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

(75 percent of the decline). * A slowdown in intensity growth including LOS

(9 percent). * Improved productivity in producing hospital services

(16 percent).

Trend data in Table 2 indicate that rates of increases in staffing and compensation declined early in PPS, then eventually rose. ProPAC (1991a) data show a similar pattern: a substantial slowdown in the rate of increase in salary and in benefit expenses (per full-time equivalent, or FTE). This slowdown began with limits established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and continued through 1987 at modest levels, with the levels rising again thereafter. Sloan, Morrisey, and Valvona (1988b) also find a significant PPS efficiency effect on labor costs per case for the first 2 years of PPS.

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A study by Hadley, Zuckerman, and Feder (1989) demonstrates that the expenditures reductions and other outcomes are moderated in the second year. The authors interpret this to mean that incentive effects were one-time only, and pressure was required to achieve continuing savings. The trend data support the view that the magnitude of savings has been dissipating over time, even if effects are somewhat more extended than one-time only. The trends in expenditures *Table 2) suggest that inflation in PPS expense per case has remained at 9-11 percent per year from PPS 1 through PPS 6 (well above the market basket inflation rate); by contrast, over the same period, the initially reduced rate of inflation in overall hospital expenditures has not been sustained.

There is some evidence that clinical and general productivity in hospitals improved under PPS and may still be improving. Using AHA survey data, Cromwell and Pope (1989) note that total-factor productivity and labor productivity in hospitals improved in the TEFRA-PPS 2 period. Depending on output measure (days, cases, charges), the improvements after the enactment of TEFRA represent absolute improvements in productivity (if charges are used), or a slowdown in the rate of productivity decline. Using entirely different data and productivity measures based on case-mix-adjusted episode outcomes (from the Professional Activity Study [PAS] of the CPHA) Long et al. (1987) confirm a clinical productivity improvement. For 49 diagnosis-related groups (DRGs), these authors demonstrate a substantial reduction in inputs per unit output in the first year of PPS. (Pharmaceutical usage is the exception.) They also note that the output measure - the episodes of care considered completed - was also lower after the introduction of PPS; but the reduction in inputs was even larger, causing an overall improvement in clinical productivity.

ProPAC (1991a) notes that the rate of increase in intermediate productivity (services per FTE) has been rising slowly since PPS 3. This pattern, and the patterns in Table 2, seem to suggest a sharp initial increase in efficiency resulting from a reduction in growth rates of intensity (length of stay) and in salary and benefits, followed by continuing restraints on labor costs and improved labor productivity. The return to higher rates of inflation seems to be a result of higher rates if fringe and salary increases and sharp increase in the pace of both the CMI and CMI-adjusted intensity after 1985.