Assessing Medicare's Prospective Payment System for Hospitals

The Medicare prospective payment system for hospitals was created to slow the growth of government spending on health care. This analysis has shown that the program has accomplished its cost-containment objective in the first five years of its existence. The average length of hospital stay has dropped sharply under PPS, reducing hospital costs. These reduced costs combined with payments based on higher pre-PPS historic costs have given hospitals high profits in the early years of PPS. One of the expected but unwanted outcomes, more admissions, has never occurred. The unexpected rop in admissions under PPS has been responsible for government savings on Medicare inpatient care. Although Medicare outpatient hospital and physician expenditures have grown at fast rates during PPS, there is no evidence in aggregate date that they have grown any faster because of inpatient care shifting to avoid PPS payment controls. The Medicare PPS savings have extended to all U.S. hospital spending, which has grown at much slower rates since the implementation of PPS. There have also been negative outcomes from PPS, and some questions posed about PPS remain unanswered. The inflation in "DRG creep" or upcoding that was predicted for PPS did occur. The government has since washed much of this code inflation out of the permanent payment base, but this phenomenon may not be a self-limiting problem, as was widely hoped. To date there is no convincing evidence of poorer quality of care under PPS, but most of the available evidence is based on mortality studies, which have limited use in measuring changes in quality of care. While PPS has helped to slow the growth in Medicare and national hospital spending, it has not had an appreciable effect on the rate of growth in the nation's total health spending. Although it was unintended, PPS has been providing a natural experiment on the issue of whether increased cost sharing dampens demand for health care services. By slowing the growth rate of inpatient hospital spending, PPS has increased the share of Medicare spending under SMI, where beneficiaries have higher coinsurance. The short-run beneficiary response appears to be an increase in demand for Medi-gap health insurance rather than a dampening of demand for services. To this point it appears that Medicare's PPS has been successful in containing the growth in hospital costs while avoiding, or managing, unwanted consequences. (ABSTRACT TRUNCATED AT 400 WORDS)