Chapter 8.E.2: Prospective Payment

To insert after Ch. 8.E.2 (p. 837):

Problem: Technology Innovation

What effects are DRGs and other forms of prospective payment likely to have on technology acquisition and medical innovation? The answer depends on the type of innovation. Consider: Those that involve greater cost versus lesser costs. Those that increase admissions by finding new things to treat versus those that shorten length of stay for existing diagnoses. And, those that improve diagnostic accuracy versus those that improve treatment. Here are several concrete examples. For each, consider the technology from a perspective of when it was first introduced, that is, assuming that a specific DRG has not yet been created for it or that overall payment rates have not yet been adjusted to reflect the new technology.

  1. A procedure known as “balloon angioplasty,” (or P.T.C.A. for percutaneous transluminal coronary angioplasty) is an alternative to bypass surgery that involves inserting a small balloon into an artery and inflating it to clear blockage.
  2. A PET (positron emission tomographer) scanner, a multi-million-dollar machine that produces images of biochemical activity inside the body, in contrast with an MRI, which depicts soft tissues, or a CAT scan, which depicts bones and hard tissue.
  3. Low osmolarity contrast media, used for angiography.
  4. Extracorporeal shock-wave lithotripter, a space-age machine that pulverizes kidney stones by concentrating blasts of focused shock (sound) waves, as an alternative to either surgical removal or enduring pain (sometimes excruciating) while waiting to excrete the stones naturally.

On the institutional control of physicians (note 2), see Jessica Mantel, The Myth of the Independent Physician, 64 Case W. Res. 455 (2013); Theodore Ruger, Plural Constitutionalism and the Pathologies of American Health Care, 120 Yale L. J. Online 347 (2011); Robert F. Rich et al., Judicial Interpretations of Managed Care Policy 13 Elder L. J. 85 (2005).

For more on “outlier payments” and their manipulation by hospitals (note 4), see Elizabeth A. Weeks, Gauging the Cost of Loopholes: Health Care Pricing and Medicare Regulation in the Post-Enron Era, 40 Wake Forest L. Rev. 1215 (2005); R. Brent Rawlings & Hugh E. Aaron, The Effect of Hospital Charges on Outlier Payments Under Medicare’s Inpatient Prospective Payment System: Prudent Financial Management or Illegal Conduct?, 14 Ann. Health L. 267 (2005).

For further discussion and debate on Medicare physician payment and relative value scales (note 8), see Miriam J. Laugesen, Fixing Medical Prices: How Physicians Are Paid (2016); Joseph P. Newhouse, Medicare Spending on Physicians: No Easy Fix in Sight, 356 New Eng. J. Med. 1883 (2007); Paul Ginsburg, Rapidly Evolving Physician-Payment Policy: More Than the SGR, 362 New Eng. J. Med. 172 (2011); Paul B. Ginsburg & Robert A. Berenson, Revising Medicare’s Physician Fee Schedule — Much Activity, Little Change, 356 New Eng. J. Med. 1201 (2007); and the annual reports of MedPAC, the Medicare Payment Advisory Commission.

For recent discussions of rate-setting and the public utility model (note 9), see Erin C. Fuse Brown, Resurrecting Heath Care Rate Regulation, 67 Hastings L. J. 85 (2015); Robert Murray & Robert A. Berenson, Hospital Rate Setting Revisited Dumb Price Fixing or a Smart Solution to Provider Pricing Power and Delivery Reform? (2015); David M. Frankford, It’s the Prices, Advanced Capitalism, and the Need for Rate Setting — Stupid, 44 J. L., Med. & Ethics (2017).

For discussion of one ambitious proposal “that prices for new clinical measures be set, then continually adjusted, based on emerging evidence of efficacy,” see Neel Sukhatme & M. Gregg Bloche, Health Care Costs and the Arc of Innovation, 104 Minn. L. Rev. 955 (2019). See also Rachel Sachs, The Accidental Innovation Policymakers, 72 Duke L.J. 1431 (2023).