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Medicare Prospective Payment Systems (PPS)

A Summary

Prospective payment systems are intended to motivate providers to deliver patient care effectively, efficiently and without over utilization of services.The concept has its roots in the 1960s with the birth of health maintenance organizations (HMOs). The HMO receives a flat dollar amount (i.e., monthly premiums) and is responsible for providing whatever services are needed by the patient. Thus, there is a built-in incentive for providers to create management patterns that will allow diagnosis and treatment of the patient as efficiently as possible. In contrast, conventional fee-for-service payment systems may create an incentive to add unnecessary treatment sessions for which the need can be easily justified in the medical record.

There are only a few changes to make in the HMO model to describe the Medicare PPS systems for hospitals, skilled nursing facilities, and home health agencies. Instead of receiving a monthly premium to cover the whole family, the health care facility receives a single payment for a single Medicare beneficiary to cover a defined period of time or the entire inpatient stay. The payment amount is based on diagnoses and standardized functional assessments, but the payment concept is the same as in an HMO; the recipient of the payments is responsible for rendering whatever health care services are needed by the patient (with some exceptions).

Except for acute care hospital settings, Medicare inpatient PPS systems are in their infancy and will be experiencing gradual revisions.

Some common characteristics of Medicare PPS are:
  • Prepayment amounts cover defined periods (per diem, per stay, or 60-day episodes).
  • The payment amount is based on a unique assessment classification of each patient.
  • Applies only to Part A inpatients (except for HMOs and home health agencies).
  • A patient who remains an inpatient can exhaust the Part A benefit and become a Part B case. Such cases are no longer paid under PPS. (Part B payments for evaluation and treatment visits are determined by the Medicare Physician Fee Schedule.)

Medicare Hospital Outpatient PPS (OPPS) [PDF] is not a "pure" PPS methodology consistent within the characteristics listed above because payment is made for individual evaluation and treatment visits.

Following are summaries of Medicare Part A prospective payment systems for six provider settings.

Provider Setting Classification System Summary Description
Inpatient acute care hospital Diagnosis-Related Groups (DRGs)
  • Primary diagnosis determines assignment to one of 535 DRGs
  • The DRG payment rate is adjusted based on age, sex, secondary diagnosis and major procedures performed. DRG payment is per stay.
  • Additional payment (outlier) made only if length of stay far exceeds the norm
Inpatient rehabilitation hospital or distinct unit Case-Mix Groups (CMGs)
  • Patient Assessment Instrument (PAI) determines assignment of patient to one of 95 Case-Mix Groups (CMGs). CMG determines payment rate per stay
  • Rehabilitation Impairment Categories (RICs) are based on diagnosis; CMGs are based on RIC, patient's motor and cognition scores and age. Discharge assessment incorporates comorbidities
  • PAI includes comprehension, expression, and swallowing
Skilled Nursing Facility Resource Utilization Groups, Third Version (RUG-III)
  • Fifty-eight groups
  • Each beneficiary assigned a per diem payment based on Minimum Data Set (MDS) comprehensive assessment
  • A specified minimum number of minutes per week is established for each rehabilitation RUG based on MDS score and rehabilitation team estimates
Home Health Agency Home Health Resource Groups (HHRGs)
  • Eighty HHRGs
  • The Outcome & Assessment Information Set (OASIS) determines the HHRG and is completed for each 60-period
  • A predetermined base payment for each 60-day episode of care is adjusted according to patient's HHRG
  • No limit to number of 60-day episodes
  • Payment is adjusted if patient's condition significantly changes
Hospice Each day of care is classified into one of four levels of care 
  • Per diem rate for each of four levels of care:
    • Routine home care
    • Continuous home care
    • Inpatient respite care
    • General inpatient care
  • Geographic wage adjustments determine the only variation in payment rates within each level

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