Hospital Payment Rates Should Be Revised To Assure Reasonableness and Equity

T-HRD-88-9: Published: Mar 1, 1988. Publicly Released: Mar 1, 1988.

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Pursuant to a congressional request, GAO discussed Medicare's Prospective Payment System (PPS) hospital rates. GAO noted that: (1) the original PPS rates were too high because they incorporated unaudited cost data, including unallowable costs and costs for unnecessary services; (2) subsequent annual updates and adjustments to rates have used estimated and incomplete data; (3) costs of services covered by about a third of the PPS diagnosis-related groups (DRG) widely varied; and (4) because of that variance, hospitals' profits depended more on the type of patients they served rather than on their level of efficiency. GAO believes that the Department of Health and Human Services should: (1) base PPS rates on audited cost data that reflect hospital operations under PPS; and (2) modify PPS DRG to eliminate the wide variations in expected treatment costs.

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