What is a Prospective Payment System?

Prospective Payment Systems (PPS) was established by the Centers for Medicare and Medicaid Services (CMS). PPS refers to a fixed healthcare payment system. This is based on the operating and capital-related costs of a medical diagnosis and determines reimbursement for care provided to Medicare and Medicaid participants. The enables healthcare providers to be aware of the predetermined reimbursement amount for patient care regardless of the amount of care provided.

PPS is intended to motivate healthcare providers to structure cost-effective, efficient patient care that avoids unnecessary services. The goal is to provide quality patient care that engages patients, and strives for faster diagnosis and treatment, shorter hospital stays, and lower costs.

Comparing the PPS Payment System

Although the PPS payment system may sound somewhat like a health maintenance organization (HMO), there are differences. Instead of a monthly payment amount for all services, like an HMO provides, PPS provides the healthcare facility with a single predetermined payment for each Medicare patient. This prepayment is based on the patient diagnosis and standardized assessments and covers a defined time such as an inpatient hospital stay, or a 60-day Home Health episode.

Compared to fee-for-service plans, which reward the provider for the volume of care provided and can create an incentive for unnecessary treatment, the PPS payment is based on multiple factors including service location and patient diagnosis.

PPS Classifications

PPS determines payment based on a classification of service. For example, for inpatient hospital services, CMS uses separate PPSs for reimbursement related to diagnosis-related groups (DRGs). This patient classification method indicates groups of patients that would incur similar resource consumption, length of stay, and the costs generally incurred with this diagnosis to classify inpatient groups for payment. CMS uses separate PPSs for reimbursement for services such as:

  • Acute Inpatient Hospitals

Acute inpatient PPS (IPPS) classification is based on diagnosis-related groups (DRG) with assigned payment weight based on average resources.

  • Home Health Agencies

Home Health PPS classifications are based on Home Health Resource Groups (HHRG) determined by the Outcome and Assessment Information Set (OASIS). Medicare pays a predetermined base rate that is adjusted based on the patient’s health condition and service needs, which is considered the case-mix adjustment.

  • Hospice

Hospice has a per diem rate for each level of care such as routine home care, continuous home care, inpatient respite care, and general inpatient care.

  • Inpatient Psychiatric Facilities

Inpatient Psychiatric Facility (IPF) PPS classifications are based on a per diem rate with adjustments to reflect statistically significant cost differences.

  • Inpatient Rehabilitation Facilities

PPS classification is based on Case Mix Group (CMG) which reflects clinical characteristics and expected resource needs.

  • Long-Term Care Hospital

A long-term care hospital (LTCH) is a hospital whose average inpatient length of stay is greater than 25 days. The PPS for LTCHs is a per discharge system with a DRG patient classification system.

  • Skilled Nursing Facilities

PPS classification is based on Resource Utilization Groups (RUG) and a per diem payment per patient.

  • Hospital Outpatient

PPS classification is based on the Ambulatory Payment Classification System (APC).

PPS Payment Adjustments

There is a potential for add-on payment adjustments for PPS classifications. Payment adjustments can be based on area wage adjustments, outliers in cost, disproportionate share adjustments, DRG weights, case mix and geographic variation in wages. Hospitals may be eligible for an add-on payment if they are considered a disproportionate share hospital (DSH), in that they care for a large percentage of low-income patients, or if they are an approved teaching hospital for indirect medical education (IME).

Currently, PPS is based upon the site of care. Units of payment and payment adjustments may also result in different rates for similar patients depending upon where they are treated. This may influence providers to focus on patients with higher reimbursement rates. The future may bring a unified payment system based on the patient’s clinical needs. This could result in replacing the four independent PPSs for skilled nursing facilities, home health agencies, inpatient rehabilitation facilities and long-term care hospitals with one for post-acute care.

From Volume to Value

PPS continues to focus on many of the principles of value-based care. To continue the shift from fee-for-service care, healthcare providers are striving to optimize technology to increase their productivity. This may assist in the shift from volume to value, and support incentives for the provision of quality, holistic, preventative patient care.


Article Sources


Maureen Bonatch MSN, RN is a freelance healthcare writer specializing in leadership, careers, and mental health and wellness. She is also a fiction author. She is the owner of CharmedType.com and MaureenBonatch.com

Staffing in the New Economy

Keep your staff focused on patient experiences

Download our free e-book

Start typing and press Enter to search