In the current debate over health care reform, issues of access, cost, and quality are paramount. Much can be learned from what we might call “experiments of nature,” real-world examples of innovations designed to address one or more of these critical health care issues. The unique payment program begun more than twenty-five years ago in the Rochester, New York, area is one such example. In Communities and Health Care: The Rochester, New York, Experiment, Sarah F. Liebschutz describes the hospital experimental payment (HEP) program that the nine hospitals in Rochester and its surrounding counties participated in from 1980 to 1990. Insights gained from that experiment have important implications for the organization and delivery of health care services throughout our diverse country and how they might be reimbursed to promote ready access to care of high quality at costs that are sustainable.

The experiment was undertaken in response to a New York State hospital reimbursement formula that penalized the Rochester-area hospitals for their efficient use of hospital beds. The fact that their numbers were considerably below those of metropolitan areas elsewhere in the state left the hospitals in financial distress. The goals of the experiment were to contain hospitals’ costs while improving their financial health, ensure ready access to hospital services, and maintain care of high quality. The experiment involved Medicare, Medicaid, and Blue Cross, covering almost the entire population of the area. It was a prospective-payment program based on four core principles. First, hospital cost containment can be accomplished more effectively through appropriate incentives than through penalties and sanctions. Second, hospitals should be paid for their output rather than for the inputs they expend in producing the output. Third, they should be accountable for the costs they can control, not for those they cannot. Finally, hospitals should be able to project their revenue in advance and budget and manage accordingly.

In operation, HEP was a prospective-payment, global budgeting system. The hospitals received a payment every two weeks from each of the three payers. The first year's budgets were derived from the hospital's prior year's cost basis. The payment formula included an annual inflation factor and an adjustment for changes in admissions and case severity.