Medicare Prospective Payment System


Medicare Prospective Payment System, also known as PPS was a government initiation established in 1983 as a means of changing hospital behavior by the provision of financial incentives encouraging cost-efficient management as regards medical care (Singh, 2009). With each Medicare admission, the hospital usually gets a predetermined rate under this system.

Under the PPS an individual is entitled to a fixed payment to cover his/her healthcare for a specified period (Balakrishnan & Soderstrom, 2000). Payment formulas have been observed to be extremely intricate having numerous adjustments addressing every issue as relates to the system. However, the main objective is to set the bundled prospective payment on the cost incurred by an efficient provider in serving the patient (Jacobs & Rapoport, 2004).


Before implementation of the PPS, hospitals got their payment as determined by the actual cost incurred through the provision of services to Medicare beneficiaries. Policymakers associated with the federal government during this time perceived the healthcare system as being wasteful given that inflationary costs were at that time huge (Mason, Leavitt & Chaffee, 2002). This increased cost was attributed to the increased cost of medical technology as well as the fact that healthcare providers were paid as per what they charged for providing services. Currently, for those patients who are under the outpatient PPS, hospitals are given a specified amount of money meant to provide particular outpatient services to those individuals having Medicare (Colamery, 2003). PPS system for Medicare inpatients has not yet been fully developed though it is also expected to gradually take shape in the near future.

The introduction of PPS has seen huge changes within the hospital industry, in addition to the manner in which hospital services are used by physicians and their patients (Mayes & Berenson, 2006). Calculation of Medicare payment provided to the hospital and physician for the services provided to patients is usually recorded by the hospital to measure how well their PPS is doing and what needs to be adjusted or improved in due time. Generally, policy concerning Medicare indicates that payment for services provided by a physician to their patients should be based on the lesser of the actual fee that is calculated under the physician’s payment schedule (Flowers, 2004).

Participating physicians get 80% actual amount as per the fee schedule, which is usually lesser. On the other hand, non-participating physicians get their payment directly from the Medicare beneficiary and this is usually 115% of the nonparticipating fee schedule amount (Cleverly & Cameron, 2007).

In those circumstances where Medicare patients receive wound care services from their physicians, these services are catered for by Medicare for the drugs, clinical staff, and equipment required for the care of the patients (Benn, 2001). The physician is required to instruct Medicare not to pay the higher non-facility rate as per the service. Medicare usually pays a physician more when a particular service is provided in a non-facility setting for instance in the physician’s office as compared to when it is delivered in a hospital outpatient department (Cole, 2009).

A few years after the implementation of the Medicare PPS, the government put pressure on the budget and made reductions in physician and hospital payment rates for services provided to patients. This was observed whereby cost-based reimbursement for hospital services for inpatients was canceled only to be replaced by the PPS under which payment for services provided are determined by Diagnosis Related Groups or the DRGs (Farley & CMMS, 2002). Medicare payments for skilled physician care, rehabilitation as well as hospital admissions for longer periods were also altered to fixed-price systems (IM, 2007). The rates by which Medicare pays the hospital and physician for services provided to patients are approximately 80% of private-sector rates and do not include costs incurred from caring for Medicare patients(Ford, 2009). In addition, this constant reduction of Medicare payments to hospitals and physicians for services provided has led Congress to realize that there is an urgent requirement for it to implement and apply legislation and policy addressing the current Sustainable Growth Rate (SGR) policy on which these Medicare payments are founded (Drummond & McGuire, 2002).

The Diagnosis Related Groups have proven quite effective in the recent past in managing patient costs associated with their care and quality measurements. The federal government should consider the implementation of new healthcare policies that would ensure reductions as regards PPS are minimized and hospitals and physicians compensated accordingly for the services they provide to patients.


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