No, it's M-JPEG (motion JPEG), not MPEG. The two are substantially different. Motion JPEG is exactly what it sounds like: each frame is a JPEG. No interframe compression, so M-JPEG overall doesn't compress much. So you either have an M-JPEG and an MPEG of similar quality, but the M-JPEG is a gigantic file, or you have the two of the same size, but the M-JPEG is much worse quality. On the upside, M-JPEG requires much less power to decode.
If PSX had an MPEG decoder in hardware, it would play VCDs out of the box. Instead, playing VCDs/MPEG video requires a silly third-party hardware add-on:
http://i.imgur.com/SCJuR.jpg
I don't think the issue is dev kits when it comes to video clips. The main issue is the software codec used. Earlier Saturn games mostly used Cinepak, while later Saturn games tended to use True Motion -- this is broadly speaking, as True Motion was available from launch, and Cinepak was still used up to the end. True Motion produced much better results. Those are the two main ones. Both were also used in a number of PC games, Cinepak was common on 3DO, and True Motion was also used on Dreamcast. Even with the MPEG card a codec was needed, and I think the only one used was CRI's MPEG Sofdec. There was another codec called Lucid Motion used for a few Japan-only games. Indeo is another codec that was around at the time, that should have been usable on Saturn, but I don't know of any games that used it.
Aside from the choice of codec, the main thing that affects video quality is the amount of compression. More compression makes for a grainier video with more artifacts. On PSX, they would tend to save space by eliminating frames, which is why PSX videos sometimes suffer from low framerates. Lowering resolution to save space was done on both systems.

