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At the request of the Subcommittee on Oversight of the House Committee on Ways and Means, the Congressional Budget Office prepared this staff working paper updating the June 1979 CBO evaluation of the Professional Standards Review Organizations (PSROs). This analysis parallels the earlier evaluation in focusing on the PSRO program's effects on Medicare hospital utilization and costs. In keeping with CBO's mandate to provide objective analysis, this study offers no recommendations.
Daniel Koretz of CBO's Human Resources and Community Development Division
prepared the analysis under the supervision of Paul B. Ginsburg, David
S. Mundel, and Nancy M. Gordon. Thanks are due to many people in the Health
Care Financing Administration (HCFA), especially Allen Dobson and Roger
McClung, for their cooperation and assistance. The author is particularly
grateful to Paul Eggers of HCFA for his generous contributions of time
and effort and his helpful comments. Patricia H. Johnston edited the manuscript
and Rosetta Swann and Toni Wright typed the drafts of this report and prepared
the final manuscript.
Alice M. Rivlin
Director
January 1981
SUMMARY
CHAPTER I. PSROs AND THE CONTROL OF MEDICAL-CARE USE
CHAPTER II. THE EFFECT OF PSROs ON UTILIZATION AND COSTS
CHAPTER III. POLICY ISSUES AND QUESTIONS FOR RESEARCH
APPENDIX A. EXECUTIVE SUMMARY OF THE JUNE 1979 CBO REPORT, "THE EFFECTS OF PSROs ON HEALTH CARE COSTS: CURRENT FINDINGS AND FUTURE EVALUATIONS"
APPENDIX B. THE REGRESSION MODEL
| TABLES | |
| 1. | PSRO PROGRAM FUNDING |
| 2. | PSRO IMPACT BY REGION |
| 3. | REGIONAL DIFFERENCES IN PROGRAM IMPACT AND DEGREE OF PROGRAM IMPLEMENTATION |
| 4. | QUALITY OF DATA ON PRE-PSRO AND PSRO COSTS AND BENEFITS |
| 5. | RANGE OF SAVINGS-TO-COST RATIOS |
The rapid increase in federal expenditures for health care since the enactment of Medicare and Medicaid in the mid-1960s has engendered Congressional concern about the costs and quality of these programs. The Professional Standards Review Organization (PSRO) program, established in 1972, is one attempt to meet these concerns through peer review of health services financed under the Social Security Act. Although this program's goals include both restraining the use and ensuring the quality of health-care services, in practice it has placed greater emphasis on the control of utilization--in particular, the control of inpatient use of short-stay hospitals.
The analysis in this paper updates the June 1979 Congressional Budget Office (CBO) evaluation of the PSROs as a means of controlling hospital utilization and attendant health-care costs.1 The former report covered the program's impact in 1977; this report analyzes 1978 data, the most recent available. Consistent with the 1979 CBO evaluation, this paper considers neither the costs nor the benefits of the quality-assurance portion of the PSRO program.
The 1978 data indicate that the PSRO program's utilization and cost-control efforts have met with mixed success:
DOES PSRO REVIEW REDUCE USE OF INPATIENT HOSPITAL CARE?
The 1978 data suggest that a PSRO program in which all Medicare hospital patients are reviewed would reduce Medicare days of hospitalization by about 1.5 percent.2 The effect of the current "focused" system, in which only a fraction of cases are reviewed, is probably less, but there are as yet no data indicating how much less.
The evidence that PSROs reduce Medicare utilization, however, is not firm. Considering the nation as a whole, the program's apparent effect is sufficiently small and variable that it could be an artifact of chance variation in the data. Moreover, in the South, PSRO review seems to increase utilization, a pattern that is difficult to explain and throws all the results into some doubt.
PSROs affect utilization by Medicare patients primarily by shortening hospital stays rather than by preventing admissions. Of the days of care saved in 1978, roughly 90 percent can be attributed to shortened lengths of stay. Since the first days of hospitalization are usually more expensive than subsequent days, this effect does not reduce costs as much as would a comparable change in utilization by means of admission denials.
There are still no data with which to assess reliably the program's
effect on Medicaid patients. Differences in the characteristics of the
Medicare and Medicaid populations, however, suggest that PSROs are likely
to have less impact on Medicaid utilization.
HAS PSRO PERFORMANCE IMPROVED?
The earlier CBO report noted that, as of 1977, there was no evidence
that PSROs become more effective in reducing utilization as they gain experience,
and the more recent data confirm that finding. The program's performance
did not improve appreciably between 1977 and 1978, even though the average
duration of the program in active PSRO areas increased from 16 to 25 months
during that interval.
DO PSROs SAVE MONEY?
Total Resource Savings. Although PSROs appear to reduce Medicare utilization, the program consumes more resources than it saves society as a whole. The 1978 data indicate that, for every dollar spent on PSRO review of Medicare patients, only $.40 in resources were recouped, for a net loss of $.60.3 This corresponds to a savings-to-cost ratio of 0.4-to-l.4 Because PSROs are a part of the health-care system, this finding indicates that, by channeling resources into the PSRO program, society increases slightly its total expenditures for health care.
