cover the costs of the average case. The impact of the hospital inpatient PPS on the quality of hospital care is unclear. Early concerns that the DRG payment system would lead to stinting on care and an inappropriate shortening of hospital stays appear largely to have been unfounded. MedPAC’s most recent assessment of trends found lower in-hospital and 30-day mortality rates, improvement in measures of appropriateness of care and clinical effectiveness, and some increases and some decreases in measures of adverse events (MedPAC, 2006).


The implementation of inpatient PPS promoted a shift of care to outpatient departments because hospitals continued to be reimbursed for such care on a retrospective, cost basis. To reduce this incentive, a hospital outpatient PPS was introduced in 2000. Like the inpatient PPS, the outpatient system groups services that are similar clinically and costwise into one of about 850 ambulatory payment classification (APC) categories, each with its own payment rate. Additional APCs are designated for new technologies—those for which the Centers for Medicare and Medicaid Services has insufficient data—which are grouped together by cost, not clinical similarity. There are also pass-through payments that cover the costs of particular new drugs; costs of biologicals and devices used in the delivery of services; outlier payments for cases that are unusually expensive relative to the preset payment rate; and adjustments for rural, low-volume facilities.

Compared with the inpatient PPS, the outpatient system provides somewhat weaker incentives for efficiencies because the APC service bundles are not as broad as those of the DRGs, and the use of certain new technologies is encouraged. The volume of outpatient services continues to grow rapidly as procedures once requiring a hospital stay can now be performed safely on an outpatient basis. There is little systematic knowledge about trends in the quality of outpatient care or the impact that the outpatient PPS may have had on the quality of care.


Skilled nursing facilities (SNFs) shifted from cost-based reimbursement to a PPS in 1998. Under the PPS, SNFs are paid set per diem rates for each patient. Based on periodic assessments, patients with similar needs and characteristics are placed in one of 53 resource utilization groups, each with its own payment rate. These rates, which are the sum of a nursing component, a therapy component, and a routine services component, are intended to cover all routine care and ancillary services. Additional payments are made for certain rare but high-cost ancillary services, such as an outpatient hospi-

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