Question

The Medicare prospective payment system (PPS) was introduced by the federal government in October, 1983 as a way to change hospital behavior through financial incentives that encourage more cost-efficient management of medical care.

Questions:

1. Discuss two major reasons that Medicare administrators turned to the prospective payment concept for Medicare beneficiaries.
2. Discuss the benefits and disadvantages of the Prospective Payment System.

Answer 1

Two Major reasons due to which the Medicare administrators turned to the PPS for Medicare beneficiaries are listed below:

1) On an average if we see the annual rate of growth, Medicare payments to hospitals grew by 19%.

2) It has created a burden for Medicare beneficiaries due to the expansion of Medicare hospital deductible.

Advantages of Prospective Payment System:

1) The PPS is not very static and can be changed/updated to stay on top of the healthcare industry.

2) As it is based on the government regulation, it can be changed to bring in the new factors like changes in money value to account the inflation and make it more accurate.

Disadvantages of Prospective Payment System:

1) The formula to make the PPS is very complex and accounts for many different factors few of them includes statistical variance, teaching related costs and other situations.

2) While the PPS can be changed through voting and regulatory changes, it is not always changed in the right way. While the goal is to update the system for inflation and other changes, voting is often influenced more by political motivation than the desire to better the system.