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

Closures

Closure rates represent a blunt, external measure of financial health of hospitals - a measure that is politically provocative as well. Closure rates have certainly been higher since PPS was implemented. As the U.S. General Accounting Office (GAG) (1991b) notes, the number of closures in the 4 years after PPS was double the number in the 4 years prior to PPS. About one-half of all closures in the 1980s were of rural hospitals, and 85 percent of all closures were for hospitals with fewer than 100 beds.

Multivariate models in two recent studies enumerate factors that predict closure. Although the models they use are different in many respects, both GAO (1991b) and Adamache and Hurdle (1991) concur that higher closure rates are associated with: * Declining volumes (days or occupancy). * Declining population or high unemployment. * More competition. * Small number of beds. * More debt (Adamache and Hurdle only). * Less severe case mix. * Status as an independent proprietary hospital.

Case studies done by both groups also suggest that one part of the rural closure problem concerns physician availability. The loss of a physician creates volume and occupancy problems in small rural hospitals, which in turn reduce profits and raise the threat of closure.

ProPAC (1991a) concurs that competition from urban hospitals and volume and population problems were central to closure in rural places. ProPAC also notes that volumes of births, outpatient activity (surgical and medical), and the availability of high-technology services were lower in sole-county hospitals that closed than in other sole-county hospitals that did not close.

All serious studies conclude that PPS payment levels have not been an important cause for closure. PPS payment levels were higher for closure than non-closing hospitals (Adamache and Hurdle, 1991) and higher for Medicare than for non-Medicare cases in the closing hospitals (U.S. General Accounting Office, 1991b). Additionally, GAO concludes that Medicare-dependent facilities (hospitals at which Medicare days exceed 60 percent of all days) do not have higher closure rates; and Adamache and Hurdle similarly find no relationship between closure and Medicare's share of patient days. Both studies point to declining volumes and low occupancy rates as the cause for closure, relying on non-statistical arguments. Indeed, GAO (1991b) and ProPAC (1991a) both conclude, fairly decisively, that access to inpatient care has unlikely been seriously affected, even if PPS had caused the demise of these hospitals.(1) "It does not appear, therefore, that access to inpatient hospital care has been impeded by rural hospital closures, even in counties where the only hospital closed" (Prospective Payment Assessment Commission, 1991a).

These studies do not rule out the possibility that PPS did affect closure rates.(12) Rural admission rates have traditionally been quite high; and post-1983 rate were substantially higher among small hospitals and rural populations than urban ones (Gaumer, 1989, Prospective Payment Assessment Commission, 1991a). This set of facts may be related to the payment effects of PPS and more related to the regulatory aspects (PROs) and the relatively large declines in admissions in rural hospitals. Moreover, small institution faced greater volatility in patient volumes (Gaumer, 1989), and the financial consequences of this volatility are not as well buffered by PPS as they would be by cost reimbursement. Thus, the incentives and regulatory aspects of PPS may have contributed to elevated closure rates, even if payment levels were not implicated. The literature does not confirm this possibility, but research on the levels of payment rates, and Medicare shares does not rule it out.