All Saints Hospital is reputed for innovative care, introduction of advanced technologies, teaching and research. It has an inner-city location and serves a rapidly aging population.The chief source of funding for acute inpatients is private insurers and Department of Veteran’s Affairs. Together they pay for close to 90% of all inpatients and their mode of payment is based according to Diagnosis related groups. Since the hospital is in financial difficulty, its source of funding needs to be revisited and possibly an alternative manner of payment negotiated. A possible alternative payment may be per diem instead of based on DRG. Both DRG and per diem payment rate is based on International Classification of Diseases; for surgical cases per diem uses Medicare Benefits Schedule, which may not reflect hospital-relative cost. Both systems take into account average length of stay in the hospital, which is argued to be one major factor underlying financial difficulties. However, when close to one-fifth of the inpatients are over 65 years of age, average length of stay computed for all ages may not be a true representation of the case.
Aged patients are expected to have other co-morbid conditions, making their length of stay longer than the national average. Introduction of a per diem basis payment may take care of this aspect of the cost. However, in case of surgical patients, the flat per diem payment rates are based on very broad classifications and it may not always address the differential costing of treating less and more severe patients. DRG payment system is more efficacious to include additional diagnoses and complications as secondary diagnoses, thereby making adjustment to the costs (Ferguson 2004). There may also be a moral dilemma for a hospital to possibly overcharge if per diem system is adopted (Jian & Guo 2009). In case of All Saints Hospital that may not be important as this is a charitable hospital with a limited number of beds and serving an inner-city population. Moreover, being a teaching and research hospital, cost per patient is more compared to a non-teaching hospital (Gottlober et el. 2001). A better strategy from the hospital’s point of view may be to combine both modes of payment. Payment according to DRG may be added on by disproportionate share adjustment and outlier adjustment methods prevalent in United States (Centers for Medicare and Medicaid Services 2011). 2. Versions of DRG In November 2008 AR-DRG V6.0 has been released. This incorporates the sixth edition of ICD-10-AM/ACHI within the structure of AR-DRG version 5.2. Several new classes have been introduced to keep the system up to date where ventilation and ventilator support is necessary (Australian Govt Dept of Health and Ageing 2009). DRG separations are based on primary diagnosis (medical) or procedures (surgical) and presence of complications and/or co-morbidities. However, age is no longer a factor for DRG classification. While in AR-DRG V5.0 E66A (Major Chest Trauma Age > 69 W CC), E66B (Major Chest Trauma Age > 69 or W CC) and E66C (Major Chest Trauma Age < 70 W/O CC) took care of age-based splits, in AR-DRG 6.0 E66A (Major Chest Trauma W Catastrophic CC), E66B (Major Chest Trauma W Severe or Moderate CC) and E66C (E66C Major Chest Trauma W/O CC) combine patients of all ages in one single classification. The Chief Information Officer’s argument that the latest version of AR-DRG uses age as a factor, leads one to believe that All Saints Hospital may not be using AR-DRG V6.0. In fact Price Waterhouse Coopers (2009) found in their review of AR-DRG system that in many Australian states and territories AR-DRG V5.2 or even V4.2 is being used. These coding systems are not capable of correctly classifying the diagnoses or procedures in many cases. All Saints Hospital introduces new technology and is known for innovative care. The coding system needs to keep up with