Prospective Payment Systems

As its name indicates, a PPS is forward-looking. Predetermined payment amounts are established before the actual provision of the item or service and are intended to reflect the typical costs of treating or diagnosing a beneficiary with a particular condition. The predetermined payment amount generally is adjusted annually using existing prior years' actual Medicare claims data and statutorily prescribed annual update factors intended to reflect variables, such as inflation.

PPS methodologies were designed to encourage efficiency and control costs by requiring providers to bear cost overruns. Perceived successes have led Congress to expand the use of PPS to a number of provider services. Originally prescribed for certain hospital inpatient services in 1982, Congress in the last several years has authorized PPS methodologies for services and items provided in several other settings: hospital outpatient departments, inpatient rehabilitation facilities, home health agencies, skilled nursing facilities, and long-term care facilities.

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