Paying Hospitals Under Medicare's Prospective Payment System: Another Perspective

Abstract

In 1983, Congress enacted as part of the Social Security Amendments of 1983 (SSA), major Medicare reforms designed to ensure the solvency of Social Security into the 21st Century. The enactment and implementation of a "prospective payment system" (PPS) for hospitals under Medicare constituted one of the most significant, and perhaps enduring, innovations of the Reagan Administration. The Prospective Payment System, which replaced the retrospective, cost-based reimbursement system, fundamentally altered the payment of hospital care for the elderly and disabled, and played an integral part in the revolution of health care delivery in America. The Reagan Administration's goal was to create incentives for hospitals to operate more efficiently in order to curb rising government expenditures on health care. The underlying agenda, however, was to reduce the federal deficit, a political issue that related only tangentially to health care but that has driven the operation of PPS during the past seven years.