Medicine: Putting Lids on Medicare Costs

A new federal program tries to make hospitals more efficient

In recent years the nation's Medicare system has been moving on a high-speed course toward financial disaster. Inflation, the high cost of new medical technology and the rapid growth of the nation's elderly population are draining the resources of the program, which pays the hospital expenses of people 65 and over. By 1988, if there is no letup in the rise in medical costs, Medicare's $8.8 billion hospital insurance trust fund will be depleted. By 1995 it would be in the red by as much as $400 billion. Last March, in a desperate effort to stem the hemorrhaging of Medicare dollars, Congress, working with the Administration, approved a major and controversial reform of the program. The new rules went into effect last week. They are, says Health and Human Services Secretary Margaret Heckler, "the most important improvement in the history of Medicare."

The reform was designed to correct a fundamental flaw in the system: the Government had set no limit on what it would pay for hospital care. "The incentive was perverse," explains Carolyne Davis, head of the Health Care Financing Administration, which runs Medicare. "The more hospitals spent, the more we paid." The new regulations place a ceiling on the amount a hospital receives for treating each ailment. Upon admission, Medicare patients will be assigned to one of 467 newly de fined "diagnosis-related groups," or DRGs, home on the nature of their jeopardizing Each DRG carries a specific rate of reimbursement. If the hospital treats the patient for less, it can keep the profit; if it charges more, it must absorb the loss.

Reimbursement rates will be adjusted annually to reflect inflation and medical advances, and will vary regionally to accommodate the higher costs of running hospitals in urban areas. (The rate for a simple appendectomy in Chicago: $3,825; the same operation in Lawton, Okla.: $2,773.) Psychiatric hospitals, long-term care facilities and rehabilitation centers are exempt from the new regulations. So are hospitals in Maryland, New Jersey, New York and Massachusetts, which have their own cost-containment programs.

To ease the adjustment of hospitals to the new arrangement, which is called the prospective payment plan, the Government will phase it in over three years. In ;he first year, Medicare reimbursements for each patient will be based 75% on the hospital's usual cost for treating the ailment in question and 25% on the new federal rate. One year later, the formula will be 50/50. After three years, hospitals will be reimbursed entirely on the basis of the federal rate.