The Impact of Medicare's Per Diem Prospective Payment System on Psychiatric Inpatients: an empirical study on length of stay between Maryland and New Jersey psychiatric inpatients

Prior to January 1, 2005, psychiatric hospitals and Medicare exempt inpatient psychiatric units were paid on a reasonable cost basis, with a limit on the rate of increase, under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). They were exempted from Medicare's DRG-specific per case PPS because of concerns that the psychiatric DRGs were very heterogeneous. As of January 1, 2005, an inpatient per diem prospective payment system (IPPS) was phased in over four years to allow adjustment time for hospitals. The IPPS was presumed to better capture these within-DRG variations among patients. It is possible, however, that length of stay (LOS) of Medicare's psychiatric inpatients would increase because of incentives to retain some patients longer if the applicable per diem rates exceeded their marginal per diem costs. This thesis examined the IPPS impacts on LOS of patients discharged from Medicare exempt inpatient units in New Jersey (the treatment group) with similar Medicare patients in Maryland and non-Medicare psychiatric patients in New Jersey (the control groups). We used a difference-in-differences regression for two models, the first with Medicare patient data only and the second with both Medicare and non-Medicare patients, using discharge data for calendar years 2004 and 2007. Analysis was restricted to patients in two DRG groups, depressive neuroses and major depression. Results, from both models, indicated that, ceteris paribus, the treatment group experienced a small increase in LOS relative to the control groups after IPPS implementation. With Model 2, however, the differential LOS increase for New Jersey Medicare patients was barely (and not significantly) larger than the differential increase for New Jersey non-Medicare patients. This result may be evidence of IPPS spillover effects onto LOS decisions for non-Medicare patients. Overall IPPS impacts (including the spillover effects) on the average LOS of New Jersey Medicare patients were statistically significant and positive but the magnitudes were relatively small. With the exception of hospital size, which tended to increase LOS, no patient or hospital characteristics showed systematically significant influences on LOS. Our findings mirrored previous studies. Hospitals appeared to respond to the IPPS incentive as expected though the estimated effect was modest