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Healthcare Payment Systems

Prospective payment system (PPS) is a healthcare reimbursement method where
providers receive fixed payment amounts for specific services that they provide to patients from
Medicare (Berenson, 2016). It is the opposite of non-prospective payment service in which
payment amounts are determined after the healthcare service has been provided. PPS was
initiated with the goal of reducing healthcare costs while at the same time improving the quality
of services provided by healthcare facilities (Berenson, 2016).
Prospective payment system (PPS) uses multiple classifications to determine the amount
of reimbursement it gives to providers. The two most commonly used classification systems are
Diagnosis Related Groups (DRG) and Case-Mix-Groups (CMG). In the case of DRG
classification system, payment is primarily determined by the patient’s diagnosis (Berenson,
2016). The payment rate is then further adjusted based on factors such as age of the patient,
major medical procedures performed on them, sex, and secondary diagnoses (Berenson, 2016).
For DRG the healthcare facility receives payments per patient stay in the facility. Extra payment
can only be made if a patient stays in the facility much longer than it is usually the case. As for
CMG system, there are 95 categories that determine the amounts the services are paid (Berenson,
2016). Patients are assessed and then assigned to one of the categories. Payments are then made
per patient stay.
Prospective payment system has a major impact on hospital operations. For inpatient
services, hospitals try to induce shorter patient lengths of stay. This is because healthcare
facilities receive payments based on length of stays for patients which are, for all practical
purposes, fixed for specific treatments. Thus, the longer a patient stays in hospital the more the

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hospital uses its resources. In addition, PPS provides hospitals with a strong incentive to cut
down on costs and only serve the patient with bare minimum resources.

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References

Berenson, R. A. (2016). Improving Performance, Not Just What’s Measured: Does the Inpatient
Prospective Payment System Provide Useful Lessons?. The Journal of ambulatory care
management, 39(2), 111-114.