Reforming Medicare Payment: Early Effects of the 1997 Balanced Budget Act on Postacute Care

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Abstract
Since its passage in 1965, medicare has provided financial support for much of the acute medical care provided to the nation's aged and disabled. Over the years since the program was enacted, however, the cost of these services has increased dramatically, raising concerns about how to make the system more efficient. At first, payments to providers were based on the actual costs of delivering the care. In the early 1980s, Medicare moved its largest providers, acute care hospitals, to per‐case payments based on the medical diagnoses for which the care was being provided (called DRGs, or diagnosis‐related groups). This change gave hospitals an incentive to keep their treatment costs for each patient as small as possible. Inherent in such a system, however, are incentives to underserve beneficiaries by moving them out of care too quickly. In 1997, the Balanced Budget Act (BBA) further reformed Medicare payments by extending per‐case payment methodologies to all types of postacute care.