The Concept of Prospective Payment
Prospective payment systems reimburse providers a predetermined rate for services based on classification of the patient's condition or care needs, rather than reimbursing actual costs incurred. This approach, first introduced for inpatient hospital care in 1983, incentivizes efficient resource use since payment does not increase simply because a provider incurs higher costs.
Inpatient Prospective Payment System
The Inpatient Prospective Payment System, or IPPS, reimburses acute care hospitals based on Medicare Severity Diagnosis Related Groups, or MS-DRGs, which classify inpatient stays by principal diagnosis, procedures performed, complications and comorbidities, and other factors. Each MS-DRG carries a relative weight reflecting expected resource use, multiplied by the hospital's base payment rate to determine reimbursement.
Outpatient Prospective Payment System
The Outpatient Prospective Payment System, or OPPS, reimburses hospital outpatient services using Ambulatory Payment Classifications, or APCs, grouping outpatient procedures and services by clinical similarity and resource intensity, with packaging rules bundling many ancillary services into the primary procedure payment.
Additional PPS Settings
- Skilled Nursing Facility PPS - uses Patient Driven Payment Model case-mix classification based on clinical characteristics and care needs
- Home Health PPS - uses the Patient Driven Groupings Model, classifying 30-day care periods based on admission source, clinical grouping, and functional status
- Inpatient Rehabilitation Facility PPS - uses Case Mix Groups based on impairment category, functional status, and age
Skilled Nursing Facility PPS
The SNF Prospective Payment System reimburses based on the Patient Driven Payment Model, which classifies residents into payment groups reflecting nursing, therapy, and non-therapy ancillary needs, replacing the prior therapy-minutes-based system to reduce incentives for providing unnecessary therapy volume.
Home Health PPS
Home health reimbursement under the Patient Driven Groupings Model uses 30-day payment periods rather than the prior 60-day episodes, classifying periods based on factors including admission source, timing, clinical grouping, functional impairment level, and comorbidity adjustment.
Inpatient Rehabilitation Facility PPS
IRF PPS classifies patients into Case Mix Groups based on impairment category, functional independence measures, age, and comorbidities, reflecting the intensive therapy and nursing resources required in inpatient rehabilitation settings.
Common Elements Across PPS Systems
Despite differing classification methodologies, all Medicare PPS systems share the underlying goal of tying payment to patient acuity and resource needs rather than actual provider costs, requiring accurate clinical documentation and coding to ensure appropriate reimbursement and compliance across every care setting.