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Sign Up for an Account. Interpreter Services. In absolute terms, length of stay declined by almost 1 full day in fiscal year , compared with the largest pre-PPS drop of only one-half day. Figure 2 graphically depicts the downward trend in Medicare length of stay. The actual length of stay for fiscal year 9. This finding would appear to confirm a priori expectations as to the impact of PPS. This CMI increase was decomposed into the components shown in Table 5. The Rand study found that most of the CMI increase was accounted for by changes in documentation and coding, including improvements in data collection by the Medicare program.

Medical practice changes were also found to have accounted for a substantial portion of the increase. Other dramatic changes in hospital behavior are being observed under PPS. With decreases in both admissions and length of stay, hospitals are experiencing the lowest occupancy rates in memory.

For fiscal year , the American Hospital Association b reported an average occupancy rate of Not surprisingly, hospital staffing levels also dropped 2. At the same time, hospitals have reported sharp increases in profits. Surplus revenue the difference between income and expenses associated with treating patients for all U.

In addition, an analysis of a sample of Medicare Cost Reports by the Inspector General of the Department of Health and Human Services indicates that PPS payments were an average of 14 percent greater than operating costs for Medicare patients Kusserow, This increase in profitability, at a time when occupancy rates are falling, indicates that the Nation's hospitals are responding rapidly to the changing environment in the health care sector.

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The Medicare program accounts for some 27 percent of all expenditures on hospital care in the United States, clearly establishing Medicare as the largest single consumer of hospital services Gibson, Waldo, and Levit, Given the dominant role played by Medicare, and the dramatic change in the way that Medicare pays for hospital services under PPS, it would not be unreasonable to expect that the entire hospital payment environment might be altered by the new system.

This authority relieved the States of the requirement that their Medicaid programs follow Medicare's retrospective reasonable cost-based reimbursement principles, and enabled them to tailor their programs more specifically to their own policy needs.

Following the enactment of OBRA, several States began experimenting with prospective payment and other alternatives to retrospective reimbursement. With the implementation of PPS, States' activities in modifying their hospital payment methodologies have accelerated. A study of the 54 State and territorial Medicaid programs found that, as of October , 33 States and one territory had some form of prospective payment methodology in effect for hospital inpatient services Bill et al.

Data on recent trends in Medicaid utilization and expenditures from a study at Brandeis University Singer, , indicate decreases in the number of Medicaid users of inpatient hospital services and in the rate of growth of Medicaid payments for inpatient hospital services. These trends are consistent with trends in Medicare utilization and expenditures presented in this article, and suggest that the changes occurring in the health care sector may be broader than can be accounted for by PPS alone.

Blue Cross was begun in as a prepayment plan for hospital care for some 1, employees of Baylor University. The first Blue Shield plan, designed as a complementary prepayment plan for physicians' services, was organized 10 years later. By , nearly 86 million people had hospital insurance protection under Blue Cross and Blue Shield plans Health Insurance Association of America, Collectively, these plans comprise a large share of the hospital services market.

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Historically prior to the enactment of Medicare prospective payment , however, the majority of these plans have used cost-based reimbursement methods, with the remainder using charge-based systems. New Jersey has an all-payer DRG-based system. The use of prospective pricing in Massachusetts and New York is mandated by State law.

By the end of , the number of these HMO's had increased to 62, with a membership of 2 million. The causes of these changes have not been ascertained, but several factors are being considered in the study, including:. Although the organizational response of other third-party payers for hospital services has been mixed, with the Medicaid programs showing a tendency to move toward prospective payment and the Blue Cross and Blue Shield plans investigating other cost-containment strategies, the overall picture that is presented is the same.

A dramatic change is occurring within the health care sector, and new payment strategies are at the center of that change. The interactions among these strategies, and their effects on the health care sector, will continue to be a topic of study in the coming years.


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As hospitals respond to the system of incentives created by PPS, their decisions regarding the treatment of Medicare patients may have an impact on other providers of health care, particularly physicians and nursing homes. Currently, physician payment is based on Medicare customary and prevailing charge schedules, with increases in Medicare payment rates limited by the Medicare Economic Index.

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Therefore, the incentives provided by prospective payment do not apply directly to physicians. Responses of the pretest Survey sample, which included some physicians in five States, to a question on recent pressures by hospital management to change their patient management behavior are presented in Table 7. These results are consistent with the expectation that, under prospective payment, hospitals would encourage physicians to reduce ancillary services, shorten hospital stays, and increase outpatient testing.

