Medicare's Prospective Payment System Research Articles

Is Healthy Competition Healthy? New Evidence of the Impact of Hospital Competition

Competition among hospitals is commonly regarded as inefficient due to the medical arms race phenomenon, but most evidence for this hypothesis predates the Medicare prospective payment system and preferred provider legislation. Recent studies indicate hospital competition reduces costs and prices, but nearly all such research has focused on California. We add to the body of literature that analyzes the effects of competition in hospital markets. Using data from the state of Washington, we show that hospitals assume more risk in competitive markets by being more likely to accept prospective payment arrangements with insurers. If the arrangement is retrospective, the hospital is more likely to offer a discount as the number of competing hospitals increases. Both findings indicate that competitive forces operate the same in hospital markets as in most others: as the number of competitors increases, prices decrease and market power shifts from the suppliers to purchasers. The medical arms race hypothesis that favors more concentrated hospital markets no longer appears to be valid.

Health Care Finance and the Early Adoption of Hospital Information Systems

This study examines the adoption of hospital information systems (HIS), specifically focusing on the connection between the financing of health care and the adoption of these new technologies. Using a recently uncovered dataset detailing the systems installed at over 2300 hospitals, the results indicate that state price regulations slowed the adoption of these systems during the 1970's. In contrast, hospitals increased their adoption of HIS in response to the implementation of Medicare's prospective payment system. The evidence suggests that in the early years, these systems did not have the ability to save sufficient funds to justify their expense and adopters, in particular not-for-profit hospitals, were motivated by factors other than cost. By the early 1980's, this had changed: hospitals with the greatest incentives to lower costs were now more likely to adopt these technologies.

A Pilot Study of the Delivery of Occupational Therapy in Long Term Care Settings Under the Medicare Prospective Payment System

Objective: The purpose of this pilot study was to examine occupational therapists' perceptions of practice in skilled nursing facilities since the implementation of the Medicare Prospective Payment System (PPS).Method: A survey was sent to 250 randomly selected occupational therapists who had worked or were currently working in skilled nursing facilities for a minimum of two years.Results: A majority of therapists reported an increase in caseload size since the implementation of the new prospective payment system. Most also noted increasing expectations to maintain patients on their caseloads for longer periods of time. Many reported that their facilities were decreasing the number of level II fieldwork students they were accepting. An even greater number reported that their facilities were decreasing the amounts of their continuing education budgets. A significant number also reported that they felt the quality of life for their residents had decreased since the implementation of prospective payment.Conclusion: This pilot survey may indicate some problematic trends in occupational therapists' perceptions of practice in skilled nursing facilities. There may be a relationship between these trends and the implementation of prospective payment in these settings. Further studies are recommended to more deeply assess occupational therapists' practice perceptions, as well as the quality of life of patients in skilled nursing facilities. Research is also needed to determine if occupational therapists' perceptions of practice in skilled nursing facilities changes or stabilizes under the prospective payment system.

Data Mining and the Implementation of a Prospective Payment System for Inpatient Rehabilitation

This paper describes the development of a new Medicare Prospective Payment System (PPS) for inpatient rehabilitation care. Congress mandated such a system in the Balanced Budget Act of 1997. To help implement this system, we assembled four years of Medicare hospitalization data, linked it to rehabilitation hospitals' information about impairment and the functional status of patients, and developed case mix groups using the CART algorithm, a common method for determining groups in health services.

Does Competition under Medicare Prospective Payment Selectively Reduce Expenditures on High-Cost Patients?

Competition and prospective payment have been widely used to control health care costs but may together provide incentives to selectively reduce expenditures on high-cost relative to low-cost patients. We use patient discharge and hospital financial data from California to examine the effects of competition on costs for high- and low-cost admissions in the 12 largest Diagnosis-Related Groups before and after the Medicare Prospective Payment System (PPS). We find that competition increased costs before PPS, but that this effect decreased afterward, especially inpatients with the highest costs. We conclude that competition and PPS selectively reduced spending among the most expensive patients and that careful assessment of these patients' outcomes is important.

