We developed a model to measure the contribution of changes in length-of-stay, service intensity, and productivity to the unusually low rate of growth in hospital costs per discharge in recent years. From 1992 through 1996 declining length-of-stay explained 97 percent of the decrease in real costs per discharge. Much of the drop was probably caused by care shifted from inpatient to postacute settings. Although complete data for our model are unavailable beyond that point, we cite several "leading indicators" that suggest that length-of-stay declines have played a smaller role in the continued low cost growth of 1997 and 1998 and that productivity may have risen sharply.

ABSTRACT:The Medicare program initiated prospective payment for inpatient hospital services in 1983. Although the payment system has achieved many of its goals, changes in the health care market and the public nature of the program will continue to present both challenges and opportunities for improvement. Looking forward, policymakers must consider how to balance paying accurately for services with using Medicare to achieve broader policy objectives. Paying for new technologies, responding to market segmentation and specialization, and encouraging quality improvement must also be addressed. To successfully navigate these issues, policymakers and program administrators need accurate and timely information. As m e d i c a r e 's i n pat i e n t p r o s p e c t i v e pay m e n t s ys t e m (PPS) marks its twentieth anniversary, we see many challenges and opportunities for improvement. The principal goals of the payment system continue to be ensuring beneficiaries' access to high-quality care and encouraging efficiency. The system has helped control spending by encouraging improvements in efficiency; its performance regarding quality of care is less certain.1 The health care system is not static; therefore, the PPS must be refined over time. Policymakers have also used the PPS as a vehicle for achieving broader policy objectives, which can hinder its ability to achieve its central goals. Key issues facing the PPS include (1) maintaining accurate payments while balancing other goals, such as supporting medical education or defraying the costs of uncompensated care; (2) incorporating new technologies into the payment system in a timely manner, while maintaining incentives for their judicious use; (3) responding to market segmentation of hospital services and the spread of specialized facilities in ways that encourage efficient delivery of care while preserving the full range of needed services; (4) finding ways to improve quality and strengthen incentives to provide high-quality care; and (5) providing timely and accurate data to support decision making.

One of the leading questions of our time is whether high-quality care leads to lower health care costs. Using data from Hawaii hospitals, this paper addresses the relationship of overall cost per case to a composite measure of the quality of inpatient care and a 30-day readmission rate. We found that low-cost hospitals tend to have the highest quality but the worst readmission performance. Change in quality and change in cost were also negatively correlated, but not statistically significant. We conclude that high-quality hospital care does not have to cost more, but that the dynamics of the readmission rate differ substantially from other quality dimensions.

No abstract