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The Incidence of Adverse Medical Outcomes Under Prospective Payment

David M. Cutler

Abstract

This paper examines the effect of prospective payment for hospital care on adverse medical outcomes. In 1983, the federal government replaced its previous cost-based reimbursement method with a Prospective Payment System, under which reimbursement depends only on the diagnosis of the patient. Hospitals thus lost the marginal reimbursement they formerly received for providing additional treatments. In addition, the average price each hospital received for patients with different diagnoses changed. This paper relates each of these changes to adverse outcomes, with two conclusions. First, there is a change in the timing of deaths associated with changes in average prices. In hospitals with price declines, a greater share of deaths occur in the hospital or shortly after discharge, but by one year post-discharge, mortality is no higher. Second, there is a trend increase in readmission rates caused by the elimination of marginal reimbursement. This appears to be due to accounting changes on the part of hospitals, however, rather than true changes in morbidity.