Institutional responses to Medicare's prospective payment system

The introduction of Medicare's prospective payment system (PPS) meant an important change in the environment of US hospitals. The new payment system was expected to improve clinical and non-clinical efficiency in hospitals. A case study in a non-profit Pennsylvania hospital was performed to analyse the impact of PPS on hospital services. The hospital responded to PPS by a twofold strategy. First, attempts were made to achieve effective cost containment by improving the efficiency of intermediate and final outputs. Here special attention is paid to the activities of the DRG coordinator and the Utilization Review Committee and to the activities of nurses in their role as case manager. The second strategy was directed at revenue enhancement, initially mainly by shifting more costs to non-Medicare patients and later by trying to strengthen the position of the hospital in the local health care market. This second strategy was considered more important than the strategy of cost containment. With respect to organizational structure and policy-making, the following changes can be observed: a growing importance of strategic management; more integrated hospital-physician relationships; and the development of an adequate medical information system and a medical records department.