Assessing the FY 1989 change in Medicare PPS outlier policy

In fiscal year (FY) 1989, Medicare changed its rules for paying for extremely long or expensive hospital stays called “outliers.” We compared outlier payments in FYs 1989 and 1988, after adjusting for other simultaneous policy changes. We found that the new policy succeeded in targeting more outlier payments to the most expensive cases and to the hospitals suffering larger prospective payment system (PPS) losses and in reducing hospital financial risk. Using time-series analyses, we show that the policy change had no measurable effect on the timing of discharges or on the concentration of expensive cases in urban government-owned hospitals.