Helping Shape Medicare's Payment Systems

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Aggregate mortality rates declined, but discharges in unstable condition increased after implementation of PPS

SOURCE: Draper D, Rogers WH, Kahn KL, Keeler EB, et. al. "Effects of Medicare's Prospective Payment System on the Quality of Hospital Care," RB4519-1, RAND, 2006.

The Medicare Prospective Payment System (PPS) was introduced by the U.S. federal government in 1983 to encourage hospitals to provide more efficient care to Medicare patients. Before that, hospitals were paid for their costs, giving them no incentive to economize. Under PPS, hospitals receive a fixed amount for treating patients diagnosed with a given illness, regardless of the length of hospital stay or type of care received.

Some feared that the new system would cause hospitals to stint on care. At Medicare's request, RAND examined this concern. We found that the PPS did not decrease quality of care, and mortality rates continued their historic fall. But after the PPS, Medicare patients were more likely to be discharged quicker and sicker—in unstable condition.

Since that initial assessment, RAND has continued to help refine and monitor the PPS payment system. RAND has also provided technical expertise and analysis as Medicare has expanded the PPS to other domains of care, such as inpatient rehabilitation. 

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