The effect of prospective payment on Medicare expenditures

The New England Journal of Medicine
L B Russell, C L Manning

Abstract

Medicare's prospective payment system was introduced in 1983 to slow the growth of expenditures for hospital care, which from the bulk of Medicare costs. Instead of reimbursing hospitals for the actual costs of patient care, the system pays them at fixed rates for each admission. In this study, we estimated the savings to Medicare from the use of prospective payment. We analyzed the expenditure projections published in 10 successive annual reports (1979 to 1988) by the trustees of the federal Hospital Insurance Trust Fund, which pays hospital bills for Medicare beneficiaries. To show the effect of prospective payment, these projections were adjusted to correct for the different assumptions about inflation and admissions made in each report. We also examined trends in expenditures from the Supplementary Medical Insurance Trust Fund, which pays for outpatient services, to see whether the savings in hospital expenses were offset by higher spending for out-of-hospital services. We found that prospective payment has reduced Medicare's hospital costs substantially. Expenditures from the Hospital Insurance Trust Fund for 1990 are expected to be +12 billion less in 1980 dollars, and +18 billion in 1990 dollars, than was expected shortl...Continue Reading

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