Contributions of Case Mix, Intensity, and Technology to Hospital Cost Increases Under Medicare's Prospective Payment System

This study examined why the average cost of Medicare hospital discharges increased more rapidly than inflation after the implementation of Medicare's prospective payment system (PPS). The average cost per Medicare case rose by 28.4 percent between 1984 and 1987. The increase in the hospital market basket was 11.0 percent during this period, thus, the real increase in cost per case was 15.7 percent. The authors decomposed this change in real cost per case into two major components: changes across DRGs (i.e. case mix) and changes within DRGs (i.e. intensity). Average cost per case increased 11.2 percent due to changes in case mix, and 4.5 percent due to higher costs per case within DRGs. We further decomposed the across- and within-DRG increases into the following components: technology, outpatient shift, and a residual. The authors estimate that technology changes accounted for 5.8 percent of the total increase in cost per case, while outpatient shift accounted for 3.4 percent of the total increase.