A study of the impact of medicare prospective payment system on hospital cost containment activities



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Texas Tech University


The purpose of this study was to assess the impact of the change in Medicare payment method, from cost-based to fixed-price prospective payment, on cost containment and revenue enhancing activities in hospitals.

The study had two primary objectives: (1) to identify changes in the use of "good" management techniques which may be the result of changes in Medicare payment method, and (2) to determine the influence of Medicare and other hospital characteristics (size, ownership, affiliation with other hospitals, management, occupancy rate, nonpayment rate, and competition) on the use of "good" management techniques before and after Medicare Prospective Payment System (PPS) was enacted.

A set of management techniques was identified by the General Accounting Office (GAO) in 1980 as effective in controlling costs. The set of "good" management techniques in this study combines techniques identified by the GAO with others from the hospital literature that are effective in reducing costs and enhancing revenues. Techniques were grouped into those related to: (1) purchasing, (2) energy conservation, (3) general management, and (4) revenue enhancement. The study hypothesized a model of cost containment in which Medicare, moderated by payment method, and other hospital characteristics determine whether a hospital uses few or many of the techniques within each category.

The group of hospitals used in the study was community hospitals in Texas. The administrators of these hospitals were asked to complete a questionnaire on which techniques are used in their hospital and when the techniques were implemented. Demographic data were obtained from the questionnaire and listings with Texas Hospital Association. Changes in the use of "good" management techniques subsequent to PPS were identified using tests of means and proportions. The influence of Medicare and other hospital characteristics on the use of "good" management techniques before enactment of PPS was determined using discriminant analysis. The influence subsequent to PPS was determined using regression analysis.

The results indicated that there have been significant increases in the use of "good" management techniques subsequent to enactment of PPS. Hospitals of greater size and affiliated with other hospitals used more of the techniques prior to enactment of PPS. Greater Medicare dependency characterized those hospitals using fewer of the techniques. This is support for the theory that cost-based Medicare payments provided a disincentive for cost containment. Subsequent to enactment of PPS, those hospitals with greater proportions of their revenues derived from fixed-price Medicare payments have added more than the average number of good management techniques for all hospitals. This supports the theory that fixed-price prospective rate setting provides incentives for cost containment.