Battling for Budgetary Savings: The
Prospective Payment System for
Hospitals under Medicare
ALEXIS A. HALLEY
Environment of Health Policy
Major structural changes have occurred in the nation's health care system during the past fifty years. 1 The delivery system for medical and health care has moved away from physicians' offices into hospitals, nursing homes, out‐ patient clinics, and other health care arrangements. Who pays for health care and how it is paid for are different now, especially since 1965, when the federal government began to pay for the health care of persons who are medically indigent or over 65.
From 1945 to 1965 the federal government played a principal role in expanding the health care system, especially the number of hospitals. The basic strategy to assure equality of access was to build capacity. The federal government became the banker, distributing seed monies for hospital construction and becoming the major source of funding for research. From the late 1960s to the early 1970s the basic strategy to assure equality of access was to buy health care for the indigent and elderly with the passage of Medicare, Medicaid, and other entitlement programs. Shortly thereafter a different and enduring emphasis emerged: cost containment. In the case of hospital care, cost containment has become the dominant public policy issue.
The I980s was a decade of revolution in the nation's health care, primarily its financing. One component of the transformation was the 1983 landmark legislation creating the Prospective Payment System (PPS) for Hospitals under Medicare (P.L. 98-21). The Medicare program finances inpatient hospital, skilled nursing facility, home health, and other institutional services (Medicare Part A, Hospital Insurance Trust Fund), and physicians' services and hospital outpatient services (Medicare Part B, Supplementary Medical Insurance Trust Fund) for the elderly and disabled. PPS is the pay