Academic journal article Health Care Financing Review

Use and Cost of Short-Stay Hospital Inpatient Services under Medicare, 1988

Academic journal article Health Care Financing Review

Use and Cost of Short-Stay Hospital Inpatient Services under Medicare, 1988

Article excerpt

Use and cost of short-stay hospital inpatient services under Medicare, 1988


The Medicare prospective payment system (PPS) was established by the Social Security Amendments of 1983 (Public Law 98-21). It became effective for hospital fiscal years beginning on or after October 1, 1983. PPS applied to all hospitals except for specified types of hospitals or units of hospitals excluded by law (Definition of terms). Designed to provide incentives to hospitals to control cost without adversely affecting the quality of care, PPS represented a restructuring of the system of paying hospitals for inpatient services furnished to Medicare beneficiaries. PPS replaced the original cost-based retrospective payment system by making payments at predetermined rates based on the patient's diagnosis-related group (DRG). If the hospital could provide services at a cost less than the predetermined rate, it retained the difference.

The DRG to which a Medicare patient is assigned determines the amount paid by the program for the patient's care. The DRG assignment is based on such factors as the principal diagnosis, surgical procedures performed, the patient's age and sex, and the presence or absence of additional conditions (Definition of terms).

Tables 1 and 2 are designed to provide some measure of the impact of PPS on short-stay hospital utilization and program payments under Medicare. In Table 1, it can be seen that notable changes in utilization patterns coincide with the implementation of PPS. Between 1983 and 1984, the first full year of PPS, the discharge rate for Medicare beneficiaries dropped from 387 to 363 per 1,000 enrollees. In the second year, the drop in the discharge rate was even greater, to 328 per 1,000 enrollees, and it has continued to decrease through 1988. This basic pattern was observed among both aged and disabled beneficiaries and , for the period from 1983 through 1988, both groups showed virtually the same rate of decrease.

This decrease in the discharge rate (that was also noted in the non-Medicare population) was not anticipated in the predictions of the possible impacts of PPS. It is still not completely clear why this decrease in the discharge rate took place. However, during this period, many procedures that previously had required an inpatient admission became increasingly performed on an outpatient basis. One specific example of such procedures is cataract removal. Another factor that may have been operating to reduce the discharge rate is the application of more rigorous criteria to reduce marginal medical admissions. The Codman Report (1990) to the Prospective Payment Assessment Commission (ProPAC) indicated that the largest decreases occurred among high-volume medical conditions for which there was a relatively weak consensus on the need for hospitalization. The timing of this change suggests that it may, in part, represent the impact of peer review organization monitoring of hospital admissions. In contrast to the unanticipated drop in the discharge rate, a decrease in lengths of stay was anticipated and has occurred.

Selected data highlights

In Table 1, it can be seen that lengths of stay had been decreasing prior to the initiation of PPS. However, between 1983 and 1984, the average length of stay (ALOS) had its largest 1-year drop in any year before or since. Unlike the discharge rate, however, the ALOS has not continued to decline. It quickly stabilized and even increased slightly after 1985.

The combined effect of the changes in the discharge rate and the ALOS is reflected in the total days of care (TDOC) rate. Again, a notable decrease between 1983 (3,786 days per 1,000 enrollees) and 1984 (3,217 days per 1,000) is noted, with a further decrease in 1985 (2,822 days per 1,000). The overall rate has remained relatively stable since then (Figure 1). This stability in the TDOC rate is more evident among aged beneficiaries, where it has hovered around 2,760 per 1,000 enrollees, than among the disabled. …

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