Effects of the Medicare Prospective Payment System on Hospital Cost Containment: An Early Appraisal

In 1983 federal efforts to contain hospital costs were coalesced under the Medicare prospective payment system (PPS)-a “self-interest” approach to administered prices. Diagnosis-related groups (DRGs) and the tougher peer review organizations (PROs) serve to define “products”; PPS sets the price on each. The effects of PPS go beyond Medicare; they have been system-wide. Differential impacts on hospital utilization, substitution of capital for labor, and quality are examined through a variety of data sources and descriptive as well as regression analyses. The greatest cost savings are attributed to a reduction in hospital admissions per capita.

Author(s): Frank A. Sloan; Michael A. Morrisey; Joseph Valvona

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Volume 66, Issue 2 (pages 191–220)
Published in 1988