The Effects of the DRG-Based Prospective Payment System on Quality of Care for Hospitalized Medicare Patients

In 1983, in an effort to control rising health care costs, the federal government established a prospective payment system (PPS) to reimburse hospitals for inhospital care of Medicare patients. Under PPS, hospitals are paid an amount based largely on flat rates per admission calculated for each of approximately 470 diagnosis-related groups (DRGs). This new payment system has been somewhat successful at slowing the upward spiral of Medicare costs. However, because PPS presents incentives to decrease lengths of stay and to substitute lower-cost services and procedures, patients, physicians, and policymakers are concerned that, despite the introduction of monitoring by professional review organizations, the quality of health care given Medicare patients may have declined under PPS. This report assesses the quality of inhospital care for Medicare patients age 65 and over, before and after the implementation of PPS, and estimates the effects of the PPS intervention on quality of care, by comparing quality of care now with the best estimate of what it would have been without PPS. Specifically, the authors describe the study's design, sampling, and fieldwork; discuss changes in sickness at admission following the introduction of PPS; consider measurements of the quality of care using explicit criteria before and after implementation of the PPS; compare changes in quality of care between 1981 and 1986 for five diseases as measured by implicit review; and discuss PPS and impairment at discharge.