Hospital employment under revised medicare payment schedules - Diagnosis Related Groups-based medicare payments' effects on employment

Monthly Labor Review, August, 1986 by Eileen Appelbaum, Cherlyn Skromme Granrose

A third aspect of data gathering consisted of using archival data to identify the broader changes in patient centsus and employment in all Philadelphia area hospitals. This enabled us to place the responses of interviewees into a more general context.

Just as their counterparts elsewhere, Philadelphia area hospitals began preparing for the implementation of DRG's even before the authorizing legislation had been passed. In the view of some of the hospital administrators interviewed, the initial response at many institutions was an overreaction to the prospect of a fixed fee schedule. With 2 years of experience since passage of the legislation, the administrators believed that reactions had moderated, although the extent and difficulty of required adjustment varied widely among hospitals.

An overview of pertinent hospital operations in the Philadelphia area can provide useful perspective for interpreting these and other responses to our study. Admissions for the 90 Philadelphia area hospitals (including those in the New Jersey suburbs) declned nominally from 325, 966 in late 1982 to 325, 733 in late 1983, then rose to 326, 943 by 1984. Philadephia's experience in this respect differs sharply from that of the Nation as a whle, which experienced an unprecedented decline in admissions in 1984. Reasons for this difference include the relatively high proportion of elderly people in the Philadelphia area, the substantial number of referrals from outside the area to major medical centers in Philadelphia, and the below-average enrollments of health maintenance organizations (HMO's) in the area..

While admissions remained essentially stable in Philadelphia, hospitals stays were shortened. Length of stay in acute case hospitals declined steadily from 8.8 days at the end of 1982 to 7.5 days in 1984. The combination of stable admissions and declining length of stay enabled Philadelphia hospitals to earn record income while containing costs. Of the 60 hospitals in Philadelphia and its Pennsylvania suburbs, all but three were in the black for the fiscal year ending June 30, 1985. The five hospitals with the highest net income included a children's hospital, a community hospital, and three teaching hospitals. Taken together, the 60 Philadelphia hospitals had income exceeding $165 million on revenue of more than $3 billion.

While DRG's provide incentives to all hospitals to decrease length of hospital stay and to compensate for the decrease in bed occupancy rates by increasing the volume of admissions, the effects are very uneven across institutions. The employment impact depends, in part, on the extent to which the hospital is affected by DRG's and the size of the hospital's medicare caseload. DRG's currently do not apply to specialty hosptials, which do not provide acute care. These include psychiatric institutions, drug and alcohol treament centers, and physical rehabilitation facilities. Children's hospitals are also waivered under present regulations. Cost contianment pressures thus are far less severe in these institutions than in acute care hospitals. Nevertheless, specialty hospitals are responding to a number of pressures for change. These include the expectation that coverage by DRG's will eventually be extended to them, incentives from private health insurers to reduce costs, greater acceptance by ptients of less expensive outpaitent cre, and increated competition from freestanding, specialized facilities estblished by acute care hospitals to avoid DRG coverage.