Prospective Payment Systems for inpatient hospital services under Medicare

Medicare was enacted by President Lyndon B. Johnson as Title XVIII of the Social Security Act of 1965, extending health coverage to almost all Americans aged 65 or older

Center for Medicare and Medicaid

• Established in 1977 as the Health Care Financing Administration
• In 1983, the inpatient acute hospital prospective payment system was adopted.
• This meant that payment was given based on patients’ diagnoses instead of cost-based.

Some Background on IPPS

• The legislative history is actually from the Social Security Administration
• Established as part of the 1983 Social Security Amendments: PL 98-21
• Not a decision by the Department of Health or CMS
• Signed into law by President Reagan from H.R. 1900

Department of Health and Human Services

• Kathleen Sebelius is the Secretary
• Created as the Department of Health, Education, and Welfare in 1953
• The Center for Medicare and Medicaid is a branch of the Department

CMS assigns each patient discharged from a hospital a diagnosis-related group based on age, sex, principal diagnosis, secondary diagnosis, procedure performed, and discharge status. Each DRG is assigned a federal reimbursement rate that is adjusted to take into account different wage levels of a geographic area (i.e. cities are paid more, rural is paid less).

Example: Hip Fracture - DRG 210

• Age: 69+ = more $$$
• Secondary Diagnosis: Osteoporosis? = more $$$
• Lives in city? = more $$$

INpatient Operating Costs Include:

• Routine Services (nursing, board),
• Ancillary Services (radiology, lab),
• Special Care (intensive care), and
• Malpractice Insurance costs

Purpose of Regulation

• To have a cost-effective way to administer Medicare
• Instead of a cost-based method, it is now a diagnosis-based payment
• The hospital keeps the difference between the DRG payment rate and its actual operating costs
• Thus it is in the hospital’s best interest to keep costs low