Change in the Medicare Case-mix Index in the 1980s and the Effect of the Prospective Payment System

Persistent increases in the Medicare case-mix index over the 1980s have been ascribed to changes both in medical treatment ("real changes") and in the way medical information is recorded ("coding changes") in hospitals. These changes have been attributed, in the absence of appropriate data and analyses, to the incentives of the Medicare prospective payment system (PPS). Using data for 1980-1986 from 235 hospitals, we estimate the effect on the Medicare case-mix index of a series of variables that reflect medical treatments and coding practices. Each of these underlying real or coding variables was changing prior to PPS and would likely have continued to change even in the absence of PPS. Furthermore, PPS may have had a distinct effect on these variables. These underlying trends and the PPS effects must each be estimated. Thus, the analysis begins by developing separate estimates for each of these real and coding variables (1) in the absence of PPS (autonomous effects) and (2) as a result of PPS (induced effects). Then, changes in the case-mix index are regressed against all of these variables to determine the degree to which specific autonomous real or coding variables or induced real or coding variables actually influenced measured case mix. Results show that real and coding changes each accounted for about half of the change in the Medicare case-mix index between 1980 and 1986, with the influence of coding starting to wane by 1986. PPS-induced factors explain about 80 percent of the change in measured case mix over time, autonomous factors about 20 percent. Especially powerful determinants of case-mix change included PPS-induced substitution of surgical for medical care and PPS-induced improvements in the accuracy of coding that led to assignment of patients to higher-weighted DRGs. Also, stringent Medicare peer review organizations appeared to restrain rises in case-mix indexes for their hospitals. Outpatient substitution for inpatient treatment, which others attributed to PPS, was well underway before PPS was announced.