Good quality care increases hospital profits under prospective payment

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.