Prospective Payment and the New Perspective

Nov. 25, 2009
Editor’s Note: When this article was published in the January 1990 issue of Computers in Healthcare, John Whitehead was president of TDS Healthcare Systems, which he formed in 1986 after acquiring it from Revlon Corp. An acknowledged advocate of applying information technology to improve the delivery of healthcare services, Whitehead also served as a member of National Institute of Health’s Environmental Health Services Advisory Committee. He was a director of the Whitehead Institute, a leading center for biological research founded by his family and based at Massachusetts Institute of Technology in Cambridge, Mass.

The healthcare industry changed forever on Oct. 1, 1983, when Congress imposed a new reimbursement system for hospitals that replaced the traditional cost-plus method of payment for expenses associated with Medicare patients with a prospective payment system. The new system, conceived to facilitate efficiency and competition, was built upon the concept of diagnosis-related groups and established fixed-hospital reimbursement based primarily on a patient’s diagnosis.

Editor’s Note: When this article was published in the January 1990 issue of Computers in Healthcare, John Whitehead was president of TDS Healthcare Systems, which he formed in 1986 after acquiring it from Revlon Corp. An acknowledged advocate of applying information technology to improve the delivery of healthcare services, Whitehead also served as a member of National Institute of Health’s Environmental Health Services Advisory Committee. He was a director of the Whitehead Institute, a leading center for biological research founded by his family and based at Massachusetts Institute of Technology in Cambridge, Mass.

The healthcare industry changed forever on Oct. 1, 1983, when Congress imposed a new reimbursement system for hospitals that replaced the traditional cost-plus method of payment for expenses associated with Medicare patients with a prospective payment system. The new system, conceived to facilitate efficiency and competition, was built upon the concept of diagnosis-related groups and established fixed-hospital reimbursement based primarily on a patient’s diagnosis.

There is also a growing recognition that the key to maximizing a healthcare system’s effectiveness is to design it for direct use by healthcare professionals, particularly physicians and nurses.

Hospitals suddenly found themselves in a revolutionary new operating environment characterized by shrinking revenues and rising expenses. Overnight, their incentive switched from doing as much as they could over as long a time as possible, to doing the minimum necessary to treat patients in the shortest time possible.

Along the way, an aging population, an acute nursing shortage and ongoing liability issues have only compounded the pressures. As a result, a number of hospitals have closed their doors. Those hospitals that have survived have learned that their traditional management strategies are no longer viable in the face of eroding margins.

To survive, healthcare institutions have been forced to adopt business strategies common to most other industries for many years. Entire healthcare delivery systems are being re-evaluated as hospitals strive to strike a delicate balance between profitability and quality.

Administrators wrestle with issues such as return on investment, resource management and cost-revenue profiles for each product or case-mix category. They look to expand their services and forge stronger relationships with their key source of both revenue and cost – physicians. They seek techniques and tools to enhance productivity. And, as always, they search for better means of assuring the highest quality of care possible for their patients.

Not by coincidence, this new age in healthcare has thrust the hospital-information systems industry into the spotlight. It has been in this post-diagnosis-related group era that what a few of us have known for quite some time has now become a generally accepted premise – the key to better managing the business of hospitals (caring for patients) lies in gaining better access to meaningful information.

There is also a growing recognition that the key to maximizing a healthcare system’s effectiveness is to design it for direct use by healthcare professionals, particularly physicians and nurses.

Since Oct. 1, 1983, and especially over the last few years, our entire industry has undergone radical change, as the perception of the role of information systems has changed. System-design philosophies that were once driven almost exclusively by financial and administrative considerations are now driven by an awareness of the need to put information systems into the hands of the medical professionals – the people who are, after all, the primary originators and users of information in a hospital.

We are finally beginning to see the far-reaching impact that appropriate applications of information technology can have in a healthcare setting.

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