The Interaction Between Payment Adjustors and the Size of the Outlier Pool Under Medicare's Prospective Payment Plan

The authors have explored the implications of a simultaneous increase in outlier payments and decrease in the extra payments to teaching and disproportionate share hospitals. The authors simulated payments to a random sample of FY 1990 Medicare discharges under a set of six alternative payment policies which are combinations of two levels of outlier payments and three payment adjustment policies. A simultaneous increase in outlier payments and a decrease in the payment rates for teaching and disproportionate share hospitals could provide modest improvements in the correspondence between costs and reimbursement at the hospital level and at the case level. In the authors' simulations of an outlier pool equal to 10 percent of federal payments and a reduction of the operating payment factors to the level of the capital adjustment, they found that reimbursement to the quartile of hospitals that earn the smallest amount from their Medicare cases would increase by 2.12 percent and that to the highest earning quartile would decrease by 4.00 percent. The same policy would also reduce hospitals' financial risk. Reducing the size of the payment factors would, of course, reduce payments to teaching and disproportionate share hospitals. On average these hospitals earn substantially more than other hospitals on their Medicare cases, but within the group of teaching and disproportionate share hospitals there is a wide range in Medicare profit and in total margin. Increasing the outlier pool and removing the standardization in the cost outlier formula effectively ameliorates the effect of the reduced IME and DSH payments on the subset of IME and DSH hospitals that receive very low earnings from Medicare patients. The simulated policies would have little effect on the distribution of total margins. The variations in Medicare profit and in total margin limit the extent to which the PPS can be improved based on changes in the payment adjustments for the existing categories of hospitals.