What is PPS in Healthcare?

Beginning in 1983, PPS, or prospective payment system was implemented for use by the Centers for Medicare and Medicaid Services (CMS).

A prospective payment system provides reimbursement for medical services according to a specific classification system unique to the service that the patient receives.

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 is based upon code and is a formula for calculating the cost of medical care. This calculated price is a predetermined, fixed amount. However, it could change slightly over time due to inflation. There are defined periods for predetermined payments. This could be per hospital stay or per 60 days, for example.

In general, the same payment will be received for the same type of care all the time.

What is the Purpose of the Prospective Payment System?

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

These types of payment systems reward providers who make sure that top-quality care is provided to patients. Another important goal that prospective payment systems focus on is making sure that any risk is transferred to the provider, not the patient. This will make sure that providers give the highest quality healthcare at a reasonable price.  It is also important that there is no overuse of services. 

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 makes the process quicker and more manageable. PPS can also result in not only patients saving money, but insurance companies saving money as well.

Despite many benefits, many healthcare providers do not fully understand prospective payment due to its complexity. The only way that the potential benefits can be attained is if everyone understands the system and has a level of dedication to it.

Drawbacks of PPS

With numerous different factors having influence over the prospective payment system, it can be overly complex. Due to these complexities, there can be some confusion for different medical providers across the nation. This could result in errors in categorizing medical procedures within the prospective payment formula.

Since PPS can be easily changed through laws or voting, a large downside is potential political influence. This type of voting could be more so out of a political motivation than a healthcare one. This could result in changes that do not benefit patients in the long run. These types of changes could also result in unforeseeable shifts.  

With providers only receiving fixed pay, some could seek to cut corners to make a larger profit. This could lead to potentially lower-quality care, or other healthcare aspects receiving a lower allocation of funds.

PPS vs. Fee-For-Service

Compared to a prospective payment system, fee-for-service payments could incentivize adding unnecessary medical expenses and bills thus increasing unnecessary use of equipment.

Fee-for-service payments can put an emphasis on the provider more so than the patient and result in providers being reward simply for having an increased volume of patients.

Instead of providing a fixed amount, fee-for-service charges a fee for each service provided. This could be extremely inefficient compared to PPS. It could also lead to corruption as the providers will want to do more unnecessary testing to increase revenue. This skyrockets costs for patients. These types of systems are not low-cost focused.

Fee for service is also limited to face-to-face visits. However, the benefit of fee-for-service is that within the service that is being provided for the cost, care is the focal point.

However, in the past, fee-for-service did have a larger focus on reactive care. PPS is overall a better option as it is focused on value and providing the best service.

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 kinds. Retrospective payment systems result in the amounts owed being paid after services have been provided. Prospective payment plans work with a fixed rate whereas retrospective payment systems are based upon actual charges. For example, after services are provided, a bill is sent to an insurance company. The insurance company can then decide if they want to pay for the services.

However, prospective payment systems greatly outshine retrospective ones in a few different ways.

First, having payments based upon code allows for more accurate and appropriate reimbursements. It also keeps payments and billing accurate. Prospective payment systems also generally reward efficient care more so than retrospective. There is also increased risk management. PPS is a more organized and quicker system compared to retrospective. PPS also is a wonderful system in times of uncertainty. With the COVID-19 pandemic, many individuals were faced with unforeseen medical bills. Likewise, medical providers saw a huge change in the number of patients cared for.

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