Inpatient Psychiatric Care is Paid Differently than All Other Hospital Care
An APA Dispatch!
Psychiatric hospital care and general medical hospital care are paid for in completely different ways. In fact, on the financial backend, there are even two different types of payment models for psychiatric hospitals.
In every other medical condition, the payment model follows the same basic principles: (the patient) may get a hospital bill, and it's got a bunch of line items, and it's for a phenomenal amount of money, and then it gets knocked down to this or that.
This is Live Action Role Playing on the part of Big Health.
The truth? This that's not how any of the actual bills from Medicare or other payers are paid. The bill you see is a legal truth and practical fiction… if you have insurance. The song and dance and $400 Tylenol are all there to obscure the fact that everything is paid differently:
Diagnosis-Related Group (DRG): Under the DRG system, patients are classified into groups based on primary ICD-10 diagnostic code, surgical procedures, age, etc. Each DRG group has a fixed reimbursement rate. Hospitals receive a single payment per patient per DRG. This system “encourages efficiency and cost containment,” but at least it is internally consistent. It’s the prix fix menu approach to hospital payments.
So for medical hospitalizations, they're getting a lump sum. Examples (estimates, not exact numbers):
Heart failure and shock (DRG 291): This is a relatively common condition, but it can be serious. It might have a weight of about 0.7.
Major joint replacement or reattachment of lower extremity without major complications or comorbidities (DRG 470): This is a surgical procedure that might have a weight of about 2.0.
Tracheostomy with mechanical ventilation 96+ hours with major operating room procedure (DRG 207): This represents a very severe condition that requires significant resources. It might have a weight of about 8.0.
Below is the 2023 from is the AHA. The 2024 CMS data is here.
Each DRG's weight is then multiplied by a base payment rate, which is about $5000+ ish from Medicare. This can get multiplied by a LOT MORE in major payer contracting.
The hospital has every incentive theoretical incentive to take care of you in the most cost-efficient manner.
All of the negotiations is around the multiplier the hospital gets for the management of any given DRG in their setting. These multipliers for any DRG payment are considered proprietary by third-party payers.
Psychiatric hospitals don't work this way. They don't work one way. There are two different models with two different fee structures:
Per Diem: Under the per diem system, hospitals receive a daily rate for each day a patient is in the facility. This rate is meant to cover the costs of care, including room and board, nursing care, and other services.
Inpatient Psychiatric Facility Prospective Payment System (IPF PPS): The IPF PPS is a Medicare payment system specifically designed for inpatient psychiatric facilities. It determines payment rates based on a patient's diagnosis, age, and other factors, similar to the DRG system.
Similar to the DRG System Isn’t the Same As The DRG System.
There was no financial mechanism to pay for any innovative treatment in psychiatric hospitals…(yes, this is foreshadowing!)
General medical hospitals have a bunch of payments factored into the care of a cardiac patient. That care can involve MRI scanners, surgical interventions, Extracorporeal Membrane Oxygenation, and associated wizardry of modern medicine. If you come into the hospital with a heart attack, they factor in the cost of the cardiac catheterization lab that will save your life.
The separate billing schemes for psychiatry, until the 2024 CMS update that inspired this article, never imagined any technology being brought to inpatient psychiatric care. When I previously complained about the archaic nature of inpatient psychiatry, I did not understand this. Even the admittedly very nerdy healthcare economics enthusiast author of this column did not know these were different systems from a payment standpoint, much less two separate systems.
The practical upshot? The whole game for hospitals is about getting the most financially viable care per patient. The healthcare payers had the incentive to “deny days.”
There was no incentive on the part of inpatient psychiatry to get the person out the door quickly, efficiently, and well.
And that is on the verge of changing…Follow for More!
—O. Scott Muir, M.D.
Other factors can also increase the payment, such as if the hospital is a teaching hospital, if the hospital treats a disproportionate share of low-income patients, or if the patient is unusually costly ("outlier").