What Is the Acute Care Prospective Payment System?

Acute care prospective payment is a system used to determine reimbursement for hospitals. Implemented in 1984 to help control Medicare costs, the prospective payment system (PPS) was based on diagnosis-related groups (DRG's). Other insurance payers soon started using DRGs and prospective payment.

Understanding Prospective Payment

• Prospective payment systems are reimbursed on predetermined charges rather than actual charges. DRG calculations help to predetermine the amounts paid under prospective payment.

Diagnosis-Related Groups Factors

• DRG formulas are based on factors like patient age, gender, diagnoses, procedures and where the patient was discharged.

How it Works

• Resources used to treat the patient are key factors in prospective payment. The less resources used, the more money the hospital makes. For example, a hospital may be reimbursed $2,500 for treating a patient, but only use $1,500 in resources. Under prospective payment, the hospital is still paid $2,500 and makes a $1,000 profit.

Result of Prospective Payment

• As a result of prospective payment implementation, health care organizations began to operate more efficiently. Previously, health care was reimbursed on actual charges and provided no incentive for efficiency. Under PPS, predetermined reimbursement makes it beneficial for hospitals to operate using fewer resources.

Prospective Payment Updates

• In 2008, the government updated DRGs to the Medicare severity-adjusted diagnosis related group system. MS-DRGs account for more detail and a more stringent payment system.