Clinical and billing data were collected on all admissions to six California newborn intensive care units during a 6-month period. Charges were adjusted to costs using Medicaid cost to charge ratios and for inflation, and patients were classified by the diagnosis-related group (DRG) system. Costs were from 97% to 708% more than the proposed DRG reimbursement levels. Regression analysis showed that DRGs explained 22% of the variation in costs. An alternative model using binary variables to control for birth weight, assisted ventilation, surgery, survival, multiple births, and mode of discharge explained 42% of the variation in costs. In contrast to other proposed DRG alternatives, this simple model does not require special training or subjective decision-making.

To understand the sources of the high costs of neonatal intensive care, financial and medical information on 1,185 admissions to an intensive care nursery was gathered. Multiple regression analysis showed that a significant portion of the variation in individual costs was explained by three measures of risk: low birth weight, surgical intervention, and assisted ventilation. There was a highly skewed distribution of costs. Nearly half of all admissions had none of the above risk factors, had an average cost of about $2,000, and accounted for only 13% of the total costs for the whole sample. In contrast, less than one quarter of the admissions had two or more of the risk factors, had an average cost of $19,800, and accounted for nearly 60% of the total costs. Models that predict costs and length of stay on a basis of seven risk factors were developed to allow for differences in patient populations.