Claire Dawson
The Prospective Payment System (PPS) is a reimbursement method where Medicare payment is based on a predetermined, fixed amount. The system incentivizes hospitals to use resources efficiently, possibly reducing the length of stay and increasing the use of skilled nursing facilities and home health care. PPS aims to control the growth of inpatient benefit costs without increasing costs for beneficiaries. While PPS has led to a surprising decrease in hospital admissions, it has also resulted in a shift towards outpatient care. The impact of PPS on access to care and quality of care is yet to be determined, but early evidence suggests it is achieving its objectives without major problems.
| Characteristics | Values |
|---|---|
| Purpose | Control the growth of inpatient benefit costs without increasing costs to beneficiaries |
| Reimbursement | Based on a predetermined, fixed amount |
| Payment amount | Derived based on the classification system of that service |
| Categories | Set up around the expected relative cost of treatment for patients in that category or group |
| Categories function | Intended to cover the costs that reasonably efficient providers would incur in furnishing high-quality care |
| Rates | Adjusted for each local market |
| Incentives | To control costs, either by managing the number and type of services or minimizing the length of stay |
| Admission rates | Reduction in admissions to hospitals after the implementation of PPS |
| Effect on physicians | Hospitals would encourage physicians to reduce ancillary services, shorten hospital stays, and increase outpatient testing |
| Effect on net profit rates | Net profit rates declined |
| Effect on Medicare expenses | Hospitals that reported net profits in the Medicare inpatient PPS sector in PPS 7 (1990) had smaller increases in Medicare expenses |
| Rate of growth of Medicare benefit payments | Appears to have decreased under PPS |
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What You'll Learn
Medicare's Prospective Payment System (PPS)
PPS has had a significant effect on admissions, lengths of stay, intensities of care during stays, and the real and nominal case mix of admitted patients. There was an unexpected reduction in admissions, which may be due to the increased tendency to treat patients in non-hospital settings. There is also evidence of a sharp initial increase in efficiency resulting from a reduction in growth rates of intensity (length of stay) and in salary and benefits.
The system has been designed to provide incentives for hospitals to control costs by managing the number and type of services provided or minimizing the length of stay. However, there is a risk that the outcome of care could be negatively affected if a provider were to provide insufficient or inadequate care in an attempt to increase profits from the prospective payment.
The rate of growth of Medicare benefit payments appears to have decreased under PPS, led by the decline in inpatient hospital payments. PPS appears to have achieved its purpose of controlling the growth of inpatient benefit costs without increasing costs to beneficiaries.
Certain types of hospitals and units have been excluded from PPS, including psychiatric, rehabilitation, children's, and long-term care hospitals. Hospitals located outside of the 50 states and the District of Columbia are also currently excluded.
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Reduced hospital admissions
A Prospective Payment System (PPS) is a method of reimbursement in which Medicare payment is made based on a predetermined, fixed amount. The system provides incentives for hospitals to use resources efficiently, and to serve patients as efficiently as possible. This may be achieved by reducing the length of hospital stays and increasing the use of skilled nursing facilities (SNFs) and home health care (HHA).
The introduction of PPS has been shown to reduce hospital admissions. This is surprising, given the incentives of PPS for higher admission rates and shorter lengths of stay. One explanation for this could be the increased tendency to treat patients in non-hospital settings, such as outpatient testing. Other reasons for the decline in admission rates include the effects of awareness of unprofitable admissions, the increased use of second opinion and pre-authorization programs, changes in medical technology, and the movement of location of services from inpatient to outpatient settings.
The rate of growth of Medicare benefit payments has decreased under PPS, led by the decline in inpatient hospital payments. This is in line with the system's purpose of controlling the growth of inpatient benefit costs without increasing costs to beneficiaries. Hospitals that reported net profits in the Medicare inpatient PPS sector in PPS 7 (1990) had smaller increases in Medicare expenses than hospitals that reported PPS losses in PPS 7.
The impact of PPS on hospital admissions may also be influenced by the type of hospital and its cost structure. Hospitals with higher base-year costs per case experienced greater cost reductions and virtually no increase in PPS revenues per case. These hospitals were also more aggressive in their responses to improve financial performance, including cutting lengths of stay and reducing rates of inflation in expenditures.
While PPS has reduced hospital admissions, it is important to monitor the quality and outcome of care. There may be concerns about inappropriate hospital discharges and readmissions, as well as potential negative effects on the outcome of care if providers reduce the delivery of necessary services to increase profits.
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Increased outpatient care
The Prospective Payment System (PPS) has been shown to reduce hospital admissions. This is despite PPS incentivizing higher admission rates and shorter lengths of stay. One explanation for this decline in admissions is the increased use of outpatient care settings.
The shift from inpatient to outpatient care is driven by technological advances, such as the development of minimally invasive surgical procedures, and value-based care incentives. Between 2005 and 2015, visits to outpatient facilities increased by 14%, while hospital inpatient stays declined by 6.6% over the same period. This shift has been associated with a 13% increase in per capita outpatient expenditures and an 8.4% decrease in inpatient care expenditures.
