Effects of Medicare's Hospital Prospective Payment System (PPS) on Disabled Medicare Beneficiaries: Final Report


U.S. Department of Health and Human Services

Effects of Medicare's Hospital Prospective Payment System (PPS) on Disabled Medicare Beneficiaries

Executive Summary

Korbin Liu, Sc.D., The Urban Institute

Kenneth G. Manton, Ph.D., Duke University

February 1988

This report was prepared under contract #18-C-98641 between the U.S. Department of Health and Human Services (HHS), Office of Social Services Policy (now known as the Office of Disability, Aging and Long-Term Care Policy) and the Urban Institute. Funds were also provided by the Health Care Financing Administration. For additional information about the study, you may visit the DALTCP home page at http://aspe.hhs.gov/daltcp/home.htm or contact the office at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, SW, Washington, DC 20201. The e-mail address is: webmaster.DALTCP@hhs.gov. The DALTCP Project Officer was Floyd Brown.

Conclusions in this report are solely those of the authors, and do not necessarily reflect the view of the Urban Institute, Duke University, or the Department of Health and Human Services


We wish to thank many people who helped us throughout the course of this project. Mary Harahan, who first recognized the unique opportunity offered by the 1982 and 1984 NLTCS to study PPS effects on disabled beneficiaries, catalyzed the research leading to this report. Our project officers, Floyd Brown and Herb Silverman, along with Tony Hausner, ensured the timely availability of data sets and provided helpful suggestions on technical and substantive issues. Paul Eggers, Jim Vertrees, Bob Clark and Judy Sangl read earlier drafts of this report and provided many insightful comments and suggestions. While we benefited from the collective knowledge of the individuals noted, and others, we are solely responsible for the results and conclusions reported.


Medicare's prospective payment system (PPS) reimburses hospitals on a casemix adjusted, flat-rate basis. This method of payment provides incentives for hospitals to serve patients as efficiently as possible, possibly by reducing length of stay and increasing use of skilled nursing facility (SNF) and home health (HHA) care. While increased SNF and HHA use might be viewed as an intended consequence of PPS, there has been concern that PPS induced changes in the duration and location of care would affect quality of care received by Medicare beneficiaries. Moreover, a particular concern was that the frail and disabled elderly would be disproportionately affected by the utilization changes resulting from the introduction of PPS.


Several studies have examined PPS effects on the total Medicare population. The purpose of this study was to examine the effects of PPS on the subgroup of Medicare beneficiaries who were functionally disabled. The specific aims of this study were to measure changes in Medicare service use and to evaluate the effects of these changes on quality of care in terms of hospital readmission and mortality.

To focus on disabled persons, Medicare service use patterns of the samples of disabled Medicare beneficiaries in the 1982 and 1984 National Long Term Care Surveys (NLTCS) were analyzed. With Medicare Part A bills for the NLTCS samples of approximately 6,000 persons in 1982 and 1984, this study compared utilization patterns in one-year periods pre-PPS (1982-83) and post-PPS (1984-85). Service use measures that were analyzed were hospital admissions, Medicare hospital length of stay (LOS), SNF and HHA use. In this study, hospital readmission and mortality were viewed as indicators of quality of care. A multivariate clustering methodology was employed to identify relatively homogeneous subgroups of disabled Medicare beneficiaries so that utilization changes could be compared for medically and functionally similar cases as well as for the total disabled population.


Hospital LOS. The study found that expected reductions in lengths of hospital stays occurred under PPS, although this reduction was not uniform for all admissions and appeared to be concentrated in subgroups of the disabled population. For example, while persons who were "mildly disabled" experienced reductions in LOS (10.8 days to 8.2 days), persons who had "heart and lung" problems experienced virtually no changes in hospital LOS (10.5 days to 10.6 days).

Post Acute SNF Use. The study found virtually no changes in Medicare SNF use after PPS was implemented. In fact, a slight decline in hospital episodes resulting in SNF admissions (5.2% to 4.7%) was observed.

Post Acute HHA Use. Different from PPS effects on SNF use, the study found an increase in hospital episodes resulting in the use of HHA services (12.6% to 15.6%). In addition, HHA use without prior hospital stay increased from 13.6% to 21.5%.

Outcomes. In terms of outcomes of hospital use related to quality of care, no difference in overall readmissions or mortality pre- and post-PPS were found. For example, the proportions of hospital episodes resulting in readmission within the one-year observation periods were 39.3% pre-PPS and 38.4% post-PPS. Proportions of episodes resulting in death in the observations periods were 12.1 % pre-PPS and 12.5% post-PPS. In a further analysis of these measures, the hospital cases were stratified by whether they were followed by post-acute SNF or HHA use. Post-acute use of SNF or HHA did not influence either hospital readmission or mortality rates. Analysis of subgroups of the disabled population also showed few differences in pre-post PPS hospital readmissions and mortality.

Limitations and Conclusions

This study on the effects of hospital PPS on Medicare beneficiaries has certain limitations. The available data precluded analyses of other service episodes such as traditional nursing home stays. At the time the study was conducted, data were not available to measure use of Medicare Part B services. Detailed service-specific, casemix information (e.g., DRGs) was unavailable for comparison in pre- and post-PPS observation periods. Finally, the analysis was not specifically designed to evaluate the effects of PPS on the need for or use of "aftercare" in the community.

In conclusion, this study of the effects of hospital PPS on the functionally impaired subgroup of Medicare beneficiaries indicated no system-wide adverse outcomes. Further research on the community services, nursing home use and other types of care would be necessary to develop a complete picture of the effects of PPS on disabled Medicare beneficiaries.

The Full Report is also available from the DALTCP website (http://aspe.hhs.gov/daltcp/home.shtml) or directly at http://aspe.hhs.gov/daltcp/reports/pps.htm.