Healthcare Finance a Prospective Payment

Healthcare Finance

A Prospective Payment System is the method that Medicare uses to reimburse payments based upon a predetermined set amount. The payment amount for a particular service is determined based on the classification of a particular service. "CMS uses separate Prospective Payment Systems for reimbursement in regards to acute inpatient hospitals, home health agencies, hospice, hospital outpatient, inpatient psychiatric facilities, inpatient rehabilitation facilities, long-term care hospitals, and skilled nursing facilities" (Prospective Payment Systems-General Information, n.d).

The inpatient hospital benefit that Medicare provides covers a person for 90 days of care per illness with an additional 60 days of lifetime reserve. Illnesses are considered to begin when a person is admitted and end after they have been out of the hospital or Skilled Nursing Facility (SNF) for 60 consecutive days. The Inpatient Prospective Payment System is based on two national base payment rates. The first one covers operating expenses and the second is for capital expenses. These national base payment rates are then adjusted to account for a hospital's costs in furnishing care. These costs take into account a person's condition and what treatment will be needed along with local market conditions (Acute Inpatient Prospective Payment System, 2009).

All discharges are assigned to a diagnosis related group (DRG). These groups consist of patients with similar conditions that are expected to require similar amounts of hospital care. Each DRG has a relative weight that reflects the expected cost of inpatient treatment for all patients in that group. "The payment rates for DRG's in each local market are determined by adjusting the base payment rates to reflect the input price level in the local market which is then multiplied by the relative weight for each DRG" (Acute Inpatient Prospective Payment System, 2009).

There are several factors that can affect a hospitals final payment. These factors include such things as the fact that an operating payment rate is increased for facilities that train residents in approved graduate medical education programs. Operating and Capital payment rates are increased for facilities that treat an unequal share of low income patients. Rates are reduced for certain transfer cases, and outlier payments may be added for cases that are extremely costly. In addition, hospitals may be paid an additional amount for treating patients with new technologies. Add on payments for technologies may be approved if the technology is approved as new, costly, and a substantial clinical improvement over existing treatments (Acute Inpatient Prospective Payment System, 2009).

IPPS payment rates are intended to cover the average costs that a provider incurs in furnishing care for one type of case in relation to another. The steps that are used to figure payments are as follows:

1) "A standardized amount (a dollar figure) is divided into labor and non-labor related portions and the labor portion is adjusted by a wage index to reflect area differences in the cost of labor. If the area wage index is greater than 1, the labor share equals 69.7%. The law requires the labor share to equal 62% if the area wage index is less than 1.0.

2) the wage adjusted labor share is added to the non-labor share of the standardized amount.

3) the wage adjusted standardized amount is multiplied by a relative weight for the DRG. The relative weight is specific to each of 746 DRG's (for fiscal year [FY] 2009) and represents the relative average cost of a beneficiary in one DRG compared to another.

4) if applicable, additional amounts will be added to the IPPS payment for hospitals engaged in teaching medical residents, hospitals that treat a disproportionate share of low income patients, and for high cost outlier cases" (Acute Inpatient Prospective Payment System, 2009).

Physician services include office visits, surgical procedures, and other diagnostic services. These services are usually performed in physicians' offices, hospitals, ambulatory surgical centers, skilled nursing facilities, hospices, outpatient dialysis facilities, and clinical laboratories. Medicare pays for physician services based on payment rates called the physician fee schedule. In determining payment rates for each service on the fee schedule, the Centers for Medicare & Medicaid Services (CMS) considers the amount of work required to provide a service, expenses related to maintaining a practice, and liability insurance costs. The values given to these three types of resources are adjusted by the differences in prices in different markets, and then a total is multiplied by a standard dollar amount, called the fee schedule's conversion factor. Medicare's payment rates may be adjusted based on provider characteristics, additional geographic designations, and other factors (Prospective Payment Systems-General Information, n.d).