Medicare Payment To Psychiatric Facilities: Unfair And Inefficient?

Abstract

In retrospect, 1982 can be seen as a turning point in Medicare payment policy. The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 established a target amount of payment per discharge for all hospitals, placing reimbursement ceilings on total operating costs for the first time. When Medicare’s prospective payment system (PPS) was adopted a year later for general acute care hospitals, certain specialized facilities, including psychiatric hospitals and units of general hospitals, remained under a modified TEFRA system because of perceived inadequacies in the psychiatric diagnosis-related groups (DRGs). From 1984 to 1987, the number of psychiatric hospitals qualified to be paid under TEIRA grew by about one-third (Exhibit l), as did the number of total Medicare discharges. Psychiatric units in general hospitals paid under TEFRA also grew by one-third over this time period, but Medicare discharges from these units more than doubled. Clearly, during the early, transitional years of PPS, more Medicare patients were being assigned to PPS-excluded psychiatric units, perhaps to avoid losses from fixed DRG rates. Structural shifts of this magnitude demand a careful evaluation of the dynamic efficiency and equity of the TEFRA system.