Payment Reform Under Medicare's Prospective Payment System: The Experience of Hospitals in the State of Connecticut

Date of Submission


Document Type


Degree Name

Doctor of Science in Management Systems (Sc.D.)




Steven Shapiro

Committee Member

William Pan

Committee Member

Ben Judd

LC Subject Headings

Medicare--Connecticut, Hospitals--Connecticut--Prospective payment

Call No. at the Univ. of New Haven Library

AS 36 N290 Mgmt. Syst. 1996 no.6


The implementation in 1983 of payment reform under Medicare's prospective payment system dramatically altered an almost two-decades tradition of cost-based reimbursement for hospitals. Health care expenditures had continued to escalate, at alarming rates. Medicare's payment reform introduced a prospective reimbursement device founded on a clinical index of diagnoses, called Diagnostic Related Groups, or DRG's. Although incentives for efficiencies were inherent in the system, the transfer of financial risk from Medicare to hospitals was also apparent.

The literature suggests this payment reform fostered dramatic change in the health care system, such as reductions in lengths of hospital stays. The majority of studies are based on experiences of acute care hospitals throughout the country, mixing nonprofit and for-profit hospitals' experiences, and mixing states with diverse levels of state regulatory functions.

This research explores the effects of Medicare's prospective payment on hospitals in a single state—Connecticut—with a long embattled history of state regulation. The State is unique in its absence of investor owned, for-profit hospitals or large hospital systems common in other parts of the country. Thirty-four nonprofit acute care hospitals are examined, for a ten year period, to explore effects of prospective payment on measures of financial profitability, case (product) mix, technology acquisition, and organizational structure. The ten year period allows for comparisons of multi-year trends, before and after the implementation of Medicare's prospective payment.

The research design employs a factorial analysis of variance to explore differential trends. Three main effects are explored: pre-versus post-intervention effect, time effect, and interaction of time and intervention. Supplementary analyses compare types and sizes of hospitals.

Research hypotheses are tested to explore effects of implementation of Medicare's prospective payment. Findings suggest that prospective payment did make a difference, and that effects for hospital size closely replicate effects for hospital teaching status. Key findings include: (1) slower growth of profit margins relative to national studies, (2) increasing fiscal pressure over the period, and (3) slowing of technology acquisition. Suggestions emerge as to the additional constraint imposed by extensive State regulation.