What is PPS in Healthcare?

PPS stands for “prospective payment system” and is a classification system used by the Centers for Medicare and Medicaid Services (CMS). CMS is the government agency responsible for running both Medicare and Medicaid.

A PPS is a method of reimbursement in which CMS payments to healthcare providers are made using a predetermined, fixed amount based on the service being provided. This system is used to encourage healthcare providers to be as economical as possible, as they get to keep the part of this fixed amount that is not spent on providing care.

The amount of the reimbursement depends on the service being provided and where it is provided. 

According to CMS, “CMS uses separate PPSs for reimbursement to acute inpatient hospitals, home health agencies, hospice, hospital outpatient, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities.”

PPS uses predetermined, fixed amounts that can be modified by CMS based on changes in the costs of providing care and factors like inflation. Hospitals and other healthcare providers use the rates set by CMS to plan how to economically deliver patient care.

What is the Purpose of the Prospective Payment System?

The main goal of implementing the prospective payment system is to reduce the cost of medical care.

By providing a fixed amount, doctors and hospitals know how much they will be paid for a certain procedure. This encourages them to perform the procedure as economically as possible to keep as much of the payment as possible. Ultimately, the concept is that this will result in less expensive care for patients who are paying through other means. 

Another important goal that prospective payment systems strives for is transferring financial risk to the provider, not the patient. If an unexpected expense occurs during care, it will ultimately be the provider who has agreed on fixed amount that absorbs the loss, not the patient.

Benefits of PPS

A major benefit of the prospective payment system is price control.

PPS is not based on market influences or individual hospital prices. Instead, it uses national prices. 

This system, therefore, results in increased clarity in the billing process. It also results in more fair medical payments across the country. Since there is increased accuracy, this could also benefit all other components of the healthcare system such as suppliers, management, and contracting.

Providing a structure for medical billing also makes the process quicker and more manageable. PPS can result in both patients and their insurance companies saving money, as well.

Drawbacks of PPS

With the numerous, complex details that make up the prospective payment system, it can be overly complicated. This can lead to confusion for different medical providers across the nation. PPS can also can increase providers costs by forcing them to consult with experts who understand the system well.

 Failure to understand how to navigate the PPS can result in errors in categorizing medical procedures and fines or underpayment.

Since PPS can be easily changed through laws or voting, another large downside is potential political influence. Changes could be made based on political motivations rather than healthcare factors. This could result in changes that do not benefit patients in the long run. These types of changes are unpredictable and could have far-reaching consequences.

Another important potential drawback is that providers only receiving fixed pay can incentivize some to cut corners to make a larger profit. This could potentially lead to lower-quality care at the patient’s expense.

PPS vs. Fee-For-Service

Fee-for-service payments involve paying for each, individual service provided by a physician.

Compared to a prospective payment system, fee-for-service payments can incentivize adding unnecessary medical expenses and bills, thus increasing the cost of healthcare.

Fee-for-service payments can put an emphasis on the quantity of care a provider gives instead of the quality of care. This encourages providers to do more services rather than to improve the services that they perform.

Instead of providing a fixed amount, fee-for-service charges a fee for each service provided. This can be inefficient compared to PPS and can lead to problems like incentivizing unnecessary testing to increase revenue. This can significantly increase costs for patients.

Prospective vs Retrospective Payment Systems

Another type of payment system that can be compared to prospective payment systems is the retrospective payment system. In the US, prospective and retrospective payment systems are the two major types of reimbursement. 

Retrospective payment systems result in charges being paid after services have been provided. While prospective payment plans work with a fixed rate, retrospective payment systems are based upon actual charges. 

However, there are some ways that prospective payment systems can be superior to retrospective payment systems.

Basing payments upon specific codes and categorizations allows for more accurate and appropriate reimbursements. It also helps to keep payments and billing accurate. Prospective payment systems also are generally better at rewarding efficient care than retrospective systems.