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Prospective Payment Assessment Commission And Report Hi Recommendahons TbTkECongress March 1,1993 Prospective Payment Assessment Commission And Report Recommendations TbTkE Congress March 1,1993 PROSPECTIVE PAYMENT ASSESSMENT COMMISSION H. Altman, Ph.D., Chain Richard A. Berman Larry L. Mathis James D. Bernstein Donald R. Oder Clay D. Edmands Elliott C. Roberts, Sr. William D. Fullerton J. Michael Sadaj, M.D. William S. Hoffman, Ph.D. Leonard D. Schaeffer Clark E. Kerr J.B. Silvers, Ph.D. James R. Kimmey, M.D. Roxane B. Spitzer-Lehmann David A. Kindig, M.D. Bruce C. Vladeck, Ph.D. Staffand Consultants Donald A. Young, M.D., ExecutiveDirector Laura A. Dummit, Deputy Executive Director Stuart Guterman, DeputyExecutive Director Sharon B. Arnold, Ph.D. Claudia C. Johnson John L. Ashby Lynn L. Lewis Amy B. Bernstein, Sc.D. Craig K. Lisk Thomas B. Bradley Mary Anne Miles Wylene Carlyle Julian H. Pettengill Delores J. Curtis Molly Ryan Teresa A. Fama Claire E. Sharda Karen S. Fisher, J.D. Deborah K. Williams Gina M. Fortuna Melissa M. Winkel BarbaraJ. Gage Jeannette A. Younes Timothy F. Greene Prospective Payment Assessment Commission 3007thStreet,S.W. Suite30IB Washington. D.C. 20024 Tel (202)401-8986 Fax(202)401-8739 March 1, 1993 The Honorable Al Gore President ofthe Senate United States Senate Washington, D.C. 20510 DearMr. President: I am hereby transmitting to the Congress the annual report ofthe Prospective Payment Assessment Com mission as required by Section 1886(e)(3) ofthe Social Security Act as amended by Public Law 101-508. This report presents a discussion oftrends in hospital costs and payments under Medicare's prospective payment system in the context ofrising Medicare and overall health care expenditures. The report also con- tains 22 recommendations and addresses several additional concerns that reflect the Commission's collec- tivejudgment about issues ofsubstantial importance to beneficiaries, hospitals, otherproviders, and the Medicare program. Sincerely, Stuart H. Altman, Ph.D. Chairman Enclosure Prospective Payment Assessment Commission 3007thSlri-et. S.W. Suite301B Washington, D.C. 20024 Tel (202)401-8986 Fax(202)401-8739 March 1,1993 The Honorable Thomas Foley Speaker United States House ofRepresentatives Washington, D.C. 20515 Dear Mr. Speaker: I am hereby transmitting to the Congress the annual report ofthe Prospective Payment Assessment Com mission as required by Section 1886(e)(3) ofthe Social Security Act as amended by Public Law 101-508. This report presents a discussion oftrends in hospital costs and payments under Medicare's prospective payment system in the context ofrising Medicare and overall health care expenditures. The report also con tains 22 recommendations and addresses several additional concerns that reflect the Commission's collec- tivejudgment about issues ofsubstantial importance to beneficiaries, hospitals, other providers, and the Medicare program. Sincerely, Chairman Enclosure 8 TABLE OF CONTENTS Chapter Page EXECUTIVE SUMMARY 1 HEALTH CARE EXPENDITURES AND HOSPITAL PAYMENTS: 1. HOWMUCH IS APPROPRIATE? 13 Overview 16 The Impact ofHealth Care Spending Growth 17 Businesses 17 Households 18 Government 1 PPS and Medicare Payments 19 Medicare Payments and Hospital Costs 20 PPS Payments 20 Hospital Costs 21 Hospital Revenues and Cost Shifting 22 MajorConcerns 24 Conclusions 25 RECOMMENDATIONS 2. 