Effects of the Medicare Prospective Payment System on Hospital Cost Containment: An Early Appraisal

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Medicare's Prospective Payment System (PPS) created incentives to reduce the application of technology to hospitalized Medicare beneficiaries. Using data from 501 hospitals from 1980 and 1983-85, this study assesses changes in use of intensive care units and use of nonsurgical procedures before versus after implementation of PPS. The percent of hospitalized patients, both Medicare and non-Medicare, admitted to intensive care units increased post-PPS. Also, stays within such units remained constant. However, the percent of inpatients to whom several nonsurgical procedures were administered was lower post-PPS. For some (e.g., CAT scanning), the percentage of inpatients having the procedure continued to increase after PPS but at a much slower rate. For others, the percent of inpatients with the procedure declined at a faster rate (e.g., intravenous pyelogram). Still others showed utilization increases during 1980-83 followed by declines thereafter (e.g., occupational and physical therapy). Before 1983, there was almost no change in the number of routine tests per inpatient (e.g., serology and blood chemistry). Afterwards, there were major decreases. PPS has influenced the inhospital use of many nonsurgical procedures by both Medicare and non-Medicare patients.

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