Rational of Reimbursement Systems
Health Care Infrastructure
Richard M. Hill
June 26, 2006
Prospective Payment System (PPS) created very different incentives from those of the earlier cost based payment system. The PPS was introduced by the federal government in 1983, as a way to change hospital behavior through financial incentives that encourage cost-efficient management of medical care (Centers for Medicare, 2006). To stay within the fixed rate for each patient, a hospital must try to keep its costs for that patient low by cutting services or substituting less expensive for more expensive services. It can substitute care outside the hospital for hospital care, by discharging the patient to another provider earlier than it would have under cost reimbursement to a nursing home, long term care or to the community where family or home health provider may provide services. Under prospective payment, Medicare pays home health agencies (HHAs) a predetermined base payment. The payment is adjusted for the health condition and care needs of the beneficiary. The payment is also adjusted for the geographic differences in wages for HHAs across the country.
The adjustment for the health condition, or clinical characteristics and service needs of the beneficiary is referred to as the case-mix adjustment. The home health PPS will provide HHAs with payments for each 60-day episode of care for each beneficiary. If a beneficiary is still eligible for care after the end of the first episode, a second episode can begin; there are no limits to the number of episodes a beneficiary who remains eligible for the home health benefit can receive. Diagnoses and procedures must be documented by the attending physician in the patient’s medical records. They are then coded by hospital personnel using ICD-9-CM nomenclature. This is a numerical coding scheme of over 13,000 diagnoses and 5,000 procedures (American Hospital, 2000). The coding process is...