Outpatient care has been shown to be a lower-cost setting for treatment, with gross outpatient revenue per visit increasing by 45% between 2010 and 2015. This shift to outpatient care has been further encouraged by the Medicare payment policy, which incentivizes health systems to buy physician practices by paying on-campus hospital-owned physician practices more than independent physicians for the same services. This has resulted in a 39% increase in physician-hospital consolidation between 2012 and 2014.
The use of virtual care and technology has also played a role in the growth of outpatient care. By investing in virtual care capabilities, hospitals can expand their outpatient services while reducing costs and increasing revenue. This allows health systems to add capacity and generate referrals, as well as provide lower-cost treatment options for patients.
Overall, the increase in outpatient care has been shown to have a positive impact on hospital admissions and costs, with improved accessibility of outpatient care leading to a reduction in the need for inpatient care.
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Improved financial performance
The Prospective Payment System (PPS) has been shown to improve the financial performance of hospitals in several ways. Firstly, it incentivizes hospitals to use resources more efficiently, encouraging them to reduce costs and manage their services and expenses better. This can include minimizing the length of patient stays, increasing the use of skilled nursing facilities (SNFs) and home health care (HHA), and reducing ancillary services. As a result, hospitals can avoid larger reductions in admission volumes and maintain profitability.
Secondly, PPS helps control the growth of inpatient benefit costs, which was its main financial purpose. This is achieved by providing fixed prices per discharge, adjusted for each local market, and incentivizing providers to restrain inpatient care costs. While Medicare inpatient PPS net profits may be understated due to overreported capital-related expenses, hospitals with Medicare PPS inpatient sector losses can maintain net profit levels comparable to pre-PPS periods through increasing net profits in non-Medicare sectors.
Furthermore, PPS has led to a decrease in the rate of growth of Medicare benefit payments, particularly inpatient hospital payments. This indicates that PPS is achieving its objective of reducing costs without negatively impacting access to or quality of care. The shift to post-hospital care has not been significant, and hospitals continue to treat patients efficiently while managing their expenses.
The impact of PPS on financial performance is also evident in hospitals' responses to payment rates. High-cost hospitals, facing pressure from PPS payment rates, have shown more aggressive responses to improve financial performance. They have achieved this by cutting lengths of stay, reducing rates of inflation in expenditures, and avoiding significant decreases in admissions.
Overall, PPS has helped hospitals improve their financial performance by incentivizing cost control, managing inpatient care costs, and encouraging efficient use of resources, resulting in stabilized expenses and maintained profitability.
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Incentives for hospitals to use resources efficiently
Medicare's Prospective Payment System (PPS) incentivizes hospitals to use resources efficiently by reimbursing them on a case-mix adjusted, flat-rate basis. This payment system encourages hospitals to reduce costs by shortening patient stays and increasing the use of skilled nursing facilities (SNF) and home health care (HHA). While this can lead to reduced hospital expenses, it may also increase the risk of premature discharge and subsequent readmission.
The impact of PPS on hospital admissions has been mixed, with some studies showing a decline in admissions, while others suggest incentives for higher admission rates. The decline in admissions could be attributed to factors such as increased awareness of unprofitable admissions, the use of second opinions and pre-authorization programs, advancements in medical technology, and the shift from inpatient to outpatient care.
To further encourage efficient resource utilization, Medicare has implemented financial incentives for hospitals to improve the quality of care and reduce readmissions. Hospitals that successfully reduce readmissions by allocating resources towards transitional care, at-home monitoring, and patient empowerment are rewarded. However, an excessive focus on avoiding penalties may compromise overall quality, safety, and patient satisfaction.
Additionally, Medicare has boosted incentives for hospitals to adopt electronic health record systems (EHRs) and share data with public health agencies. This enables health departments to identify demographic groups or areas with specific health needs and allocate resources accordingly.
While PPS and other financial incentives have shown potential in improving efficiency, it is important to strike a balance between cost reduction and maintaining the quality of care. Hospitals must consider the broader impact of their incentive structures on patient outcomes and overall population health.
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Frequently asked questions
PPS stands for Prospective Payment System. It is a reimbursement system in which Medicare payment is made based on a predetermined, fixed amount.
PPS provides hospitals with an incentive to reduce costs by encouraging them to manage their services and costs efficiently. This could mean reducing the length of patient stays, increasing the use of skilled nursing facilities and home health care, and increasing outpatient testing.
Yes, data suggests that PPS has helped to control the growth of inpatient benefit costs without increasing costs to beneficiaries. Hospital net revenues increased more slowly than expenses during the PPS 2 through PPS 7 period.
While PPS has helped reduce costs, there are concerns about its potential impact on the quality of care. PPS may increase the risk of premature discharge and readmission of patients. It may also incentivize hospitals to avoid patients who are more costly than average.
