Assignment: Relative Value Scale

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Assignment: Relative Value Scale

Assignment: Relative Value Scale

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Medicare used the DRG rate schedule to provide incentives and penalties for certain physician ordering patterns. For instance, hospitals that performed open-heart surgery before trying angioplasty were punished with a low rate of reimbursement, whereas hospi- tals that performed successful angioplasty without open-heart surgery were rewarded with high reimbursement.

Capital costs were not initially affected by the DRG system. Prior to 1990, Medicare had reimbursed capital costs based on reasonable cost, meaning that Medicare reimbursed its share of capital costs regardless of use. For instance, if Medicare patients were responsible for 35 percent of the hospital’s operating costs based on the cost report, Medicare would reimburse 35 percent of the hospital’s capital costs.

The Omnibus Budget Reconciliation Act (OBRA) of 1990 folded capital costs into the DRG rate over a ten-year period, which meant that hospitals risked losing substantial reim- bursement if their buildings and equipment were not sufficiently used by Medicare patients. For instance, Medicare now reimburses hospitals their CT scanner capital costs based only on those DRGs for which a CT scan is medically necessary. If hospitals provide CT scans that are unnecessary for a certain DRG, the hospital’s costs for that DRG would exceed the reim- bursement and the hospital would lose money. Hospitals that had overextended their capital (that is, acquired more capital costs than would be reimbursed based on their DRGs) were forced to consolidate their assets through a sale or a joint venture (joint ventures with for-profit organizations were popular because the for-profits had access to additional sources of capital).

The Health Care Financing Administration (HCFA) resource-based relative value scale (RBRVS) of 1992 changed the way Medicare reimbursed physicians under Part B. Prior to 1992, Medicare had reimbursed physicians on the basis of “reasonable and customary” charges. By reimbursing physicians on an RBRVS, Medicare established a prospective, flat fee per visit, similar to DRGs for hospitals. Physicians who provided care for a lower cost than the established rate realized a profit; those who provided care for a higher cost than the established


group (DRG)

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