Effects of Competition Under Prospective Payment on Hospital Costs Among High- and Low-Cost Admissions: Evidence from California, 1983 and 1993

Competition and prospective payment systems have been widely used to attempt to control health care costs. Although much of the increase in medical costs over the past half-century has been concentrated among a few high-cost users of health care, prospective payment systems may provide incentives to reduce expenditures selectively on high-cost users relative to low-cost users, and this pressure may be increased by competition. We use data on hospital charges and cost-to-charge ratios from California in 1983 and 1993 to examine the effects of competition on costs for high- and low-cost admissions before and after the establishment of the Medicare Prospective Payment System (PPS). Comparing persons above and below age 65 before and after the establishment of PPS, we find that competition is associated with increased costs before PPS in both age groups, but decreased costs afterwards, especially among those above age 65 with the highest costs. We conclude that the combination of competition and prospective payment systems may result in incentives to reduce spending selectively among the most expensive patients. This conclusion raises important issues relevant to the use of competition and prospective payment to control costs. It also implies that, at minimum, there is a need to carefully monitor outcomes for the sickest patients under prospective payment systems in competitive environments.

Variations in utilization and cost of inpatient psychiatric services among adults in Maryland.

The author examined variations in the clinical characteristics, costs, utilization, and discharge patterns of adult inpatients who were hospitalized for psychiatric disorders in Maryland state general hospitals in 1998. Administrative discharge data on all 30,121 adult psychiatric patients in the state in 1998 were used to calculate descriptive statistics on elderly (age 65 years and over) and nonelderly (age 19 to 64 years) patients. The most common reasons for hospitalization were substance-related disorders, which affected 25 percent of the patients, and major depressive disorders, which affected 24.6 percent of the patients. After the effects of Medicare's prospective payment system were disregarded, the average cost of treating elderly persons for depression was calculated to be around 80 percent higher than national estimates.

Medicare's payment system: Its effect on discharges to skilled nursing facilities from rehabilitation hospitals

Objective: To determine if Medicare's payment system for rehabilitation hospitals encourages discharges to skilled nursing facilities (SNFs). Medicare payments to hospitals are based on limits derived from a hospital's average allowable patient charge during a base year. Thereafter, payments are capped, but hospitals receive additional incentive payments if succeeding costs are reduced. It was a hypothesis of this study that discharges to SNFs would increase after the base year. In this way, rehabilitation hospitals would limit high-cost patients when under reimbursement limitation.Methods: Medicare claims data for 162,239 discharges from 69 rehabilitation hospitals between 1987 and 1994 were analyzed. After controlling for patient and provider characteristics, we compared the odds of being discharged to a SNF before, during, and after the base year.Results: Before and during the base year, 4.7% and 6.6% of patients were discharged to a SNF. After the base year, 9% of patients were sent to a SNF After controlling for temporal and seasonal trends, as well as for patient and provider characteristics, those discharged after the base year were significantly more likely to be sent to a SNF than those discharged during the base year. These odds increased with increasing length of stay in the rehabilitation hospital. For those with a length of stay of 29 days (75th percentile) the odds increased by 11% (odds ratio, 1.11; 95% confidence interval, 1.04–1.18).Conclusions: The incentives of Medicare's reimbursement system may encourage an increase in the percentage of patients discharged to SNFs after the base year. These findings have significant implications regarding the structure of Medicare's prospective payment system currently planned for this class of hospital.

Nurses Basic Guide to Understanding the Medicare PPS

Nurse leaders grappling with changing reimbursement need to know the background and structure of Medicare's Prospective Payment System. The author explains case mix and Resource Utilization Groups, as well as applications for practice.

Outcomes after long-term acute care. An analysis of 133 mechanically ventilated patients.

Long-term acute-care (LTAC) hospitals are facilities exempt from the Medicare prospective payment system and which provide care to patients suffering from prolonged critical illness. From August 1, 1995 to July 31, 1996, we studied the outcomes of 133 mechanically ventilated patients who were consecutively admitted to a large urban LTAC hospital from intensive care units (ICUs) of acute-care hospitals. Survival and functional status within 1 yr after the index admission were measured, and specific patient variables were used to develop a predictive model for survival at 1 yr. Of the 133 patients studied, 66 (50%) died prior to discharge. Of discharged patients, 70% had been successfully liberated from mechanical ventilation. One year after LTAC hospital admission, 103 (77%) of the patients had expired, typically after spending the majority of their days in acute care or long-term care facilities. Eleven 1-yr survivors (8%) were fully functional, whereas the remainder had significantly reduced functional status. Patients older than 74 yr, and patients older than 64 yr and not functionally independent before admission, had a 95% (confidence interval [CI]: 84% to 99%) 1-yr mortality; patients without these characteristics had a 56% (CI: 41% to 71%) 1-yr mortality (p < 0.001). We demonstrate characteristics predicting the poorest prognoses for patients requiring prolonged mechanical ventilation. These characteristics may be identifiable before transfer to an LTAC hospital.

