Altman sees industry unwilling to control costs - interview with Stuart H. Altman of the Prospective Payment Assessment Commission - interview

Healthcare Financial Management, April, 1991 by Richard L. Clarke

Altman sees industry unwilling to control costs

While hospital profit margins clearly are slipping, the cause is worthy of debate, says Stuart H. Altman, PhD, chairman of the Prospective Payment Assessment Commission (ProPAC). He questions whether the culprit is inadequate Medicare payments or the industry's own failure to control costs.

In 1990, Altman was appointed to his third three-year term as chairman of ProPAC, created by Congress to independently oversee Medicare's prospective payment system (PPS). Altman, who is interim president at Brandeis University in Waltham, Mass., and professor of national health policy at the university, recently spoke with HFMA President Richard L. Clarke, FHFMA, about ProPAC's evolving role in national health policy and other matters. Highlights of that session follow.

CLARKE: When it was first established by Congress, ProPAC was given an oversight role to vouch for the integrity or credibility of PPS. Now that PPS is fully implemented, do you believe that role should change?

ALTMAN: Yes. When PPS was first established, it was an unknown quantity in many dimensions. Both Congress and the Administration were operating in waters that this or any other country had never been in. I can appreciate why they created a body like ProPAC to help them. Now that PPS has been in operation for the better part of seven years, I think it's fair to say that it has operated fairly well. Not everybody gets as much money as they want. Not every subset of the hospital industry feels it is as well treated as another subset. But by and large, it has not brought the system to its knees.

In fact, one could say it has brought a sense of equity that may not have existed before. And it's put some - and I want to emphasize some - financial constraint on spending, although not as much as some people had hoped. But what it also has done, which I think is important for a broader mandate, it has called into question whether a government payment system as big and all-encompassing as Medicare can or should continue to operate as if it does not have any responsibility for the broader delivery system or how others pay.

CLARKE: In the early years of PPS, the Health Care Financing Administration (HCFA) had the discretion to set yearly payment update factors, and ProPAC was responsible for advising HCFA about the effects on hospital costs of factors such as scientific and technological advancement, changes in industry productivity, and so on. To fulfill this task, ProPAC developed discretionary adjustment factors. And it continues to try to measure these factors each year. Do these data accurately measure costs that affect hospitals?

ALTMAN: [T]he discretionary adjustment factor focuses on two key aspects of the hospital system, both of which are extremely difficult to measure. One is the appropriate amount of extra funds the government (Medicare) should give hospitals to allow them to bring on line needed technology that is not otherwise reimbursed through the diagnosis related group (DRG) system. And two, to take account of an appropriate offset for productivity advances in the industry, either to act as a stimulant for productivity advances or, in some sense, to compensate for productivity advances. ProPAC has tried to do both.

As we looked into it, one of the things we've learned is the amount of new technology that comes on line that is not otherwise reimbursed is rather small. [It is] important to understand that new technology is being reimbursed through the system, as it is integrated into DRG payment. The discretionary adjustment factor is not the only way that new technology is paid for.

We have tried to estimate the cost of these new technologies. We've had contractors assessing what those new technologies are, what they might be adding to the system. I think the amount of money that we're talking about is not in the order of magnitude of what we originally thought. We originally thought it might be . . . 1.5 percent to 2 percent, which in the nature of a $40 billion expenditure could come to anywhere between $600 million and $800 million. I think the numbers are closer to .5 percent or .75 percent. That is an important finding, and it took us several years to determine that.

The other side of the coin [is that] we originally had no benchmark (neither did anyone else, for that matter) on what productivity ought to be for this industry. First of all, how do you measure it? Second, in an industry that has been in a cost-based environment, everyone knew that productivity [improvement] was almost an accident when it happened, because there surely were no economic incentives for it.

We didn't have any past experience to judge. So initially, we focused on other industries. We reached the conclusion that . . . the industry has lacked any productivity advances for so long that once it got going, it ought to be able to make substantial [progress] for a period of time. We settled on a figure of around 2 percent, which is more like a historical average for other industries when events are going well.