An Analysis of the Effects of Prospective Reimbursement Programs On Hospital Expenditures

Prospective reimbursement (PR) programs attempt to restrain increases in hospital expenditures by establishing, in advance of a hospital's fiscal year, limits on the reimbursement the hospital will receive for the services it provides to patients. We used data compiled from a sample of approximately 2700 community hospitals in the U.S. for each year from 1969 to 1978 to estimate the effects of prospective reimbursement programs on hospital expenditures per patient day, per admission, and, to a lesser extent, per capita. The statistical evidence indicates that some PR programs have been successful in reducing hospital expenditures per patient day, per admission, and per capita. Eight programs—in Arizona, Connecticut, Maryland, Massachusetts, Minnesota, New Jersey, New York, and Rhode Island—have reduced the rate of increase in expenses by 2 percentage points or more per year and, in some cases, by as much as 4 to 6 percentage points. There are indications, although less strong, that PR programs also reduced expenses in Indiana, Kentucky, Washington, western Pennsylvania, and Wisconsin. There are no indications of cost reductions for programs in Colorado and Nebraska. An analysis of the relative effectiveness of the various programs suggests that mandatory programs have a significantly higher probability of influencing hospital behavior than do voluntary programs. Some voluntary programs, however, are shown to be effective.