Evaluating Financial Risk in the Medicare Prospective Payment System

The Medicare Prospective Payment System (PPS) is analogous to an insurance scheme in which financial risk is mitigated through experience rating. In addition, risk is also mitigated through reinsurance provisions. Although a provider may not want this reinsurance, participation is mandatory. We develop a framework for evaluating financial risk under the PPS. We use this framework to examine optional reinsurance as an alternative risk mitigation mechanism. We illustrate an application of optional reinsurance using data for Medicare psychiatric inpatient services. Our analysis indicates that viable schemes exist for implementing optional reinsurance as a prospective payment option.

Outcomes after Long-Term Acute Care: An Analysis of 133 Mechanically Ventilated Patients.

Long-term acute-care (LTAC) hospitals are facilities exempt from the Medicare prospective payment system and which provide care to patients suffering from prolonged critical illness. From August 1, 1995 to July 31, 1996, we studied the outcomes of 133 mechanically ventilated patients who were consecutively admitted to a large urban LTAC hospital from intensive care units (ICUs) of acute-care hospitals. Survival and functional status within 1 yr after the index admission were measured, and specific patient variables were used to develop a predictive model for survival at 1 yr. Of the 133 patients studied, 66 (50%) died prior to discharge. Of discharged patients, 70% had been successfully liberated from mechanical ventilation. One year after LTAC hospital admission, 103 (77%) of the patients had expired, typically after spending the majority of their days in acute care or long-term care facilities. Eleven 1-yr survivors (8%) were fully functional, whereas the remainder had significantly reduced functional status. Patients older than 74 yr, and patients older than 64 yr and not functionally independent before admission, had a 95% (confidence interval [CI]: 84% to 99%) 1-yr mortality; patients without these characteristics had a 56% (CI: 41% to 71%) 1-yr mortality (p < 0.001). We demonstrate characteristics predicting the poorest prognoses for patients requiring prolonged mechanical ventilation. These characteristics may be identifiable before transfer to an LTAC hospital.

Bundled Medicare payment for acute and postacute care.

One legislative policy option for controlling postacute care costs is for Medicare to make a "bundled" payment to hospitals to cover episode costs: acute plus postacute care costs. But a bundled payment might not match the costs of treatment as well as payment now does under Medicare's prospective payment system (PPS). Simulating hospital margins with and without postacute care costs, this paper finds that risks to the typical hospital would not increase under postacute care bundling. A central characteristic of a bundled payment is that it would cover multiple providers. From this characteristic comes bundled payment's major strength: cost containment.

Services utilization before and after the prospective payment system by patients with somatization disorder.

This study analyzed services utilization before and after the implementation of Medicare's Prospective Payment System (PPS) in psychiatric patients with somatization disorder in two samples: one recruited before the PPS and the other after the PPS. Individuals with this psychiatric disorder present with multiple unexplained medical complaints and consume a great number of health resources. The results from this study indicated that Medicare PPS was associated with fewer hospital admissions and fewer hospital days, with a greater number of physician visits (for Medicare patients) and emergency room visits (for non-Medicare patients) and with lower overall health expenditures. However, there were no significant changes in the average length of stay after PPS. In contrast to previous studies, Medicare PPS was significantly associated with changes in service utilization by non-Medicare patients as well, a possible "spillover effect." This study confirms the results from other research indicating that higher levels of efficiency may be achieved for certain psychiatric disorders through prospective payment mechanisms.

Hospital-physician arrangements and hospital financial performance.

The introduction of the Medicare Prospective Payment System and the more recent rise of managed care plans have greatly increased the importance of effective hospital financial management. Because physicians play a central role in directing hospital resource use, policies to influence physician behavior and to align physician and hospital interests more effectively are being advocated increasingly. This article evaluates the effect of nine strategies to facilitate physician involvement and integration into the hospital on hospital financial performance. Data came primarily from the Prospective Payment Assessment Commission's hospital-physician relations survey of 1,485 hospitals and the Medicare Cost Reports. Both ordinary least squares and first differencing models were used to evaluate the effect of physician integration on hospital financial performance. Hospitals with lower margins and higher costs were more likely to have implemented strategies to integrate physicians and to modify physician behavior than their counterparts. Analysis using first differencing models indicated that making department heads responsible for the profits and losses had a significant positive effect on margins, whereas including medical staff on the hospital's board and offering physicians management services had a significant negative impact on average Medicare costs. In addition the number of strategies implemented was associated positively with financial performance. The paper also emphasizes the importance of model specification in evaluations of hospital-physician arrangements. Changes in hospital-physician relations may have been one reason why hospitals have been relatively successful at containing costs and retaining profitability in recent years. More research needs to be done on which specific arrangements affect hospital financial performance, as well as their effect on the quality of patient care.

