Medicare's prospective payment system: a critical appraisal - Cost-Containment Issues, Methods, and Experiences

Health Care Financing Review, Annual, 1991 by Robert F. Coulam, Gary L. Gaumer

Length of stay

Prior to PPS, the average length of stay for Medicare beneficiaries was declining slowly. The introduction of PPS was expected to accelerate the trend. Indeed, the most conspicuous incentive of the new payment system was its encouragement of hospitals to reduce lengths of stay. Correspondingly, the most conspicuous fear of the new system was that it would induce hospitals to discharge patients too quickly.

The results of LOS are generally consistent with expectations: The introduction of PPS is associated with a brief, but (compared with historical norms) large, reduction in LOS, after which average LOS stabilizes or increases slightly. We reviewed almost 40 studies that, in various ways, estimate the effect of PPS on LOS. Virtually all of the studies - including studies based on small samples - find PPS associated with a decrease in LOS. Only a few studies produce contrary results. For example, two studies based on large national samples of Medicare patients in short-term hospitals (DesHarnais, Chesney, and Fleming, 1988; Morrisey, Sloan, and Valvona, 1988a) find declines in LOS in the first 2 years of PPS; but these declines are statistically insignificant for at least some subgroups of Medicare patients. Two small-sample studies (Mayer-Oakes et al., 1988; Simons and Omundsen, 1988) also find no significant change in Medicare LOS in the first year or two of PPS. But apart from these few exceptions, the finding of a decline in LOS is consistent across this literature. Russell (1989) places the LOS declines in perspective:

"Historically, length of stay for the elderly had

declined steadily, drifting slowly downward from 13.8

days in 1968 to 10.1 days in 1982 [table omitted]. The

declines in the two years before prospective payment

were unusually steep by historical standards, but the

decline between 1983 and 1984, when the average

dropped by nearly a day, was unprecedented, ample

reason to suspect that prospective payment was the

cause."

After an initial, sharp effect, the effects of PPS on LOS appear to moderate: PPS is associated with a decrease in LOS in the first, or first and second, years of implementation only. (One study [Newhouse and Byrne, 1988] finds no effect in the first year, but a slight effect in the second year.) Thereafter, studies that include at least 3 years of PPS data find LOS to have stabilized, with at most slight increases or decreases in the years thereafter (e.g., note the findings of the large-area studies with data for at least 3 years of PPS: Guterman et al., 1988; Helbing and Keene, 1989; Lave, 1990; Menke, 1990; Prospective Payment Assessment Commission, 1990a; Russell, 1989; Schwartz and Mendelson, 1991). The fact that nominal LOS was stable in later PPS years implies that LOS most likely continued to decline for comparable patients, because complexity of the average Medicare case increased over time. However, no published study rigorously documents that LOS continued to decline after 2 years on PPS. In an unpublished study, Gaumer and Fama (1988) find that a small, additional decline in LOS occurred in 1986 (following much larger declines in 1984 and 1985), when the changing DRG mix of cases is taken into account. By contrast, using a similar adjustment for severity, Lave (1990) finds a small increase in LOS in 1986. The reason for the conflicting results is unclear. In any event, severity adjustments in these studies fail to take into account within-DRG changes in severity or to eliminate changes in case mix caused by changes in coding unrelated to actual patient severity. Unfortunately, studies with more sophisticated severity adjustments (e.g., Epstein et al., 1991; Kahn et al., 1990a) have data for only limited period of PPS. Thus, although some continued decline in LOS may have occurred for comparable patients, that result is not well documented.