An increased tendency to treat patients in nonhospital settings might also help to explain the surprising decrease in admissions under PPS. SNF's are currently reimbursed for routine costs per Medicare patient day, subject to an upper reimbursement limit, with hospital-based SNF's having higher limits than do freestanding SNF's. With hospitals seeking to reduce lengths of stay for Medicare patients under PPS, an increase is anticipated in the rate of transfer of Medicare cases to long-term care providers.

Data on SNF admission notices show a slight acceleration in the projected rate of increase in SNF admissions during fiscal year These preliminary indications appear to reveal a tendency under PPS to increase the care provided to patients in other than inpatient settings.

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To the extent that this tendency reflects an improvement in the coordination of health care provision among providers in ambulatory, inpatient, and long-term care settings, PPS may be seen as encouraging overall efficiency in the health care sector. To the extent that it represents a reluctance on the part of hospitals to offer patients the amount of care that they require, PPS may be seen as an impediment to necessary health care.

To date, there is no systematic evidence that access to needed care has been hampered by PPS. This issue, however, will continue to be monitored as better data become available.

Among the major concerns under PPS is the continued access of Medicare beneficiaries to appropriate health care, and the maintenance of the quality of care provided to these beneficiaries. The issues of access and quality are particularly important to certain groups within the Medicare population, such as the disabled especially the aged disabled , renal patients, the very old, and the aged poor, each of whom have special health and socioeconomic characteristics that make them particularly vulnerable to the incentives provided by the new payment system.

Because these groups are likely to require more intensive and thus more expensive care for a given type of inpatient episode, hospitals may tend to view them as potential money losers under prospective payment. On the other hand, certain incentives under PPS may serve to encourage improvements in access and quality. Because improved management is encouraged, the effectiveness of health care may be enhanced. Greater integration of health care delivery under PPS may result in the provision of more appropriate and effective care.

Hospitals are also encouraged to specialize in services and procedures that they provide most efficiently, which may improve outcomes in certain cases, as found in several studies Luft, ; Flood, Scott, and Ewy, a and b ; Lubitz, Riley, and Newton, In addition, the incentive to eliminate unnecessary services should result in an improvement in the quality of care.

Moreover, shorter hospital stays should reduce the risk of nosocomial infection and other iatrogenic events to which the elderly are especially vulnerable. The major provision for the monitoring of access and quality under prospective payment is the PRO program. This program represents an effort by HCFA to intensify the review of Medicare claims to ensure that the care rendered by the hospital is necessary, appropriate, and of acceptable quality.

Each PRO is required to be accountable for three admission and five quality objectives with certain exceptions in waiver States and exempt areas. Assurance that patients will receive complete treatment and adequate ancillary services. In addition to the PRO program, HCFA's survey and certification program is designed to ensure that hospitals and skilled nursing facilities SNF's are in compliance with the health and safety requirements of the conditions of participation in the Medicare program.

Of the approximately 6, Medicare participating hospitals, the individual States survey about 1, for compliance with the Medicare requirements. In anticipation of the increased need for monitoring the provision of health care under PPS, the conditions of participation are being revised to place more emphasis on outcome-oriented criteria. In particular, a new quality assurance condition has been proposed that would require hospitals to have an effective program to identify and resolve problems that affect the quality of patient care.

In addition, a number of previously existing requirements that specify procedures for ensuring quality have been incorporated into the proposed quality assurance condition, in the belief that a focused requirement will be a better vehicle through which to address the quality of care. Evaluating the effects of reimbursement and coverage policy on selected health care services.

A number of studies are currently under way for the purpose of evaluating the impact of PPS on access and quality. These studies are to focus on indicators of access and quality such as the availability of services by hospital, utilization patterns of Medicare beneficiaries, in-hospital and post-discharge mortality rates, rehospitalization rates, transfers between hospitals, and discharges to post-hospital care. In addition, several studies are to focus on methods for measuring the quality of inpatient care.

At present, there are no objective data indicating that access to care has diminished or that quality of care has declined as a result of the implementation of PPS. Within HCFA's Office of Research and Demonstrations, data on trends in admissions, length of stay, and total days of hospital care by beneficiary group have been examined, and it was found that the general decreases in those indicators observed in do not appear to be concentrated among any one group of beneficiaries Eggers, Although total days of hospital care per 1, beneficiaries decreased in fiscal year after remaining relatively constant in recent years, this decrease was spread evenly across beneficiary groups Table 8.

These analyses provide no indication of an access problem for particular patient groups. As previously discussed, there is evidence of some increase in the rate of hospital discharges to post-hospital care, but the impact of this increase on access or quality has not yet been ascertained.