A Preliminary Assessment Of Medicare's Prospective Payment System

Abstract

Book Review Health AffairsVol. 9, No. 3 A Preliminary Assessment Of Medicare's Prospective Payment SystemLaura A. Dummit AffiliationsHealth policy analyst for the Prospective Payment Assessment Commission (ProPAC) in Washington, D.C.PUBLISHED:Fall 1990Free Accesshttps://doi.org/10.1377/hlthaff.9.3.200AboutSectionsView PDFPermissions ShareShare onFacebookTwitterLinked InRedditEmail ToolsAdd to favoritesDownload CitationsTrack CitationsPermissionsDownload Exhibits TOPICSProspective payment systemMedicareQuality of careMedicare savings programsMedicare trust fundsHospital costsOrganization of careCost reductionCost growthPayment Louise Russell provides a preliminary evaluation of the Medicare prospective payment system (PPS) in Medicare's New Hospital Payment System: Is It Working? The author synthesizes existing data and new analyses addressing the title question. She focuses on three empirical issues: How has the delivery of services to Medicare beneficiaries changed? Have there been changes in the quality of care delivered to the elderly? Has the growth in Medicare expenditures been slowed? Changes in delivery of services.PPS, implemented in 1984, provides hospitals with incentives to reduce the cost of inpatient services. The dramatic decline in average length-of-stay with the implementation of PPS is largely a response to these incentives. At the same time, hospital admissions fell, even though a per case payment system such as PPS provides hospitals with incentives to increase, not reduce, admissions. Russell attributes most of the decline in admissions to the activities of peer review organizations (PROs). PROs were established with PPS to monitor the appropriateness of admissions and quality of care. However, it has not been demonstrated that PROs have changed hospital behavior. A recent study not presented in the book concludes that PRO admission review is not as effective as other review programs because most admissions are evaluated retrospectively, rather than prospectively. 1 The same study also noted that PROs flagged fewer admissions as inappropriate than other research studies have identified. Further, other factors contributed significantly to the decline in admissions. 2 For example, over the past several years there have been significant technology changes that make outpatient treatment possible for a wider range of conditions. Medical practice changes that lead to the decline in admissions are not well understood and need further examination. Changes in quality of care.The author begins the difficult task of assessing changes in quality of care by examining trends in mortality rates, hospital readmissions, and patient transfers. These statistics can suggest gross changes in quality of care. While inconclusive, her review indicates that there have been no major quality of care changes. The author continues by discussing the role of PROs in monitoring quality of care. She believes that a positive consequence of PPS is that it has focused more attention on evaluating quality of care. Her discussion also emphasizes the need for beneficiary-level data across sites of care.Growth in Medicare expenditures.One of the major goals of PPS was to control the growth in Medicare spending. To test whether PPS has achieved this, the author compares expenditure forecasts made before and after the implementation of PPS. These forecasts are made every year by the trustees responsible for evaluating the fiscal soundness of the Hospital Insurance (HI) Trust Fund, from which Medicare pays inpatient bills. The trustees base these projections on assumptions about the economy, medical service use, and demographic changes. After PPS, expenditure forecasts were considerably lower than the forecasts made earlier in the decade, even after adjusting for inflation and the unexpected decline in admissions. The author asserts that this is evidence that PPS has reduced Medicare hospital expenditures.The author also examines whether Medicare outpatient expenditures increased, thus offsetting savings for inpatient care, and whether other payers or beneficiaries are compensating for reduced Medicare outlays. She concludes that PPS has reducedMedicare inpatient program expenditures without commensurate cost increases for outpatient services or for other payers.In her comparison of expenditure forecasts, Russell demonstrates that HI Trust Fund projections made prior to PPS are consistent from year to year, after accounting for inflation. She provides no evidence, however, on how accurately they predicted actual expenditures. The difference in projections before and after PPS, therefore, may reflect forecast error, unrelated to PPS savings. In addition, other Medicare changes affecting third-party liability and covered benefits could account for some of the difference in projections.Russell's discussion would have been more informative if she had better integrated the data on changes in hospital costs, payments, and profit margins. Increases in Medicare cost per case slowed considerably in the first year of PPS but returned to previous levels after that. Hospital revenues increased substantially in the first year of PPS. These institutional-level data could help in understanding hospital managerial responses to the incentives of PPS. This, in turn, would be useful in assessing potential long-term changes in Medicare inpatient expenditures.Continued debate.Medicare changed dramatically with the implementation of PPS. Extensive evaluation and discussion is needed to understand the impact of such a major policy change. Russell states that her purpose in writing this book was “to present the evidence and contribute to the debate.” She achieves this by offering a strong introduction to the basics of PPS and outlining the major public policy issues related to its implementation and refinement.Evaluation of the effects of PPS on hospital costs, beneficiaries, and medical care, however, is far from complete. For example, we do not understand how hospitals respond to financial incentives. We need more information on how changes in hospital inputs such as staff and capital investments affect hospital costs and quality of care. Understanding these relationships and monitoring changes in quality become increasingly important as PPS payment rates become more stringent.NOTES1. U.S. General Accounting Office , Medicare: Improvements Needed in the Identification of Inappropriate Hospital Care, GAO/PEMD-90-71 ( Washington, D.C. : GAO, December 1989 ). Google Scholar 2. Prospective Payment Assessment Commission , Medicare Prospective Payment and the American Health Care System: Report to the Congress ( Washington, D.C. : ProPAC , June 1989 ). Google Scholar Loading Comments... Please enable JavaScript to view the comments powered by Disqus. DetailsExhibitsReferencesRelated Article Metrics History Published online 1 January 1990 InformationCopyright © by Project HOPE: The People-to-People Health Foundation, Inc.PDF download