Value-Based Care Happened 40 Years Ago... Medicare's Prospective Payment System Explained

This video provides an in-depth exploration of the historical implementation and impact of Medicare's Prospective Payment System (PPS) in the 1980s, framing it as an early and highly effective form of value-based care. Dr. Eric Bricker, the speaker, begins by establishing the context of healthcare reimbursement prior to PPS, where Medicare paid hospitals a "cost-plus" percentage of their expenses, leading to unsustainable cost escalation. He then details how the PPS, implemented between 1983 and 1986 under a bipartisan effort, fundamentally shifted this model to a fixed payment per Diagnosis Related Group (DRG), regardless of the patient's length of stay. This change incentivized hospitals to manage resources more efficiently for specific conditions like pneumonia or hip fractures, effectively introducing a form of capitation at the individual admission level.

The presentation meticulously outlines the significant outcomes of PPS implementation. Data points reveal a 17% decrease in the average length of hospital stay for Medicare beneficiaries and a 3.5% reduction in admissions and discharges. A notable example cited is the shift of 300,000 cataract surgeries annually from inpatient to universally outpatient procedures, driven purely by the change in reimbursement, not clinical necessity. Interestingly, readmission rates remained unchanged, suggesting that earlier discharges did not compromise patient safety in this regard. While 30-day post-admission mortality slightly increased by 0.6 percentage points, Dr. Bricker attributes this to a sicker patient mix being admitted, as less complex cases (like cataract surgeries) were no longer admitted, thus removing low-mortality cases from the inpatient pool. Financially, PPS dramatically slowed Medicare inflation, reducing the annual payment increase rate from 10.1% to 5.7%.

Beyond the direct financial and operational impacts, the video highlights crucial changes in clinical practice and broader healthcare dynamics. Hospitals, now incentivized by fixed payments, developed better inpatient care coordination, involving multidisciplinary teams of nurses, case managers, and therapists to optimize patient flow and discharge planning for Medicare patients. This improved process, initially developed for Medicare, had a "spillover effect" on commercial insurance plans, leading to an acceleration in outpatient services for commercially insured individuals as hospitals applied their newly optimized outpatient infrastructure across all patient populations. Dr. Bricker concludes by contrasting the rapid and profound changes achieved by PPS in three years with the minimal impact of the Affordable Care Act (ACA) over eleven years. He attributes this disparity to the increased economic size of the healthcare industry (10% of the economy in the 80s vs. 18% today) and its greater lobbying power, suggesting that significant systemic, government-led change is less likely today, urging organizations to drive their own internal changes.

Key Takeaways:

• Historical Precedent for Value-Based Care: Medicare's Prospective Payment System (PPS) in the 1980s served as an early and effective model of value-based care, demonstrating that shifting payment incentives can drive significant operational changes in healthcare.
• Shift from Cost-Plus to Fixed Payments: PPS moved from reimbursing hospitals a percentage of their costs to a fixed amount per Diagnosis Related Group (DRG), regardless of length of stay, effectively introducing capitation at the admission level.
• Significant Operational Efficiency Gains: The implementation of PPS led to a 17% decrease in the length of hospital stays and a 3.5% reduction in admissions/discharges for Medicare beneficiaries, driven by financial incentives for efficiency.
• Impact on Clinical Practice: Hospitals improved inpatient care coordination and discharge planning for Medicare patients, utilizing multidisciplinary teams to optimize patient flow and resource allocation.
• Shift to Outpatient Services: Payment changes directly influenced the move of procedures like cataract surgeries from inpatient to outpatient settings, demonstrating how reimbursement models can dictate care delivery locations.
• Financial Savings for Payers: Medicare's annual payment increase rate to hospitals was nearly halved from 10.1% to 5.7% after PPS implementation, proving its effectiveness in controlling healthcare inflation.
• Outcomes and Patient Safety: While readmission rates remained unchanged, a slight increase in 30-day post-admission mortality was observed, attributed to a sicker inpatient population after less complex cases moved to outpatient settings.
• Spillover Effect on Commercial Insurance: The operational efficiencies and outpatient infrastructure developed for Medicare patients under PPS were subsequently applied to commercially insured patients, accelerating the increase in outpatient services across the board.
• Difficulty of Systemic Change Today: The speaker posits that the healthcare industry's increased economic size (18% of the economy today vs. 10% in the 80s) and lobbying power make large-scale, government-mandated systemic changes much harder to implement effectively compared to the 1980s.
• Call for Internal Organizational Change: Given the perceived inertia at the governmental level, organizations within the healthcare ecosystem are encouraged to proactively drive their own changes and efficiencies rather than waiting for top-down systemic reforms.

Tools/Resources Mentioned:

• AHealthcareZ.com: The channel's website for healthcare finance educational videos and newsletters.
• 16 Lessons in the Business of Healing: Dr. Bricker's book.
• Steve Brill's Book 'America's Bitter Pill': Referenced for insights into the healthcare industry's influence on government.
• NCBI and Princeton University Articles: Academic sources cited for data and analysis on PPS.

Key Concepts:

• Prospective Payment System (PPS): A method of reimbursement in which Medicare payment for hospital inpatient services is a fixed amount per diagnosis, regardless of the actual cost or length of stay.
• Diagnosis Related Groups (DRGs): A classification system that categorizes patients into groups based on diagnosis, procedures, age, and other factors, used to determine the fixed payment amount under PPS.
• Value-Based Care: A healthcare delivery model where providers are paid based on patient health outcomes, rather than the volume of services provided. The video frames PPS as an early, albeit unnamed, form of this.
• Cost-Plus Reimbursement: A payment model where providers are reimbursed for their costs plus an additional percentage, which can incentivize higher spending.
• Capitation: A payment arrangement where a healthcare provider is paid a fixed amount per patient per period of time, regardless of how many services the patient uses. PPS applied this concept at the individual admission level.