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Specialized, physician-owned cardiac hospitals have grown rapidly. Physicians have also expanded their capability to provide cardiovascular diagnostic services in their offices. In this paper we consider evidence of errors in Medicare's prices for hospital care and physician services and discuss ways to improve the accuracy of those prices. We find that recent proposals to change the inpatient prospective payment system would help dampen hospitals' financial incentives to favor some kinds of patients and related investments. For the physician fee schedule, we suggest that the Centers for Medicare and Medicaid Services (CMS) review the accuracy of prices for high-growth diagnostic services.

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.

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