The Impact of Medicare's Prospective Payment System on Psychiatric Patients Treated in Scatterbeds

Medicare's Prospective Payment System (PPS) for hospitals was phased-in during the 1884 Federal Fiscal Year. While many providers of psychiatric inpatient care were exempted from PPS patients treated in general hospital beds outside of psychiatric units (scatterbeds) were not. This allows for an initial assessment of the impact of PPS on psychiatric patients. We use a single equation model of hospital length of stay to estimate the impact of PPS. We allow for the possibility of both anticipating behavior and slow adjustment to the new payment scheme. The results indicate a substantial response to PPS over the first year of implementation. The estimated response includes sizable anticipatory and slow adjustment components. The findings suggest that policy discussions may be weighted too heavily in the direction of concern over hospital financial status given the ability of hospitals to change their behavior.