Cost Containment Strategies

Medicare's Prospective Payment System

To control community hospital costs, Medicare implemented the prospective payment system (PPS). The PPS sets hospital payments rates prior to when care is given. By setting a fixed reimbursement level based on diagnosis, prospective payment provides economic incentives for hospitals to conserve the use of their input resources. Hospitals that use more resources than covered by the flat rate lose the difference, while those with costs below the rate retain the difference.

Medicare's Resource-Based Relative Value Scale

To control physician fees, Medicare implemented the Resource-Based Relative Value Scale (RBRVS), which pays physicians for the various services they provide based on the amount of expertise needed, how much time they spend with the patient, and other factors. By using the RBRVS and changing the level of payment, certain high-growth, highly profitable services, such as endos-copy and ambulatory cardiac monitoring, may be slowed and not be overused.

Medicaid

State efforts to control the costs of healthcare have focused on Medicaid, which is jointly funded by the states and the federal government. In their efforts to control costs, states have used their discretion to determine who is eligible for Medicaid, what optional benefits to provide, and how much to reimburse providers. The various state efforts at cost containment have found the following: (a) one of the most effective means of managing costs is to limit access to the program; (b) states that set broad eligibility levels often accompany them with tightly regulated provider payment rates; and (c) states that include all payers in their cost containment strategies appear more effective than states with more limited (Medicaid-only) interventions in controlling costs.

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