Assignment: Prospective Payment System

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Assignment: Prospective Payment System

Assignment: Prospective Payment System

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President Ronald Reagan introduced the first significant reimbursement reform in his Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982. While the act reduced taxes in response to President Reagan’s campaign promise, it also contained significant reimbursement reform for Medicare. Specifically, the act introduced cost limits per case and cost limits per year (known as TEFRA limits). The act directed the US Department of Health and Human Services (HHS) to develop a prospective payment system (PPS) for hospitals (for a definition of prospective payment, see the glossary and the discussion in chapter 1). It also introduced the option of managed care plans to beneficiaries and made Medicare the secondary payer when beneficiaries had additional insurance.

reimbursement only, and it was intended to replace cost-based reimbursement. The amend- ments established prospective payment rates for each diagnosis-related group (DRG), or grouping of similar cases that should require similar resource consumption.3 Hospitals that provided care for a lower cost than the established rate for a DRG realized a profit. Hospitals that provided care for a higher cost than the established rate realized a loss. Because the DRG system gave hospitals a financial incentive to provide less service to Medicare patients, the federal government relied on peer review organizations (PROs), established under the TEFRA legislation, to ensure that Medicare beneficiaries were receiving appropriate care.4

Medicare implemented the PPS over a three-year period to give hospitals time to adjust their costs. During that time, Medicare used hospital-specific data to establish the DRG rates. At the end of the three-year period, hospitals were subject to a national rate with an adjustment for labor costs, which varied between regions. Currently, three national rates exist: a teaching hospital rate, an urban hospital rate, and a rural hospital rate (though most rural hospitals opt for cost-based reimbursement).5

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