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) 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.