Gaining Competitive Advantage through Medicare Prospective Payment System (PPS)

Prospective Payment System (PPS) is one of the most important policy tools in controlling ever-increasing healthcare costs. Built on a methodology that plays a crucial role in shaping providers’ incentive, PPS is gaining traction in health policy-making vis-a-vis the government’s efforts to expand health coverage to wider populations. 

What is the Purpose of PPS?

Prospective Payment System is aimed at delivering patient care effectively, efficiently and without over utilizing services. The concept is making healthcare facilities to be responsible to provide whatever services are needed by patients. That means there is a built-in incentive for providers to create management patterns that will allow diagnosis and treatment of the patient as efficiently as possible. 

CMS defines PPS as a method of reimbursement in which Medicare payment has to be made based on a predetermined, fixed amount, in contrast to the conventional fee-for-service payment system where unnecessary treatment sessions are added. In the PPS method, payment amount for a particular service is derived based on the classification system of that service. Take for example of the diagnosis-related groups for inpatient hospital services. 

Separate PPSs are used by CMS for reimbursement to home health agencies, acute inpatient hospitals, hospital outpatient, inpatient rehabilitation facilities, inpatient psychiatric facilities, long-term care hospitals, and skilled nursing facilities. See PPS details on CMS website.

What are the Main Advantages of a Prospective Payment System?

The first advantage of PPS method is the availability of code-based reimbursement. It helps create incentives for more accurate coding and billing, resulting in better information about what payers are purchasing to feed network development, medical management, and contracting. 

In contrast to Medicare’s previous per diem cost-based system, PPS enables Medicare to pay one amount for each hospital admission, not impacting the payment for the number of days of care or how many tests and procedures were used. 

Key Advantages of Medicare PPS:

  1. Payment amounts cover defined periods (per diem, per stay, or 60-day episodes)
  2. Payment amount is calculated based on a unique assessment classification of each patient
  3. PPS applies to inpatient facility
  4. Reduces the tendency of expensive and unnecessary drug and diagnostic procedures

PPS generally applies to all hospitals participating in the Medicare program, with certain exclusions, exemptions, and adjustments. See details in CMS website. As already said, the PPS payment is determined based on multiple factors including service location and patient diagnosis as opposed to the fee-for-service plans, which reward the provider for the volume of care provided and can create an incentive for unnecessary treatment. For example, for inpatient hospital services, CMS uses separate PPSs for reimbursement related to diagnosis-related groups (DRGs), Hospice based on Inpatient Psychiatric Facility (IPF), etc. 

How is PPS Payment Adjusted?

PPS payment adjustments are made on the basis of area wage adjustments, disproportionate share adjustments, DRG weights, outliers in cost, geographic variation in wages and case mix, etc. PPS continues to focus on value-based care standards that healthcare providers are striving to optimize with the implementation and utilization of technology to increase their productivity, focus from volume to value and support incentives for provision of quality patient care. 

The role of SaaS-based Medicare and Medicaid Self Service Solutions for repricing – CMSPricer – has been immensely useful for them to fulfil their goals and gain the competitive advantage through the prospective payment system.