Overview

Abstract

The Medicare prospective payment system (PPS) for hospitals, implemented in 1983, has motivated major changes in the hospital industry and the way hospital services are used by physicians and their patients. By paying hospitals a fixed rate for each inpatient stay based on the patient's diagnosis-related group (DRG) classification, PPS gave hospitals new incentives to provide services economically. Because Medicare's PPS concentrated on inpatient services provided in acute hospital settings, this system did not apply to all hospitals and all services. Certain specialized facilities—psychiatric, rehabilitation, long-term care, and children's hospitals—were excluded from PPS. These types of facilities were excluded because DRGs did not readily apply to the types of care provided by these facilities, or the settings for this care were otherwise unsuited to the PPS. These hospitals have remained under the payment system established by the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. Medicare payments to TEFRA facilities are related to the hospitals' actual allowable costs, limited by a facility-specific cost-based target amount. As a group, the number of Medicare cases treated at excluded hospitals and units grew from 439,454 in fiscal year (FY) 1989 to 570,694 in FY 1991, a 30-percent increase. Children's hospitals treated the fewest cases (2,671 in FY 1991), with little change from year to year. Rehabilitation facilities experienced the greatest percentage increase in the number of cases during this period, rising from 144,252 in FY 1989 to 204,213 in FY 1991, a 42percent increase. Psychiatric facilities treated the most cases in FY 1991, 343,912, up from 276,209 in FY 1989. Payments to excluded facilities grew by 39 percent during this period, from $2.8 billion in FY 1989to$3.9 billion in FY 1991. Classification schemes such as the DRG system, which describe case mix and form the basis for payments to health care providers, are often a key to the development of new payment policies. Systems with greater precision can ultimately play an important role in measuring utilization and costs and in resource management. More precise systems will be increasingly important whether the country moves toward a more competitive managed care environment or toward increased constraints on health care budgets, as providers and payers need to project future costs and negotiate contracts based on patient needs and characteristics and manage util ization and costs. The theme of this issue of the Review is "Hospital Payment: Beyond the Prospective Payment System." Three articles present authors' ideas on how current payment methods for excluded hospitals might be modified in the future.