Since its inception, how Medicare pays hospitals has been a work in progress. Medicare originally paid hospitals by reimbursing them for the cost of each “item” of care delivered, such as laboratory tests, medications, and procedures. While this was advantageous for hospitals, it ultimately led to an unsustainable increase in Medicare spending.1 In 1983, the Reagan administration responded by implementing a major payment reform: prospective payment. Under prospective payment, hospitals are paid a single fixed amount for an entire hospitalization, based on the diagnosis for which a patient is hospitalized. This creates incentives for hospitals to be more efficient during the hospitalization, reduce length of stay, and avoid nonessential tests and procedures.
Ryan AM. Medicare Bundled Payment Programs for Joint Replacement: Anatomy of a Successful Payment Reform. JAMA. 2018;320(9):877–879. doi:10.1001/jama.2018.11787
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