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the past half century. Clearly these programs have played a key role in promoting the public health but have also consumed additional public health resources. It has not been easy to quantify the long-term cost-savings.

Initially, the commitment to preventive activities focused on controlling communicable diseases, such as diphtheria, polio, measles, smallpox, and tuberculosis. These activities included massive immunization programs and activities to improve environmental sanitation. Today, most of these communicable diseases have been brought under control. On the other hand, chronic diseases, such as heart disease, cancer, and arthritis, have replaced communicable diseases as the dominant health problem confronting the nation. Most of these diseases are not preventable. Accordingly, the appropriate role for government, including the level of funding, in disease prevention activities needs to be reexamined.

Health promotion efforts have been directed at modifying lifestyles, improving mental health, and other activities. In these areas, positive results have also been difficult to substantiate. Thus, the appropriate roles of the various sectors involved in these activities also needs to be addressed.

Financing issues

Nine key issues were identified in the health financing area. These issues deal with the extent that providers raise charges to some payers to recover charges not reimbursed by other payers; the impact of recent changes in federal, state, and private sector reimbursement policies; alternative ways of reimbursing physicians; reimbursement incentives to promote alternative ways of delivering care; various methods of paying hospitals for their teaching and capital costs; and the approaches to dealing with health care fraud and abuse by providers. The financing issues are:

1. To what extent do health care providers raise charges to some payers to recover charges not reimbursed by other payers?

2.

3.

4.

What are the costs and benefits of the Medicare prospective payment system and should it be expanded?

Are there sufficient safeguards under a prospective payment system (PPS) to protect patients from health care providers who reduce or withhold needed services?

What effects have state and private sector

reimbursement changes had on cost, access, and quality of care?

5.

6.

7.

8.

9.

What are the pros and cons and cost impact of alternative approaches to the traditional fee-for-service method of reimbursing physicians and other health care practitioners?

Do third-party reimbursement mechanisms promote the development and use of alternative and less costly ways of obtaining needed health care services?

What are the costs and benefits of alternative approaches for reimbursing teaching hospitals for their costs associated with graduate medical education?

What are the costs and benefits of alternative approaches for reimbursing hospitals and other institutional providers for their capital-related costs?

Can a better approach be developed for identifying and prosecuting providers and consumers who engage in health care fraud and abuse?

To what extent do health care providers
raise charges to some payers to recover
charges not reimbursed by other payers?

Some third-party payers limit their payments to providers for certain expenses in an effort to promote the efficient delivery of health care. However, when some third-party payers, such as Medicare, Medicaid, or Blue Cross plans, establish reimbursement levels below what a hospital considers to be its cost for furnishing services, hospitals may attempt to recover the difference from other payers. The Health Insurance Association of America estimated that hospitals shifted almost $9 billion in 1984 from public to private payers. 154

While efforts by some third-party payers, such as Medicare and Medicaid, may constrain expenditures in these programs, little will be accomplished in constraining total health expenditures if expenses are shifted to other payers.

The issue to pursue will be to determine how to preclude this situation from occurring without producing undesired behavior on the part of providers which may erode quality and access to care.

What are the costs and benefits of

the Medicare prospective payment system

and should it be expanded?

Expansion of prospective payment systems to cover all payers has been offered as a solution to the revenue-shifting problem. Since all payers would be covered under the system,

hospitals would not be able to recover losses from one payer by shifting the costs to another payer. Experience with

prospective payment systems covering all payers, however, is limited.

PPS creates incentives which could produce certain undesirable behaviors on the part of providers. Patients could be discharged from hospitals prematurely which could result in subsequent readmissions. Also, services provided to hospital patients may be reduced. Further, hospitals may tend to admit only those patients with conditions for which they are able to realize a profit. On the other hand, they may be reluctant to admit other patients, leading to reduced access to care for those patients. These patients may be referred to public

hospitals for care.

In addition, consideration must be given to the impact of PPS on use of non-hospital services, such as ambulatory care, nursing homes and home health care. If PPS results in increased utilization of other services, which are reimbursed on a cost or charge basis, total health care expenditures may increase further. Thus, an evaluation of the cost-effectiveness of PPS needs to take this into account. Further, earlier discharge of patients may result in more nursing home care. This may worsen the situation involving the availability of nursing home beds.

