The first 3 years of Medicare prospective payment: an overview.

This article provides a synopsis of the available evidence on the impact of the Medicare prospective payment system (PPS) for hospitals over the first 3 years of its implementation. The impact of PPS on hospitals, Medicare beneficiaries, post-hospital care, other payers for inpatient hospital services, other health care providers, and Medicare program operations and expenditures is examined.     

Medicare dependent hospitals: who depends on whom?

Small rural hospitals with a large proportion of Medicare patients currently receive special treatment as Medicare dependent hospitals (MDHs) under the prospective payment system (PPS). Other high Medicare hospitals (HMHs)--both urban and rural--have sought to have the additional per case payments extended to them. Current utilization patterns, the availability of alternative facilities, and the socioeconomic and demographic characteristics of the service areas were examined to determine whether either the current MDH or alternative HMH targeting criteria identify hospitals whose closure might impair access to care for Medicare beneficiaries residing in their service areas. Neither MDHs nor HMHs are substantially different from other hospitals in terms of providing access. While some individual MDHs or HMHs might be considered essential access facilities, alternate criteria should be developed to identify these facilities regardless of the proportion of their patients attributable to the Medicare program.     

Vertical integration strategies: revenue effects in hospital and Medicare markets

The purpose of this study was to evaluate the revenue effects of seven vertically integrated strategies on California hospitals. The strategies investigated were managed care contracts, physician affiliations, ambulatory care, ambulatory surgery, home health services, inpatient rehabilitation, and skilled nursing care. The study population included 242 not-for-profit hospitals in continuous operation from 1983 to 1990. Many hospitals developed vertically integrated programs in the 1980s as inpatient utilization fell in response to the Medicare Prospective Payment program. Net revenue rose on average by $2,080 from 1983 to 1990, but fell by $2,421 from the Medicare program. On the whole, the more physicians affiliated with a hospital, the higher the net revenue. However, in the Medicare population, the number of managed care contracts was significant. The pre-hospital strategies generated significant revenue, while the post-hospital strategies did not. In the Medicare program, inpatient rehabilitation significantly reduced revenue.     

Medicare's New Hospital Value-Based Purchasing Program Is Likely To Have Only A Small Impact On Hospital Payments

Medicare's new hospital pay-for-performance program for all acute care hospitals will begin in October?2012. It will be the largest Medicare quality improvement initiative for hospitals to date. Using 2009 data on hospital performance, we calculated hospital performance scores and projected payments under the new program for all eligible hospitals. Despite differences across hospitals in terms of performance, expected changes in payments were small, even for hospitals with the best and worst performance scores. Almost two-thirds of hospitals would experience changes of just a fraction of 1 percent. Although the program will in effect redistribute resources among hospitals, our data suggest that the redistribution is not likely to cause major problems because the amount being redistributed is also small. These results raise questions about whether the new pay-for-performance program will substantially alter the quality of hospital care, and they highlight the challenges of designing effective quality improvement incentives.     

Pay-for-performance: the MedPAC perspective

Medicare payment systems are neutral and sometimes negative toward quality of care. The Medicare Payment Advisory Commission (MedPAC) has recommended that Congress build incentives for quality into Medicare's payment systems for hospitals, physicians, home health agencies, facilities that treat dialysis patients, and Medicare Advantage plans. In this Commentary we describe the rationale for the recommendations, criteria for determining which settings are ready, program design principles, and potential measures.     

The Payment Error Prevention Program (PEPP): reducing Medicare payment errors in prospective payment system hospitals

Peer Review Organizations (PROs) are charged by the Health Care Financing Administration (HCFA) to assist in protecting the integrity and solvency of the Medicare program. Recent audits of the Medicare program from the Office of Inspector General (OIG) revealed that more than $12 billion Medicare dollars in 1998 were spent in improper payments, with more than 25% attributed to prospective payment system (PPS) hospitals. The Payment Error Prevention Program (PEPP) is an initiative designed by HCFA in 1999 to assist PROs in meeting the goal of reducing payment errors in PPS hospitals. PEPP is implemented through the development of quality improvement (QI) methodologies. These projects are designed to achieve measurable improvements in processes and outcomes of payment errors. PEPP works to reduce payment errors at PPS hospitals through cooperative efforts with Ohio agencies and licensing boards, federal law enforcement organizations, HCFA contractors, hospital medical staffs, and medical and osteopathic associations.     

Hospital ownership and cost and quality of care: is there a dime's worth of difference?

Nonprofit organizations may predominate when output quality is difficult to monitor. Hospital care has this characteristic. This study compared program cost and quality of care for Medicare patients hospitalized following onset of four common conditions by hospital ownership. Payments on behalf of Medicare patients admitted to for-profit hospitals during the first 6 months following a health shock were higher than for those admitted to other hospitals. With quality measured in terms of survival, changes in functional and cognitive status, and living arrangements, we found no differences in outcomes by hospital ownership.     

