Medicare Begins Prospective Payment of Hospitals

The federal government, moving with unusual speed and unanimity, has enacted sweeping Medicare legislation that reverses key economic incentives that have driven the behavior of hospitals since the federal program for the elderly began 18 years ago. The government replaced "reasonable" cost reimbursement with a policy that requires Medicare to establish and fix prices in advance on a cost-per-case basis, using as a measure 467 categories called "diagnosis-related groups" (DRGs). The Department of Health and Human Services (DHHS) Secretary Margaret M. Heckler hailed the new law as "the first major element in the President's health care reform plan.... It's the . . .