The financial effects of emergency department-generated admissions under prospective payment systems

The purpose of this study was to assess the financial impact (revenues vs expenses) as measured by hospital charges and costs vs diagnosis-related group (DRG) revenues of prospective payment systems on emergency department-generated admissions for a large teaching hospital under two payment systems: Medicare and an all-payor system. All emergency department admissions were analyzed for the years 1983 (N = 4,273) and 1984 (N = 4,125) under both systems, using standard DRG methodology. Our findings were as follows: (1) With charges as a measure of expense under both payment schemes, all clinical departments had large groups of unprofitable patients: Medicare, $12,895,038; all-payor system, $15,553,893. (2) When costs were computed as the expense measure (using our hospital's cost-to-charge ratio), Medicare patients produced a deficit ($2,363,163); however, under an all-payor system there was a small net profit ($4,267,859). (3) The implementation of federalized DRG reimbursement rates increased our losses for this population from 1983 to 1984. (4) Reductions in outlier reimbursement (10%) and teaching costs (25%) caused our revenues to drop substantially, potentiating our losses. These findings suggest that hospitals with large emergency department admission populations, particularly Medicare patients, may be at a significant financial disadvantage under prospective payment systems.