The Impact of Medicare's Prospective Payment System (PPS) on Hospitals and Physicians

Abstract

DOI: http://dx.doi.org/10.5915/17-1-12748

The passage of Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the Social Security Amendments of 1983 introduced major changes in the way hospitals are reimbursed by the Medicare program . Payment to hospitals for medically necessary inpatient services will no longer be made on a reasonable cost basis . Hospitals are now at "risk" for the cost of services that are provided. Medicare's payment will be based on one of 468 Diagnosis-Related Groups (DRGs). Presently, a blending of hospital specific, regional and federal rates occurs. However, by October 1, 1986, the Medicare DRG rates will be 100 percent federal rates, with the only adjustment being area wage indexes.

The Medicare PPS legislation provides for the study of physician payments on the basis of DRGs. The Health Care Financing Administration has until October 1, 1985, to complete the study of physician DRG payments and present their recommendations to Congress. Clearly, physicians will also face the challenge of different incentives when providing services to Medicare patients.

The new Medicare payment system has the potential of creating conflict between hospitals and physicians as we operate under new payment incentives. The experience to date has been cooperation and increased understanding by physicians of the problems and limitations facing hospitals. The challenge to hospitals and physicians in the future will be the delivery of high quality care in a cost-effective manner. The incentives under Medicare PPS have the potential of creating substantive changes in the health care delivery system if payments are adequate. However, Congress is already considering arbitrary reductions in Medicare DRG payments.