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Assessing Medicare's prospective payment system for hospitals
1Health Care Financing Administration, Baltimore, MD.
Medical Care Review
|February 3, 1992
Summary
The Medicare prospective payment system (PPS) successfully reduced hospital costs and slowed spending growth. While it led to some upcoding, evidence does not show poorer quality of care or increased outpatient spending due to shifting.
Area of Science:
- Health Economics
- Public Health Policy
- Healthcare Management
Background:
- The Medicare prospective payment system (PPS) was implemented to control escalating healthcare expenditures.
- Previous healthcare payment models did not effectively curb government spending growth.
Purpose of the Study:
- To evaluate the cost-containment effectiveness of the Medicare prospective payment system (PPS) in its initial five years.
- To assess the impact of PPS on hospital stays, admissions, and overall healthcare spending.
Main Methods:
- Analysis of Medicare hospital payment data before and after PPS implementation.
- Examination of trends in average length of hospital stay, admission rates, and outpatient expenditures.
- Assessment of national hospital spending growth rates post-PPS.
Main Results:
- Medicare PPS achieved its cost-containment objective, significantly reducing average hospital length of stay and associated costs.
- Hospitals experienced high profits in early PPS years due to reduced costs and higher pre-PPS payment rates.
- Unexpectedly, admissions did not increase; instead, they decreased, contributing to government savings.
- While Medicare outpatient and physician spending grew, there's no evidence of increased growth due to shifting from inpatient care to avoid PPS controls.
- Overall U.S. hospital spending growth slowed considerably after PPS implementation.
- Predicted "DRG creep" (upcoding) occurred, though largely corrected by the government.
- No convincing evidence of poorer quality of care was found, but current measures (mortality studies) are limited.
Conclusions:
- Medicare PPS has been successful in controlling hospital cost growth and managing unintended consequences.
- The system slowed Medicare and national hospital spending but had limited impact on total national health spending growth.
- PPS inadvertently created a natural experiment on cost-sharing, showing increased demand for supplemental insurance rather than reduced service utilization.