Hospital compliance on a budget

Community and rural hospitals are among the last to jump aboard the compliance program bandwagon. For many, it boils down to a belief that a plan either is not necessary or not affordable. Ellen Beck profiles the special issues that smaller hospitals face amid government investigations into Medicare/Medicaid billing fraud.     

Medicare's operational history and impact on health care

Medicare was originally designed in the 1960s to fit into the existing health care delivery system. However, the program's early years showed an inflationary impact on health care costs. Medicare was the second largest federal domestic program and the fastest growing one, making it a target for those concerned about the size of government in general. By 1980, Medicare constituted 15% of the nation's expenditures for personal health care; and Medicare's administrators recommended substantive changes in provider payments through the introduction of the prospective payment system. Prospective payment system legislation impacted hospitals initially and later skilled nursing facilities and home health agencies. As policymakers made changes in Medicare payments to providers, providers made changes in the way services were delivered. What eventually evolved, in an insidious manner, was implicit management of the nation's health care delivery system by the Medicare program.     

A statistical analysis of the Medicare hospital routine nursing salary cost differential.

From July 1971 (but effective retroactively to July 1, 1969) to October 1981, Medicare hospital reimbursement methods assumed that patients in the qualifying categories of the aged, pediatric, maternal, and kidney transplant cases consumed 8.5 percent more routine nursing resources than patients outside these categories. Consequently, the Medicare program paid this nursing differential to hospitals for all its hospitalized beneficiaries in these categories. The purpose of this study is to investigate whether hospitals with more qualifying Medicare patients do, in fact, have higher per diem routine nursing salary costs. This study tests this hypothesis while attempting to hold constant the influences of other factors such as local area wages, hospital size, occupancy rate, type of control, and geographic region. Using 1979 data from over 4,500 hospitals, and 1977, 1978, and 1979 data from a sample of 1200 hospitals, this study looks at the relationship between per diem hospital routine nursing salary costs and the proportion of qualifying Medicare routine patient days in two models. Model I incorporates the framework of the Section 223 routine cost limits and Model II incorporates a comprehensive set of variables representing the hospitals' production and output characteristics. The evidence from this study provides little empirical basis to support the existence of a strong or sizeable relationship and, hence, does not support payment of the Medicare routine nursing salary cost differential.     

Substitutability among different types of care under Medicare.

The question of whether Medicare coverage of outpatient services, nursing home care, and home health care reduced the use of short-term hospitals by Medicare beneficiaries, and whether reduced hospital use saved the Medicare program money, is reexamined by use of a simultaneous-equations model estimated by the two-stage least-squares method. It is argued that all alternative modes of care must be examined simultaneously for accurate results. The findings partly support and partly contradict results of previous studies: both outpatient care and nursing home care can substitute for hospital care, but a complementary relationship between outpatient and nursing home care indicates that the additional coverage resulted in greater, not less, expenditure by Medicare.     

Lessons from the Essential Access Community Hospital Program for Rural Health Network Development

The Essential Access Community Hospital (EACH) Program is testing a concept for limited-service hospitals established under Medicare called the Rural Primary Care Hospital (RPCH). The program uses cost-based reimbursement and relaxed regulatory requirements to help low-volume rural hospitals shift emphasis from acute care to primary care and emergency services. RPCHs must form "horizontal" networks with larger hospitals and may form "vertical" arrangements with ambulatory service providers and practitioners. A small number of rural hospitals have converted to the RPCH status since the program entered the implementation stage in late 1993. It is unclear how many other hospitals will convert given uncertainty regarding the financial impact of RPCH conversion and concerns with certain requirements. The program illustrates how payment policies can provide incentives for network development and reflects the importance of physician involvement and technical assistance in developing limited-service hospitals. In addition, it appears that EACH/RPCH networks that form under the program may serve as building blocks for broader networks, as the seven states involved in the program look to develop rural health networks that go beyond the EACH/RPCH model.     

Where Does the Money Go? Analyzing the Patient Experience in Safety-Net Hospitals

BackgroundLow-income, publicly insured admissions historically cost more to treat than does the average patient. To ensure that hospitals are reimbursed an adequate amount for care of indigent populations, Medicare reimburses hospitals an additional percentage amount according to federally set financial schedule. At 15% of a disproportionate patient percentage, a hospital is reimbursed an extra 2.5% of the standard prospective payment rate.ObjectiveThis research seeks to determine whether hospital qualification as a Medicare Disproportionate Share Hospital results in higher patient experience ratings.MethodsA regression discontinuity method was used to determine the effect of lagged Disproportionate Share Hospital (DSH) status on next year patient experience ratings. The Hospital Consumer Assessment of Healthcare Providers and Systems data provide publicly available patient ratings.ResultsOn average, hospital ratings increase by 6% as a result of DSH status. Hospital ratings increase by an average of 6.5% when nonprofit hospitals are analyzed. This finding is primarily driven by patient facility cleanliness and medical provider communication ratings.ConclusionsThe federal mandate that individuals purchase health insurance in the United States coupled with the state expansion of Medicaid coverage will theoretically eliminate the need for Medicare DSH payments. It is calculated, however, that hospitals will need increased Medicaid reimbursements of more than $300 per patient to make up for the loss of Medicare DSH reimbursements. Hospitals will likely suffer financially as a direct result of reduced Medicare reimbursements through the DSH program.     

