The federal government in 1983 kicked healthcare providers out of a comfortable world in which Medicare made reimbursements based on costs.
They landed in a new world where they needed to tightly manage medical costs or shift them to other payers if their institutions were to continue functioning.
The event was the advent of the Medicare prospective payment system, a complex formula that aimed to pay every hospital the same rate for each of 499 diagnoses, with some variations for labor costs and other factors.
For example, instead of a hospitals admitting Medicare patients for open-heart surgery and handing the federal government the bill afterward, the feds told hospitals upfront what they would pay for the procedure and left it up to hospital executives to figure out a way to keep treatment costs from exceeding the fee.
"There was no longer the open-ended, blank-check mentality at work," says Larry Oday, a healthcare lawyer with Vinson & Elkins in Washington.
Combined with pressures from managed care, the repercussions of the Medicare change are still being felt. Lengths of hospital stay have plummeted as hospital managers have developed ways of discharging patients to subacute settings sooner, leading to increased utilization of home healthcare, skilled nursing and other outpatient settings.
As the federal government's purchasing of healthcare services has gotten tougher, so too have hospital executives with their own vendors. They also had strong incentives to find less scrupulous means to make ends meet, which forced the government to take action against companies such as for-profit hospital giant Columbia/HCA Healthcare Corp. (now known as just HCA), which faced an investigation into its billing practices.
Meanwhile, as hospitals shifted care to other sites, spending ballooned in those sectors. The federal government was forced to squeeze those costs, too, and now, preset Medicare payments exist for physicians, outpatient-care facilities, home health agencies and skilled-nursing facilities.