The hospital response to Medicare's Prospective Payment System: an econometric model of Blue Cross and Blue Shield plans.

This paper presents an empirical analysis of the impact that resulted from phase-in of Medicare's Prospective Payment System (PPS) on hospital utilization and payments for the Blue Cross and Blue Shield (BCBS) plans. A pooled cross-sectional time series econometric model was specified and estimated using quarterly hospital utilization and payments of the BCBS plans over the period 1980 to 1987. The results indicate that the implementation of PPS was significantly associated with a lower rate of hospital admissions, days and deflated inpatient payments for the BCBS plan members under age 65. A 1% increase in the proportion of hospital days reimbursed under PPS resulted in a .032% decrease in BCBS plan admissions per 1,000 members, a 0.017% decline in days per 1,000 members and a 0.016% decline in deflated inpatient payment per 1,000 members. The reductions in hospital utilization resulted in lower payments by BCBS plans to participating hospitals suggesting a positive spill-over effect of PPS for private insurers. This research underscores the importance of interaction between federal health policy and the private health insurance market.