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hospital and physician services have been implemented, and second surgical opinion programs have been tried.

One option is to further increase consumer
cost-consciousness by expanding cost-sharing
provisions in health insurance plans. Another
consumer-oriented option is to continue
encouraging changes in lifestyles that may
improve health and consequently reduce
utilization of the health care system.

Several options are also available to increase providers' cost-consciousness.

- Increasing emphasis on utilization review programs to monitor the appropriateness of provider decisions to hospitalize patients and order inpatient services.

--Improving physician training programs by

including information on the costs and economic impact of alternative treatments.

--Developing ways to reduce the practice of

defensive medicine, which results in overutilization of services to deter malpractice suits.

--Exploring further the potential for reducing

expenditures associated with widespread variations in medical practice patterns. (See ch. 4.)

Pinancing issues

Key financing issues relate to the effect of paying providers prospectively rather than retrospectively and the promotion of alternative and less costly ways of obtaining health care services.

Prospective payment systems

In the past, retrospective cost-based reimbursement created incentives for providers to increase the quantity of services delivered. Prospective payment systems, on the other hand, are designed to increase provider efficiency by making them operate within a predetermined

budgetary constraint. Such a system has been adopted for hospitals in the Medicare program and by some states in their Medicaid programs. However, questions have been raised about the system's potential effects on access to and quality of care.

Applying prospective payment systems to all third-party payers and developing a similar system for physicians warrants consideration. However, in doing so, the potential impact on patients' access to and quality of care need to be fully considered.

Insurance disincentives

Reimbursement has also tended to be oriented to the most costly health care services. More extensive health insurance coverage has been provided for the most expensive services, such as inpatient hospital care. Other less costly services, such as hospice and home health programs, have been eligible for less extensive coverage.

Reimbursement for education and capital costs

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Other important financing issues involve how hospitals and other institutions should be reimbursed for their graduate medical education and capital costs. Patient care costs are higher in teaching hospitals than in nonteaching hospitals for a variety of reasons. In 1983, Medicare alone paid an estimated $1.8 billion for costs related to medical education. Expenditures for the direct costs of graduate medical education were not included in Medicare's prospective payment system and continue to be reimbursed on a cost basis. Policy questions relate to what role, if any, the federal government should play in paying for medical education costs and how such costs should be subsidized.

Payments for capital costs have also tended to increase health care expenditures. In 1982, hospital capital costs amounted to about $11 billion. In 1984, Medicare paid about $3.2 billion for such costs. Reimbursement for capital costs is also excluded from Medicare's prospective payment system pending the results of a study on how to include them. Key policy questions focus on what method should be adopted to reimburse facilities more cost-effectively for their capital costs.

Fraud and abuse

Considerable fraud and abuse is also perceived to exist in federally financed health programs. The extent of the problem is unknown, although some estimates claim it may be as high as $10 billion. Convictions for fraud vary widely among the states. As long as fraud and abuse are perceived to be extensive, policymakers and the public may be reluctant to accept cost-cutting strategies, such as reducing benefits or increasing cost sharing. (See ch. 5.)

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