The main questions to address involve:

--What impact would the expansion of PPS to all payers
have on costs, quality, and access to care?

--If it is desirable to expand PPS, how best should this be accomplished?

Are there sufficient safeguards under
a prospective payment system to protect
patients from health care providers who
reduce or withhold needed services?

Under the Medicare prospective payment system payment rates are established in advance and hospitals treating Medicare beneficiaries must generally accept the rate as full payment. If services are provided for less than the PPS rate, the hospital can retain the difference as profit. If its costs exceed the payment amount, the hospital suffers a loss. Thus, PPS provides built in incentives for hospitals to minimize costs. However, PPS can produce some undesirable behavior on the part of providers.

Will PPS adversely affect patient care? PPS creates incentives for hospitals to shorten patients' lengths of stay and reduce the quantity of services delivered to patients. Along with HHS, we have expressed concerns that this could lead to the premature discharge of patients.

Recent hospital data on the use of hospitals under Medicare appear to show that hospitals have, in fact, responded by reducing lengths of stay. The average length of stay per PPS discharge in fiscal year 1984 was 7.5 days. The average length of stay per Medicare discharge in fiscal year 1983 (pre-PPS) was 10 days. 155 While reducing the length of hospital stay may not affect a patient's need for follow-up care, some patients may be discharged at a time in their illness when they still have substantial need for care.

To the extent that Medicare patients are discharged from hospitals sooner and with greater needs for care, PPS may increase the number of readmissions to hospitals. Also, demand for post-hospital nursing home and home health care may increase.

HHS has predicted that the number of persons qualifying for the Medicare skilled nursing home benefit will increase. However, HHS' analyses indicated that an increase in the use of skilled nursing facilities may be precluded by such factors as the shortage of nursing home beds and changes in state Medicaid reimbursement policies. By increasing demand, PPS may further affect the problems of Medicaid patients who are waiting in hospitals for nursing home beds.

What impact will this have on expenditures? PPS may create incentives to provide services outside of the hospital setting which are reimbursed under a cost or charge basis, although this care may not be appropriate for a patient. If this inappropriate care leads to a greater use of services, including those provided by skilled nursing facilities and home health care agencies, Medicare expenditures could increase. A similar result could occur if patients are prematurely discharged from a hospital and readmitted because of complications.

What mechanisms are needed to assure quality of care under PPS? In the legislation establishing PPS, the Congress created some safeguards to preclude manipulation of the system. In order to receive Medicare payments, hospitals must contract with HHS' medical review agents--PROS--for review of hospital

admissions, discharges, and appropriateness of care. The effectiveness of PROS needs to be monitored to assure that quality of care afforded Medicare beneficiaries is not eroded under PPS. In addition, hospital practices, such as the

increased use of services which continue to be reimbursed on a cost or charge basis (i.e., ambulatory services), deserve close scrutiny.

What effects have state and private sector
reimbursement changes had on cost,
access, and quality of care?

Over the years, the states and private sector have made many changes in their methods of reimbursing for health care services. Some of these have been structural changes in how services are reimbursed and other changes relate to the types of services covered. Examples of structural changes include: California's competitive bidding approach for hospital services to Medicaid beneficiaries; Massachusetts' program to cap hospital revenues; and state use of pre-determined rates for reimbursements to nursing homes. Changes relating to the types of services covered included increased coverage of alternative services, such as hospices, home health programs, and outpatient surgery.

Many of these changes made in state and private sector health care programs were enacted in an effort to constrain expenditures. In many cases, the impact on cost has not been determined. Moreover, many have had impacts on patient access and quality. For example, California's process of selecting hospitals on the basis of bids effectively excluded some hospitals from the program thus having an impact on patient access. State cutbacks in eligibility and services offered in their Medicaid programs may also adversely affect access and quality. The key issue focuses on how these changes affect health care expenditures, patient access, and quality of care.

What are the pros and cons and cost impact of
alternative approaches to the traditional
fee-for-service method of reimbursing

physicians and other health care practitioners?

Under the fee-for-service reimbursement method, physicians have had economic incentives to furnish more, rather than less, services to the patient because the physician will earn more revenue by rendering more services. Hence, the fee-for-service

reimbursement method does not give physicians incentives to economize in the delivery of services.

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