Impact of the prospective payment system on physician charges under Medicare

The onset of the prospective payment system (PPS) has profoundly changed the structure of physician charges under Medicare. The proportion of allowed physician charges originating in an inpatient hospital setting was drastically reduced. In 1982, more than three-fifths of physician charges were related to inpatient services. By 1985, less than one-half derived from inpatient care (Figure 1). The decrease in the inpatient share of physician charges was mostly offset by increases in shares for physician services in outpatient hospitals. Two-thirds of the loss in physicians inpatient shares was shifted to outpatient hospital settings and one-third to physician office and other settings (Figure 1). Two major changes resulting from PPS appear to account for these changes in shares: • Sharp reductions in hospital lengths of stay and admission rates reduced the number of inpatient hospital days that provide opportunities for medical services, mainly hospital visits (Figure 2). • Surgical services shifted from inpatient settings to other settings, particularly in 1985. Thus, the proportion of physician allowed charges deriving from inpatient surgery was reduced (Figure 3).