Prospective Payment System

Prospective Payment System
Name	Prospective Payment System
Specialty	Health policy, Health economics
Introduced	1980s
Related	Diagnosis-Related Group, Resource-Based Relative Value Scale, capitation

Prospective Payment System

A Prospective Payment System is a health care financing mechanism in which a predetermined, fixed payment is made for a defined episode, service, or period, irrespective of actual costs incurred. It aligns incentives among providers, payers, and regulators by linking reimbursement to standardized classifications and negotiated rates established in advance. The model intersects with numerous Medicare (United States), Health maintenance organization, Diagnosis-Related Group, Capitation, and Fee-for-service debates across international National Health Service, Medicare (Australia), and private insurer reforms.

Overview

Prospective payment systems specify payments using classifications such as Diagnosis-Related Group, Ambulatory Payment Classification, Resource-Based Relative Value Scale, and Current Procedural Terminology codes, and they are administered by agencies like Centers for Medicare & Medicaid Services, NHS England, and insurers including UnitedHealth Group, Aetna, and Blue Cross Blue Shield Association. Payment rates are typically adjusted by factors drawn from Consumer Price Index, International Classification of Diseases, and negotiated schedules influenced by legislation such as the Social Security Act and rulings from bodies like the Department of Health and Human Services (United States). Stakeholders from American Medical Association, Royal College of Physicians, and academic centers like Harvard Medical School and Johns Hopkins University contribute to design, coding, and review processes.

History and Development

The modern prospective payment approach emerged prominently with the introduction of the Medicare inpatient prospective payment system in the early 1980s under Medicare (United States) reforms influenced by policy debates involving Jimmy Carter, Ronald Reagan, and congressional committees. Early pilot programs and international analogues were studied by institutions such as World Health Organization, Organisation for Economic Co-operation and Development, and research centers at Brookings Institution and RAND Corporation. Subsequent milestones include the adoption of Diagnosis-Related Group methodology by hospitals across United States, adaptation in the United Kingdom within National Health Service (England), and extensions to outpatient, long-term care, and mental health settings prompted by initiatives from Centers for Medicare & Medicaid Services and directives in legislation like the Balanced Budget Act of 1997. Academic analyses from The Lancet, New England Journal of Medicine, and economists at University of Chicago and London School of Economics documented impacts on utilization, quality, and costs.

Methodology and Components

Key components include classification systems (e.g., Diagnosis-Related Group, Ambulatory Payment Classification), base rate setting informed by data from Healthcare Cost and Utilization Project, wage adjustments referencing regional indices such as those used by Bureau of Labor Statistics, and outlier provisions guided by actuarial analyses from firms like PricewaterhouseCoopers and KPMG. Case-mix adjustment leverages tools like ICD-10, ICD-9, and comorbidity indices developed at Mayo Clinic and Johns Hopkins University. Quality metrics from National Quality Forum and reporting requirements tied to organizations like Joint Commission modify payment through value-based purchasing programs initiated by Centers for Medicare & Medicaid Services. Reconciliation mechanisms and audits are conducted by entities including Office of Inspector General (United States) and private auditors such as Deloitte.

Implementation by Country

In the United States, Medicare implemented inpatient prospective payments via Centers for Medicare & Medicaid Services using Diagnosis-Related Group classifications; outpatient prospective payment systems followed, and Medicaid programs in states like California and New York (state) adopted variants. The United Kingdom implemented tariff-based payments in parts of the National Health Service with commissioning by organizations such as NHS England and strategic input from Department of Health and Social Care (United Kingdom). Germany combines prospective payments with diagnosis-related groups under a framework involving statutory health insurers like AOK. Australia uses prospective approaches within Medicare (Australia) and state health systems, influenced by agencies like Australian Institute of Health and Welfare. Other adopters include Canada, Japan, and countries in the European Union where health ministries and agencies such as Agence Régionale de Santé pilot DRG-style payments.

Effects and Criticisms

Advocates cite cost containment, efficiency gains, and predictability for payers and providers, referencing studies from RAND Corporation and Brookings Institution; critics highlight potential for upcoding, premature discharge, and service-stinting documented by analyses in Health Affairs and investigations by Office of Inspector General (United States). Concerns have been raised about impacts on vulnerable populations studied at Johns Hopkins University and Harvard School of Public Health, and about administrative burdens noted by American Hospital Association and professional societies such as American College of Physicians. Legal and regulatory controversies have involved litigation with entities like American Medical Association and enforcement actions by Centers for Medicare & Medicaid Services and Department of Justice (United States).

Variations and Related Payment Models

Variations include bundled payments as implemented in initiatives by Center for Medicare and Medicaid Innovation, capitated payments used by Kaiser Permanente and Health Maintenance Organization (HMO), per-diem rates common in long-term care overseen by agencies like Centers for Medicare & Medicaid Services, and global budgets applied in experiments in Maryland and by systems like Veterans Health Administration. Other related models encompass value-based purchasing programs championed by National Quality Forum, pay-for-performance schemes trialed by World Bank initiatives, and hybrid approaches combining Diagnosis-Related Group payments with quality incentives from entities such as Centers for Medicare & Medicaid Services.

Category:Health economics