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Developing payment refinements and reforms under Medicare for excluded hospitals

Health Care Financing Review, Spring, 1989 by John C. Langenbrunner, Patricia Willis, Stephen F. Jencks, Allen Dobson, Lisa Iezzoni

Four classes of specialty hospitals children's, psychiatric, rehabilitation, and long-term) and two types of distinct-part units in general hospitals (psychiatric and rehabilitation) have been excluded from the Medicare hospital prospective payment system since it was enacted by Congress in 1983. The number of these facilities and the Medicare dollars expended have more than doubled in less than 5 years, prompting renewed-policy interest in developing payment reform. In this context, the substantial research and policy development efforts to refine case-mix classification and payment policies for these facilities are reviewed and examined. Findings are discussed relative to possible legislative and regulatory directions. Introduction and background

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The Social Security Amendments of 1983 (Public Law 98-21), passed by Congress and enacted by the President in the spring of that year, established the statutory framework for the Medicare hospital prospective payment system (PPS). Under PPS, the Medicare program has been paying hospitals in 48 States and the District of Columbia on the basis of a prospectively determined rate for each type of case. At discharge, each case is classified into one of about 475 diagnosis-related groups DRG's). Medicare pays, based on the DRG, an amount that is published at the beginning of the fiscal year-that is, prospectively.

PPS generally applies to all hospitals participating in the Medicare program, with certain exclusions, exemptions, and adjustments specifically set forth under the law. At present, four major classes of specialty hospitals (children's, psychiatric, rehabilitation, and long-term) and two types of distinct-part units in general hospitals (psychiatric and rehabilitation) are excluded from PPS.

The exclusion for these hospitals and units presently has no limitation; however, the Secretary of Health and Human Services was mandated to report to the Congress the results of research studies on whether and how these excluded hospitals and units might be included under a prospectively based system. According to the 1983 amendments: "In the annual Report to Congress under subparagraph (A) for 1985, the Secretary shall include the results of studies on whether and the method under which hospitals, not paid based on amounts determined under such section, can be paid for inpatient hospital services on a prospective basis as under such section." (Sec. 603(a)(2)(C)(ii).)

In response to the legislative mandate, the Health Care Financing Administration (HCFA) has undertaken and funded a wide range of research studies during the last 5 years regarding the inclusion of the four classes of facilities excluded under PPS. Coordination with additional studies conducted outside HCFA has also taken place. This article, based on the Secretary's Report to Congress, Developing a Prospective Payment System for Excluded Hospitals (U.S. Department of Health and Human Services, 1987), reviews these research studies for each hospital class-children's, psychiatric, rehabilitation, and long-term. The research findings are examined relative to possible legislative and regulatory recommendations regarding inclusion of each class of facilities under PPS, and relative to payment policy reform generally.

Perhaps more importantly, the progress toward the development of a prospective payment system for these facilities is evaluated in the context of more substantial, and sometimes longer range, directions of Medicare reform that have emerged since PPS was enacted. These directions include a reexamination and extension of Medicare program benefits, such as the recent catastrophic care legislation implemented January 1, 1989. These also include payment policies that foster capitation and alternative private health plans, and program initiatives that emphasize the delivery of truly effective and appropriate services to Medicare beneficiaries. Overall, the discussions here can identify and outline policy implications and can provide directions for future research and legislation that may be proposed for each class of hospitals.

This article is organized into three sections. In the first section, we focus on characteristics and policy issues that cut across the four classes of excluded hospitals. We begin with a brief legislative history and rationale for exclusion under PPS, discuss the process developed for initial exclusion of these hospitals, and then update their current status. Data on the different levels of Medicare program expenditures for these classes of hospitals are presented, and current Medicare payment policies-that is, those legislated under the Tax Equity and Fiscal Responsibility Act of 1982 TEFRA)-for these facilities are discussed.

In the second section, we introduce the methods and tasks involved in construction and design of a prospective payment system for excluded facilities. The section includes a discussion of the present Medicare PPS and an analysis of issues that must be considered in a payment system for the excluded facilities.

Health Care Industry

Developing payment refinements and reforms under Medicare for excluded hospitals

Health Care Financing Review, Spring, 1989 by John C. Langenbrunner, Patricia Willis, Stephen F. Jencks, Allen Dobson, Lisa Iezzoni

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