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HLT 205 Week 7 Discussion Question One

HLT 205 Week 7 Discussion Question One


Describe how state Certificate of Need (CON) programs and Medicare Prospective Payment Systems (PPS) help decrease health care spending. Cite references to support your response.

The implementation of the prospective payment system (PPS) has produced major changes in the hospital industry and in the way hospital services are used by physicians and their patients. Hundreds of researchers and policy analysts have written about the consequences of PPS and commented on the principles of health care policy that PPS embodies. Our purpose here is to review this large body of work as it contributes to our understanding of:

  • The effectiveness of programs of administered pricing in controlling spending and maintaining equity across the hospital industry.

  • The relative importance of payment stringency, payment incentives, and the regulation of admissions in the pattern of effects
    HLT 205 Week 7 Discussion Question One

    HLT 205 Week 7 Discussion Question One

    seen to date.

  • The extent to which payment controls have resulted in improved operational efficiency—or if not, whether hospital finances or patient care have been compromised.

As a policy for hospital cost containment, PPS represents a bundle of ratesetting principles that are fairly well understood but are certainly not universally admired. The components include administered prices rather than market forces, national base rates rather than hospital-specific rates (i.e., a policy of equalizing rates rather than equalizing pressure), and a per case payment unit rather than payment per day, per service, or per procedure.

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When PPS was implemented, there were strongly held expectations among promoters and skeptics. Promoters of the policy hoped that payment reductions would be matched by lower levels of spending through reduced lengths of stay (LOS), reduced intensity of care, and more efficient hospital operations. Promoters presumed this could occur without financial collapse or compromises in patient care, as large volumes of “slack” were used up (unproductive resources reallocated, unnecessary ancillaries and days eliminated, and so on). So long as hospitals had been reimbursed their costs, they faced few incentives to provide efficient care. PPS gave hospitals new incentives to operate economically.

HLT 205 Week 7 Discussion Question One

But there were also skeptics. If hospitals faced new incentives for efficiency, there were serious questions as to whether they faced just the right incentives. An additional test or day of hospital care became costly under PPS, whether medically justified or not, and the narrow financial incentive was the same in either case to eliminate the added cost. Although hospitals would not necessarily strike the wrong balance between patient well-being and their income statements, there was nothing intrinsic to the PPS structure to guarantee that the right balance would be struck.1 While PPS assumed that hospitals and physicians practiced inefficiently, it also assumed that hospitals and physicians would successfully mediate between conflicting pressures to enhance patient well-being and to contain costs.

However, there necessarily were fears that the changes in practice patterns induced by PPS would be harmful—that changes in practice patterns would harm patients or, to the extent that hospitals resisted purely financial incentives and maintained quality care, that hospitals would suffer financially. Without pre-existing slack, PPS might well force a choice between survival of the institution and quality of patient care. Indeed, this choice is at the core of any system of incentive payment for hospitals: the “carrot” of being able to keep surpluses and the “stick” of failing to survive.

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