Question

In 1983, the United States Congress ended the retrospective, cost-based payment method that Medicare used to pay for inpatient hospital services. From 1984, most hospitals are paid under the prospective payment system (PPS). Under PPS, Medicare pays hospitals a fixed amount for each patient based on the patient’s diagnosis- related group (DRG) at the time of admission – this amount will not be affected by the hospital’s actual expenditures on the patient.

a) In your own words, briefly discuss: why was the retrospective, cost-based payment method considered undesirable and why was the PPS considered a better method?

b) Although PPS improves on the cost-based approach, hospitals may respond to PPS in unintended ways. In your own words, briefly discuss how PPS may affect the intensity of treatment such as the length of stay.

Answer 1

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