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Good quality care increases hospital profits under prospective payment
Abstract:
This study shows that, contrary to popular belief, the prospective payment system discourages skimping on medically indicated care. The quality of care on a nationally representative sample of Medicare discharges underwent judgmental review using implicit criteria. The reviewing physicians identified hospitalizations that omitted medically indicated services and diagnoses overlooked because of this skimping. After deduction for the cost of the omitted services and probability of negative diagnostic tests, good quality care would have increased hospital profits a significant 7.9 percent. As the specificity of diagnosis and intensity of treatment increase, the DRG payment rises faster than the cost of providing medically indicated services.
Insights
Contrary to expectations, the prospective payment system incentivizes quality care, not skimping. Providing medically indicated services for Medicare patients actually increases hospital profits, demonstrating value-based care benefits.
Area of Science:
- Health Economics
- Medical Quality Assurance
- Healthcare Policy
Background:
- The prospective payment system (PPS) is widely believed to encourage healthcare providers to reduce the quality of care to cut costs.
- Concerns exist regarding potential 'skimping' on medically indicated services and diagnoses under PPS reimbursement models.
Purpose of the Study:
- To investigate whether the prospective payment system (PPS) discourages or encourages skimping on medically indicated care.
- To assess the financial impact of providing high-quality care versus potentially skimping on services within the PPS framework.
Main Methods:
- A nationally representative sample of Medicare discharges was analyzed.
- Judgmental review by physicians using implicit criteria was employed to assess the quality of care.
- Identification of hospitalizations with omitted medically indicated services and overlooked diagnoses due to skimping.
Main Results:
- Contrary to popular belief, the PPS was found to discourage skimping on medically indicated care.
- Providing good quality care, including all medically indicated services, would have increased hospital profits by a significant 7.9 percent.
- Diagnosis-Related Group (DRG) payments rise faster than the cost of medically indicated services as diagnostic specificity and treatment intensity increase.
Conclusions:
- The prospective payment system does not inherently lead to skimping on care; it can incentivize quality.
- High-quality medical care is financially viable and potentially more profitable under the current PPS structure.
- Financial incentives within the PPS align with the provision of comprehensive and medically indicated healthcare services.