The Impact of the Medicare Prospective Payment System And Recommendations for Change

Abstract

In 1983, the U.S. Congress passed the Social Security Reform Act establishing a prospective payment system (PPS) for hospitals under the Medicare program. PPS represents a radically different approach to paying for care than the retrospective cost-based reimbursement system it replaced. The program pays hospitals a prospectively determined amount for each Medicare patient treated depending on the patient's diagnosis. Although not the only hospital prospective payment system in operation, the Medicare prospective payment system has had the greatest impact on our health care delivery system since it covers approximately 33.2 million people and accounts for nearly 27 percent of all expenditures on hospital care in the United States. The Medicare PPS has influenced where program beneficiaries receive health care services, how long they stay in hospitals, and the kinds of care they receive.