Ethical Perspectives on Prospective Payment

By Dougherty, Charles J. | The Hastings Center Report, January-February 1989 | Go to article overview

Ethical Perspectives on Prospective Payment


Dougherty, Charles J., The Hastings Center Report


Ethical Perspectives on Prospective Payment

Dramatically rising prices in the Medicare program led Congress in 1983 to pass legislation that changed the method of reimbursement for Medicare hospital charges from a cost-based retrospective system to a prospective payment system (PPS). Medicare's PPS now pays hospitals a preset price for services to its beneficiaries based on average costs of hospital care for patients in diagnosis-related groups (DRGs).

"Outliers" provide a mechanism for enhanced payments for exceptioanlly costly cases and for those whose care requires more days in the hospital. But there are restrictive caps on the number of outliers that a hospital can claim and the amount that will be added to the normal DRG payment for patients who qualify. Other adjustments have been built into the DRGs related to case mix, wages, teaching, disproportionate share of indigent patients and status as sole provider in a community. The main thrust, however, is to define a single payment schedule in advance of treatment. The Medicare PPS approach shifts the financial risk of treating Medicare patients to hospitals and gives them an incentive to provide care more efficiently.

At the same time, Congress also mandated that all hospitals seeking Medicare reimbursement contract with a peer review organization (PRO). PROs are responsible for assuring that care provided to Medicare beneficiaries is medically necessary, consistent with professional standards, and provided efficiently and economically. They monitor Medicare admissions to hospitals, review DRG designations, and review outlier cases. PROs help to enforce Medicare's DRG system and to achieve the congressional intent of containing program costs.

Some Difficulties

The introduction of PPS has effected important changes in the provision of health care whose ethical implications are worthy of examination. But significant changes are occurring rapidly throughout American health care. Health care costs, though moderating, are still increasing beyond the general rates of inflation. Competitive pressures and marketing have increased dramatically. Medical services have been "unbundled" and the typical locus of care has shifted away from hospitals and doctors' offices to nursing homes, shopping malls, and patients' homes.

The number of physicians is rising and solo practice has given way to health maintenance organizations, preferred provider schemes, and other new clinical and financial arrangements. The nursing profession is under new pressures. Corporations have become keenly interested in containing health care costs. And more and more Americans are without health insurance protection--some 35 to 37 million. Given this backdrop of large-scale systemic change, it is very difficult to isolate the effects of Medicare's new measures.

We also lack reliable data on many of the issues raised by Medicare's PPS. One of the most important issues, for example, is the impact of DRGs on the general quality of care. But there is no routine systemic collection and analysis of the data--on mortality, morbidity, and consumer satisfaction--needed to make a secure evaluation.(1)

Some modesty about ethical assessment of so large a social reality is also appropriate. Any appraisal of the goodness or badness of DRGs is open to the challenge: "Good or bad compared to what--bankruptcy of the Medicare program, more taxation, further privatization, socialized medicine?"

Such a definitive comparative evaluation of DRGs cannot be attempted here. Nevertheless, an ethical evaluation of the changes wrought by the Medicare PPS is important and timely. "For Medicare is," in the words of a recent statement by the American Association of Retired Persons, "the flagship of the American health care system--where it leads others follow."(2) Concerns about the impact of DRGs on the operation of the flagship will be offered from two ethical perspectives: utilitarian and contractarian. …

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