Protecting, maintaining and
improving the health of all Minnesotans
Staff Update: Number of Hospital Peer Groups,
Case Mix and Risk Adjustment Method

At the June Advisory Committee meeting we requested input on the possible division of
Prospective Payment System (PPS) hospitals into three peer groups, instead of two. We wanted
you to address this issue because some stakeholders have strongly voiced concerns that certain
hospitals are potentially disadvantaged in the cost comparisons made with other PPS hospitals
because they receive add-on payments in support of certain services or deliver more complex
services. Concerns have been raised about hospitals that:
o
Provide a higher intensity of medical education;
o
Provide higher proportions of uncompensated care;
o
Provide higher-level trauma care; and/or
o
Generally provide more care for complex conditions for patients at the highest severity
levels.
MDH staff recommended retaining only two peer groups.

At the meeting, several advisory group members stated that a third peer group would not be
necessary if the PPG risk/case mix adjustment method better accounted for differences in
service mix across hospitals. MDH staff acknowledged having a difference of opinion with the
RRT on two points regarding this issue:
o
We have not favored hospital-level service-mix adjustment.
o
Unless there is clear evidence of bias, we do not want to “adjust away” all cost
differences because demonstrated variations in health costs do have value to
consumers.
Since the June meeting, an additional suggestion related to case-mix was proposed by another
stakeholder. This suggestion asserts that fair comparisons would require cost adjustment
against a standard PPS hospital population – referred to as “direct standardization.”
This brief is to provide additional high-level context for members of the Advisory Committee.

To enable fair provider comparisons, current methods to balance risk and service mix
differences between facilities employ a multi-prong approach:
o The current method uses the 3M All Patient Refined DRG System (APR-DRG) to group
visits into clinically meaningful groups by different severity-of-illness categories.
85 East Seventh Place • PO Box 64882• St. Paul, MN, 55164-0882 • (651) 201-3560
http://www.health.state.mn.us
An equal opportunity employer
Protecting, maintaining and
improving the health of all Minnesotans
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This system uses differences at the patient level instead of at the population level – in
other words, a specific accounting of differences in case mix – to adjust for case mix
differences.
The risk adjustment method acknowledges that there are some service types that are
too rare to adequately correct for. It removes hospital visits for burn units and
transplants.
Outliers, or really costly cases, can bias average cost numbers. To adjust for that, we use
statistical methods to cap high payments at certain levels. For the latest report we are
working on, we further refined the outlier correction by establishing levels for different
clinical groups, instead of using a single outlier measure.
We also experimented with additional statistical adjustments to improve the strength of
the risk adjustment model.
Despite these adjustments, there may be additional differences in the characteristics of the
facilities being compared that impact cost. However, results that demonstrate variation in
health costs are at the very core of transparency and are policy relevant to the peer grouping
mandate.
85 East Seventh Place • PO Box 64882• St. Paul, MN, 55164-0882 • (651) 201-3560
http://www.health.state.mn.us
An equal opportunity employer