Has Medicare Been a ‘Bad Deal’ for Rural Hospitals?

Understanding the links between Medicare involvement and financial performance in rural hospitals is important for evaluating reimbursement policy under Medicare's prospective payment system (PPS). While simple comparisons between urban and rural hospitals suggest that the latter have lower PPS profit margins on average, there is little multivariate evidence on how Medicare involvement affects financial performance in rural hospitals and whether this relationship differs between rural and urban hospitals. Existing multivariate evidence suggests that Medicare involvement improves PPS profits in both rural and urban hospitals after controlling for other hospital- and market-specific factors. By contrast, the present analysis considers the relationship between Medicare involvement and broader measures of profitability than PPS profits. This provides insight into whether Medicare reimbursement is adequate relative to other forms of third-party payment. The results indicate that Medicare involvement has a markedly different effect on the profitability of rural versus urban hospitals. Greater Medicare involvement is associated with lower patient care profitability in rural hospitals but has a strong positive and significant effect on both patient care and overall (i.e., patient and nonpatient) profitability in urban ones. Medicare involvement is not significantly related to overall profitability in rural hospitals, however, suggesting that these hospitals may be able to mitigate patient care revenue shortfalls from greater Medicare involvement by increasing their nonpatient care revenue sources.     

Achieving Equity in Medicare Disproportionate Share Payments to Rural Hospitals: An Assessment of the Financial Impact of Recent and Proposed Changes to the Disproportionate Share Hospital Payment Formula

Historically, the Medicare Disproportionate Share Hospital (DSH) payment program has been less favorable to rural hospitals: eligibility thresholds were higher and the payment adjustment was smaller for rural than for urban hospitals. Although the Medicare, Medicaid, and SCHIP Benefit Improvement and Protection Act (BIPA) of 2000 established a uniform low-income threshold and increased the magnitude of the adjustment for certain small and rural hospitals as a means to promote payment equity, the DSH distribution formula continues to vary by location. This study examines how the DSH revisions mandated under BIPA are likely to affect rural hospitals' financial performance and simulates the financial impact of implementing a uniform DSH payment adjustment. Using data from the 1998 Medicare cost report and impact files, this study found that two-thirds of both rural and urban hospitals would have qualified for DSH payments following BIPA compared with only one-fifth of rural hospitals and one-half of urban hospitals prior to BIPA. Although the impact of BIPA revisions on rural hospitals' total margins were found to be modest, the financial impact of a uniform payment adjustment would be somewhat greater: rural hospitals' average total margins would have increased by 1.6 percentage points. Importantly, 20% of rural hospitals with negative total margins would have been "in the black" if rural and urban hospitals were reimbursed using the same DSH formula. These findings suggest that elimination of rural and urban disparities in DSH payment could strengthen the rural health care safety net.     

Competitive bidding in Medicare Advantage: Effect of benchmark changes on plan bids

Bidding has been proposed to replace or complement the administered prices that Medicare pays to hospitals and health plans. In 2006, the Medicare Advantage program implemented a competitive bidding system to determine plan payments. In perfectly competitive models, plans bid their costs and thus bids are insensitive to the benchmark. Under many other models of competition, bids respond to changes in the benchmark. We conceptualize the bidding system and use an instrumental variable approach to study the effect of benchmark changes on bids. We use 2006–2010 plan payment data from the Centers for Medicare and Medicaid Services, published county benchmarks, actual realized fee-for-service costs, and Medicare Advantage enrollment. We find that a $1 increase in the benchmark leads to about a $0.53 increase in bids, suggesting that plans in the Medicare Advantage market have meaningful market power.     

The Financial Performance of Rural Hospitals and Implications for Elimination of the Critical Access Hospital Program

Purpose: To compare the financial performance of rural hospitals with Medicare payment provisions to those paid under prospective payment and to estimate the financial consequences of elimination of the Critical Access Hospital (CAH) program. Methods: Financial data for 2004‐2010 were collected from the Healthcare Cost Reporting Information System (HCRIS) for rural hospitals. HCRIS data were used to calculate measures of the profitability, liquidity, capital structure, and financial strength of rural hospitals. Linear mixed models accounted for the method of Medicare reimbursement, time trends, hospital, and market characteristics. Simulations were used to estimate profitability of CAHs if they reverted to prospective payment. Findings: CAHs generally had lower unadjusted financial performance than other types of rural hospitals, but after adjustment for hospital characteristics, CAHs had generally higher financial performance. Conclusions: Special payment provisions by Medicare to rural hospitals are important determinants of financial performance. In particular, the financial condition of CAHs would be worse if they were paid under prospective payment.