Paying the Piper, Calling the Tune: Implications of Changes in Reimbursement

The United States is in the midst of a revolution in health care finance, the third since the end of World War II. Medicare's prospective payment system (PPS) based on diagnosis-related groups (DRGs), the State of California's hospital-specific contracts for Medi-Cal patients, deductibles and coinsurance, health maintenance organizations (HMOs), and preferred provider organizations (PPOs) are among the best known symbols of the new era in health care finance. This paper analyzes the economic factors responsible for innovations in reimbursement, discusses the distinguishing characteristics of the new methods, and examines their potential impact on hospitals, physicians, nurses, and patients. The paper concludes by considering some fundamental problems of public policy with respect to health care.