Simulating policy options for psychiatric care in general hospitals under Medicare's PPS

Psychiatric hospitals and certain distinct part psychiatric units of general hospitals are currently exempt from diagnosis related group (DRG)-based payment under Medicare's prospective payment system (PPS), in large part due to concern about the degree to which such payment would match historical costs for these facilities. This communication simulates DRG-based payments for psychiatric admissions to general hospitals under the PPS and also under a modified version of the PPS. Two major types of modifications are made: (1) an increase in the role of outlier payments and (2) a restructuring of the DRG classification to allow for a difference in the basic payment rate, depending on whether or not care is provided in a facility that is currently exempt. When compared with cost data from just before the start of the PPS, the simulation results show the degree to which these hypothetical modifications will decrease the systematic risk of general hospitals with exempt units from receiving payments that fall short of costs.