27 Recommendations forFiscal Year 1994 29 Medicare Program Policies 29 Recommendation 1: Moderating the Growth in the Cost ofHospital Inpatient Services 30 Recommendation 2: Improving Equity in the Distribution ofPPS Payments 31 Recommendation 3: Controlling Spending Across Sites ofCare 31 Recommendation 4: Ensuring Quality ofCare 32 Hospital Payment Updates 33 Recommendation 5: Update Factorfor Operating Payments to PPS Hospitals 33 Recommendation 6: Update FactorforCapital Payments to PPS Hospitals 36 Recommendation 7: Single Operating and Capital Update Factor 38 Recommendation 8: Data forEvaluating Case-Mix Index Change 39 Recommendation 9: Update Factorfor Hospitals Paid on the Basis of Hospital-Specific Rates 40 Recommendation 10: Update Factor forPPS-Excluded Hospitals andDistinct-Part Units 40 PPS Wage Index and Hospital LaborMarket Definitions 42 Recommendation 11: Improvements in the PPS Hospital Wage Index 43 Recommendation 12: Repeal ofCurrentProvisions Relating to Geographic Reclassification forthe Wage Index 45 Recommendation 13: Improvements in Hospital Wage Data 45 OtherHospital Payment Policies 47 Recommendation 14: Improving OutlierPayment Policy 47 Recommendation 15: IndirectMedical Education Adjustment to PPS Operating Payments 50 Recommendation 16: Medicare TransferPayment Policy 51 Recommendation 17: Evaluating and Improving Medicare Quality ofCare Mechanisms 52 Medicare Payment Policies for OtherFacilities 54 Recommendation 18: Update to Composite Rate for Dialysis Services 54 (v) Recommendation 19: Improving Data Quality and Program Administration for Dialysis Services 55 Recommendation 20: Prospective Payment Method for Hospital Outpatient Services 57 Recommendation 21: Beneficiary Liability for Hospital Outpatient Services 57 Recommendation 22: Nursing Facility Wage Index 58 APPENDIXES 59 A. Background Material and Analyses 61 Fiscal Year 1994 PPS Operating Update 63 Capital Update Framework 73 Fiscal Year 1994 Update for Payments to Dialysis Facilities 79 The PPS Wage Index and Hospital Labor Market Definitions 85 B. Technical Report Series 91 C. Biographical Sketches ofCommissioners 103 D. Statutory Mandate ofthe Commission 109 E. Change in DRG Relative Weights from Fiscal Year 1992 to Fiscal Year 1993 121 (vi) LIST OF TABLES Page Chapter 1. Health Care Expenditures and Hospital Payments: How Much Is Appropriate? 1-1 Aggregate Hospital Costs and Payments, by Payer Group and Non-Patient Care Revenue Source, 1990 23 Chapter 2. Recommendations 2-1 Recommended Update FactorforPPS Hospital Operating Payments, Fiscal Year 1994 34 2-2 Recommended Update FactorforCapital Payments, Fiscal Year 1994 37 2-3 Estimated Fiscal Year 1994 Average Increase in PerCase Payments Under Fully Prospective Rates 39 2-4 Recommended Update FactorforPPS-Excluded Hospitals, Fiscal Year 1994 41 Appendix A. Background Materials and Analyses A-l Comparison ofIncreases in Hospital Market Basket, PPS Updates, and PPS Payments Per Case, Fiscal Years 1984-1993 (In Percent) 64 A-2 Estimated Impact ofEmerging Technologies on Operating Costs for PPS Hospitals, Fiscal Year 1994 66 A-3 Change in Aggregate Operating Productivity, 1984-1991 (In Percent) 69 A-4 Estimated Impact ofEmerging Technologies on Capital Costs for PPS Hospitals, Fiscal Year 1994 76 A-5 Change in Aggregate Capital Productivity, 1984-1991 (In Percent) 77 A-6 Estimated Change in Cost Per Hemodialysis Treatment by Factors ofProduction, 1983-1991 82 A-7 Estimated Impact ofCost-Increasing Technologies for Dialysis Facilities, Fiscal Year 1994 83 (vii) LIST OF FIGURES Page Chapter 1. Health Care Expenditures and Hospital Payments: How Much Is Appropriate? 1-1 U.S. Health Care Expenditures as a Percentage ofGross Domestic Product, 1960-2000 15 1-2 Real Rate ofIncrease in Public Expenditures, by Category (In Percent) 18 1-3 Real Rate ofIncrease in Medicare Benefit Payments, Before and After PPS (In Percent) 19 1-4 Cumulative Increases in PPS Market Basket, Update, Payments, and Costs, First Nine Years ofPPS (In Percent) 20 -5 Cumulative Increases in PPS and Total Hospital Costs Per Discharge, First Seven Years of 1 PPS (In Percent) 21 1-6 Change in Real Hospital Expenses and Revenues Per Admission, 1977-1990 (In Percent) 22 1-7 PPS and Total Margins, First Seven Years ofPPS (In Percent) 22 1-8 PPS and Total Margins for Selected Hospital Groups, Seventh YearofPPS (In Percent) 23 Appendix A. Background Material and Analyses A-l Annual Medicare Case-Mix Index Change, 1985-1993 (In Percent) 70 A-2 Cumulative Change in Aggregate Productivity, 1983-1991 (In Percent) 78 (viii)