The impact of alternative hospital payment systems on Medicaid costs

Abstract

From 1982 onward, 25 states adopted three broad strategies to control their Medicaid hospital costs: multiple-payer rate setting, Medicaid-only prospective payment, and selective contracting. In this analysis of the three approaches, I found that the multiple-payer systems were particularly effective at controlling Medicaid payments because of their ability to control statewide hospital costs. The Medicaid-only prospective payment systems were also successful, but appear to be effective only in the short term. California's Medicaid-only selective contracting program was also successful, largely because of the simultaneous implementation of cost-control incentives for all hospitals in the state. I also found sharp reductions in Medicaid admissions where rates were set low relative to costs, as well as a shift in Medicaid admissions to public hospitals in Medicaid-only prospective payment states.