Question

Prior to 1983, hospitals received reimbursement from governmental programs such as Medicare and Medicaid on a cost-plus basis. That is, if the hospital reported total costs of $100 to provide care for Medicare/Medicaid patients, it received $135 from the government (given a 35% cost-plus mark-up).

After 1983, hospitals received reimbursement from governmental programs such as Medicare and Medicaid on a fixed-fee basis. That is, every time the hospital provided a particular type of care (for example, diagnosis and treatment of an ear infection) to a Medicare/Medicaid patient, it received the same payment from the government (e.g., $65 for every ear infection diagnosis and treatment).

Explain why hospitals are likely to have increased their investment in accounting information systems after 1983, given the descriptions of the two reimbursement plans. Be explicit about the costs and benefits involved.

Answer 1

Prior to 1983, hospitals were reimbursed under a cost plus system, in which they used to get cost plus margin for every Medicare/Medicaid patient care. There was no control over cost. Hospitals used to spend more on latest technology and extensive services to attract patients and doctors. As the patient is not the one to pay and it is the insurance company who has to pay all the cost plus margin, patient used to overuse health facilities.

After 1983, hospitals were reimbursed under fixed fee basis per diagnosis related groups. Now, irrespective of the cost of the care for Medicare/Medicaid patient, hospitals are reimbursed fixed fee. This increased the risk of cost overrun of the hospitals due to high fixed cost. Thus to reduce the cost of the treatment below the fixed fee and to disaggregate fixed and variable portion of any treatment and to achieve positive financial results, the hospitals are likely to invest more in accounting information system after 1983.