Since PSRO review replaces earlier forms of utilization review, however, it is not always appropriate to compare the savings generated by PSROs to the full cost of PSRO review. When evaluating the impact of the entire PSRO review system--rather than the effects of marginal changes in PSRO funding and activity--it is appropriate to subtract from PSRO costs the cost of the earlier utilization review that it superseded. This is called the "incremental cost" of PSRO review.
Since the incremental cost of the program is substantially smaller then
its total cost, considering only incremental costs casts the program in
a more favorable light. The 1978 data indicate that resource savings from
PSRO review are only 20 percent less than the program's incremental cost,
corresponding to a savings-to-cost ratio of 0.8-to-l (whereas resource
savings are, as noted, 60 percent less than the program's total cost).
DO PSROs REDUCE FEDERAL OUTLAYS?
Budgetary Savings. Although the PSRO program results in a loss in societal resources, it has little impact on federal outlays. PSRO review--and any other review system that succeeds in lowering Medicare utilization--affects federal reimbursement payments in two ways: by changing total resource expenditures for health care, and by transferring fixed costs to the private sector. This paper uses the term "reimbursement savings" to refer to the federal reimbursement change stemming from both of these factors. Subtracting program costs from reimbursement savings yields the program's net impact on federal outlays.
The 1978 data indicate that each dollar spent on review yields about 90 cents in reimbursement savings, corresponding to a savings-to-cost ratio of roughly 0.9-to-l.5 The net budgetary impact is accordingly a $.10 loss for every dollar in total program expenditures.6
When only the incremental cost of the program is considered, however, PSRO review produces a small net budgetary savings. Reimbursement savings from Medicare review exceed the incremental cost of those activities by about 20 percent, a savings-to-cost ratio of 1.2-to-l.
Three general conclusions can be drawn from this array of savings-to-cost estimates:
WHAT QUESTIONS REMAIN UNANSWERED?
Although the overall PSRO impact on Medicare hospital use is assessed in this report, many questions about the program's effects remain unanswered, including the following:
Do PSRO Utilization Control Activities Have Hidden Costs and Benefits? The activities PSROs conduct to control utilization and costs may have a wide variety of costs and benefits not reflected in the savings-to-cost estimates presented in this paper. For example, although these activities are largely distinct from PSROs' quality-assurance activities, they undoubtedly have both positive and negative effects on quality of care in some instances. They may provide psychological benefits to patients who are eager to leave the hospital, but generate severe stress for families ill-equipped to provide home care for the chronically infirm. Since information on such additional costs and benefits is lacking, any evaluation of the program can only provide an incomplete and perhaps misleading view of the program's impact.
As a first step toward assessing these as yet hidden effects, it is important to collect representative information on the health status of patients whose hospital stays are denied or shortened by PSROs, their subsequent care, and so forth.
Are PSRO More Effective with Certain Types of Patients? The existing research clarifies the average effect of PSRO review on hospital use by Medicare patients, but little is known about PSRO's relative effectiveness with other types of patients. The most important of other patient groups to investigate further is Medicaid patients, since PSRO review of their hospital use is mandated by law and consumes a sizeable portion of the PSRO budget.
It is also important to investigate which types of patients within the Medicare and Medicaid patient populations are most affected by review. Is the impact of the program greatest, for example, among the chronically ill, or among those who are receiving relatively minor surgery? Answers to such questions would permit a more efficient allocation of PSRO resources.
How Do PSROs Vary in Operation, and Are Some Methods More Effective than Others? Surprisingly little information is available about variations in PSRO procedures. Little is known, for example, about the various criteria PSROs use in focusing review. The absence of information about current review procedures and their relative effectiveness retards improvement of the program.
This document is available in its entirety in PDF.
1. Congressional Budget Office, The Effects of PSROs on Health Care Costs: Current Findings and Future Evaluations, June 1979. The Executive Summary of that report is appended to this report as Appendix A.
2. The difference between this figure and the comparable figure (2 percent) in the earlier CBO report reflects refinements in the estimating procedure rather than a decline in PSRO performance. The same is true of the savings-to-cost ratios presented below. Had the 1977 data been analyzed with this year's methods, the results would have been similar to those presented here.
3. In all instances, only the portion of the PSRO program's costs that can be allocated to its utilization-reduction activities were considered.
4. All savings-to-cost ratios presented here assume both the costs and the benefits of reviewing all Medicare admissions. The effect on these ratios of the change to focused review is unknown.
5. This ratio of 0.9-to-l corresponds to the benefit-cost ratio of 1.269-to-l in the most recent evaluation of the program by the Health Care Financing Administration (HCFA) in that both figures estimate the ratio of reimbursement savings to total program costs. HCFA, 1979 PSRO Program Evaluation (1980).
6. This figure, like the estimate above of the program's impact on total resources spent for health care, considers only the Medicare portion of the program. If Medicaid review were included--and if it were assumed that PSROs are equally effective with Medicaid and Medicare utilization--this ratio would drop to 0.75-to-l. This is because some of the Medicaid reimbursement savings would go to states rather than to the federal government.