, did not have an independent effect on a hospita' 
CMI. The coeffcients for the presence of a grouper, an encoder, or both, did not differ 
significantly from zero. We would conclude frm this analysis that we ar not able, with this 
data, to distinguish an increase in a hospita' s CMI due to the acquisition of this software. 
This rmding supports the views and experiences of the adnistrtors of medical record 
deparents expressed at the AMRA conference discussed earlier. 
NOTE:  Copies of the time series analysis and accompanying tables, as well 
as copies of the full AMR conference report, ar avaiable on 
request frm: 
Offce Of Inspector General 
Health Car Brach 
Room G-I0-C East High Rise 
6325 Securty Blvd 
Baltimore, MD 21207  APPENDIX A 
AMERICAN MEDICAL RECORD ASSOCIATION CONFERENCE REPORT 
The Issues of DRG Optimization from a Coding/DRG Grouping Perspective 
EXECUTIVE SUMMARY 
Purpose 
One of the issues in evaluatig the effectiveness and integrty of the Prospective Payment 
System (PPS) is DRG optimization and potential for maximization. The Offce of Inspector 
GeneraVOmce of Analysis and Inspections requested that a Conference of American Medical 
(AM) 
Record Association  members be convened to provide expert opinion on the proper 
use of aids available to manipulate infonnation in medical records for DRG assignments. 
Background 
The PPS was madated by Congress effective October 1, 1983. Under this system, hospitals 
are reimbursed, for inpatient services provided each Medicare patient, a specifIed payment 
based upon the case s classifcation into a diagnosis-related group (DRG). The DRGs are 
assigned from infonnation submitted on hospital clais. Inonnation required for DRG 
assignment includes the ICD- CM codes for the pricipal diagnosis and procedur sequenced 
fIrst; complications, comorbidities, and other procedures; and the age and sex of the patient. 
Assignment of the appropriate DRG for the case requires complete identication and accurate 
codng of diagnostic and procedural statements from the medical record and the correct 
abstracting of other patient data. 
Codng is the translation of verbal descrptions of diseases, injures, and procedures into 
numerical descrptions. The ICD- CM classification system curently requird for coding for 
DRG assignment was designed for the purose of reportng morbidity and mortality 
infonnation for statistical purposes, and for indexing of hospita records by disease and 
operations for data storage and retreval. As such, codng supports clinical research and many 
other health data needs. The codng system, however, was not designed as a classifIcation 
system for reimbursement. Thus, such use must be made with the full understanding that the 
nature of codng is reflective of the nature of medicine itself-it is not an exact science. There 
codg 
are specific conventions and principles governing codng, yet accurte  is dependent 
upon a multitude of factors which are descrbed in this report.  The natur of the codng process and its use in reimburement have resulted in the 
development of codng aids. Among these ar softwar aids: 
Encoders ar computerized aids to code assignment. 
Editors are computer programs which check for logical errors in data abstracted from the 
medical record and code assignments.

Groupers ar software which aids in branching thugh the DRG decision tres to assign 
aDRG. 
Optimizers, which interface with encoders and grupers, are aids to selectig the optimal 
DRG. 
Aids ar not limted to softwar, however, for code books, newsletters, coding hotlines, and 
codng consultants ar other ways hospitals are receiving offcial and unoffcial coding 
guidance. 
Findings 
The AMRA members parcipating in the Conference found it necessar to begi by defIning 
tenns associated with codng and DRG assignment. Parcipants next tured their 
attention to 
studies on the extent of use of computer-aided codng, DRG assignment, and optimization. 
Only very limited infonnation is avaiable, and is summarzed within the report. The major 
finding of the conferees was the belief that misuse of optimizers, that is, maximization, was 
rar in practice; where maxmization appears to have taen place, the cause most often is lack 
of knowledge and understading of codg conventions and principles resulting in inaccurate 
importt 
codng. The most  safeguard for preventing maximization or the appearance thereof 
then, is to ensur coding accuracy though adequate trning of coders, quality controls and 
other measures. 
Severa measures curently in place contrbute to codng accuracy. These include the Joint 
Commission on Accrditation of Healthcar Organizations' Agenda for Change, 
improvements in physician documentation as a result of the need for more accurate coding, 
AMRA's Code of Ethics and Professional Prctice Standards, educational progrms in coding, 
cooperation between significant pares to resolve codng issues, management system features 
for some encoder products, system security, and individual hospital medical record committee 
review of documentation. 
codg 
Severa research studies which would furher enhance  accurcy ar proposed in this 
report. These include analysis of hospital, PRO, and SuperPRO disputed codes, development 
of standardized methodologies and competencies for studies of codng accuracy, evaluation of 
A - 2
 all codng and grouping aids, monitoring of the effectiveness of crsswals between 
classification systems, and the more timely issuance of new codes and codng guidelines. 
Recommendations 
for the Conference focused on measures that could be taken to 
The recommendations resultig 
codg 
enhance understanding of the  proess and codng accuracy. The specific 
recommendations include: 
Utilize appropriate termnology in communications concerning codng and DRG 
grouping. 
Recognize the value of groupers, encoders, edtors, and optimizers as aids to 
codng and DRG  codng accuracy, and thereby 
gruping which wil enhance 
for hospitals and appropriate expenditures for the 
ensur fai reimbursement 
progr 
Medicare 
Continue efforts to eliminate fraud and abuse in the Medicare program by 
continually monitoring for maximization by any means, including misuse of 
optimizers. 
Recognize the safeguards curently in existence which contrbute to the 
codg 
enhancement of  accuracy. 
Conduct studies to enhance codng accuracy, as discussed in the fIndings. 
Institute cOlTective actions to ensure codng accuracy. 
A - 3