The Impact of Health Care Reform on Capital Acquisition for Hospitals

AbstractIn this paper, the response of the market for hospital stocks to the episode of the Medicare Prospective Payment System (PPS) legislation and its resulting impact on the ability of hospitals to generate capital for expansion and growth are addressed. The response to PPS legislation is evaluated by examining stock returns of publicly traded hospital companies using both traditional event study analysis and intervention analysis. The paper focuses on the effect of PPS over time and uses qualitative data to support the empirical evidence. Before and after its passage, the market reacted negatively to PPS legislation. This result supports qualitative evidence showing that hospitals' capital positions were impaired. When profit margins fell, bond ratings went down, while borrowing costs increased; the rate of hospital bond defaults went up and capital improvements were delayed.

Factors Associated with Achievement of Goals for Home Health Care

ABSTRACT With the introduction of Medicare's Prospective Payment System (PPS) and DRGs, the economic value of home health care services lies in its ability to reduce total patient care costs by the substitution of outpatient home care for inpatient hospital care. Analysis of service delivery patterns utilized by home health agencies in meeting goals for patient care will be an important ingredient in meeting these objectives. The purpose of this study was to determine if important patient characteristics known at the onset of home health care are predictive of utilization of home health services and/or the likelihood of meeting goals for home care established at the time of certification of care. Multivariate models were developed which predicted the odds of terminating with goals met based upon age, intensity of utilization, functional limitations, prognosis, presence of a caregiver, and type of patient condition. Results indicated that variability in likelihood of meeting goals for care is much better predicted by patient characteristics than by utilization of home care services.

The impact of transfer patients on Medicare inpatient cost per discharge.

The cost of inpatient transfer cases has concerned hospitals as well as rate-setters. Reform of transfer payment in Medicare's Prospective Payment System has been suggested to ensure access and adequate treatment for these cases in a period where inpatient revenue has been declining. This analysis indicates that both transfer cases received and cases transferred to other hospitals have above average costs per case but their impact on Medicare inpatient cost per discharge is smaller than that of variables such as case-mix, area wages and resident/bed ratio which are used directly in PPS payment. Evidence is provided indicating the desirability of reform of PPS payment methods for transfer cases.

Potential Economic Impact of Glycoprotein IIb-IIIa Inhibitors in Improving Outcomes of Patients with Acute Ischemic Coronary Syndromes

Despite the institution of various cost control measures in the 1980s, healthcare costs have continued to rise. Following the adoption of the Medicare prospective payment system, the Health Care Financing Administration (HFCA) recognized the need to assess medical effectiveness as well as the cost of care. Coronary artery bypass graft (CABG) and percutaneous transluminal coronary angioplasty (PTCA) procedures have been reported as the primary cost drivers in hospitalized patients with unstable angina, a form of acute ischemic coronary syndromes. Evaluation of glycoprotein IIb-IIIa inhibitors as primary therapy for these patients suggests that good value for money is possible, especially if the use of these agents results in a reduction in revascularization procedures.

Managing Managed Care: A Comprehensive Costing and Contract Evaluation Model for an Era of Change

As the health care industry becomes more and more competitive, management has become aware of the need for increased information to help direct its operations from a present and future perspective. While hospitals recognized the need for this data with the inception of the Medicare Prospective Payment System, other delivery systems such as home health care agencies, long-term care facilities, and hospices (systems that had historically been sheltered from the economic pressures placed upon hospitals) are now realizing that information is necessary for survival. The demands of health care consumers (most notably patients and insurers) requiring quality care coupled with cost- efficiency are making home health care agencies more cognizant of data such as product costing, clinical profiling, and the economic effect of a proposed managed- care contract. A comprehensive costing and clinical information model can help agencies prepare for and respond to the challenges that are now upon them in this ever-changing industry.