Evaluation of the impact of Medicare and Medicaid prospective payment on utilization of Philadelphia area hospitals.

The article evaluates the impact of Medicare and Medicaid DRG prospective payment on utilization in Philadelphia area hospitals. These hospitals began a combined Medicare-Medicaid DRG prospective payment at the same time after a common cost-based reimbursement history. Particular attention is paid to the hospital-driven as opposed to physician-driven explanations of declining inpatient utilization. The evaluation of the Tax Equity and Fiscal Responsibility Act (TEFRA) and Diagnosis-Related Group (DRG) interventions uses an ARIMA model that removes both seasonal and autoregressive effects. Both TEFRA and the DRG payment system produced significant reductions in average length of stay, total hospital days, and hospital occupancy rates. Neither, however, had a significant effect on admissions. Hospitals with a higher proportion of Medicare and Medicaid discharges reduced their average length of stay more than other facilities. Hospitals with a higher proportion of outpatient visits to inpatient admissions also reduced inpatient length of stay more. Hospitals with higher than expected overall admissions after the introduction of the DRG program tended to have lower than expected average lengths of stay. The results lend support to the "hospital-driven" interpretation of declines in average length of stay. They fail to support the contention that the DRG system will produce automatic counteracting increases in admissions in the system as a whole.