Benefits of a Prospective Payment System

Prospective payment systems are an effective way to manage and optimize the cost of healthcare services. By establishing predetermined rates for medical services, they create a predictable flow of payments between providers and insurers. This allows both parties to budget accordingly, reducing waste and improving operational efficiency. Additionally, prospective payment systems simplify administrative tasks such as claims processing, resulting in faster reimbursement times.

What is PPS in healthcare? It accurately estimates the costs of services provided, a PPS can help prevent overpayment. This ensures that providers receive appropriate reimbursement for the services they deliver, while also helping to control healthcare spending by eliminating wasteful practices such as duplicate billing and inappropriate coding.

What is a Prospective Payment System Exactly?

The prospective payment system definition refers to a type of reimbursement model used by healthcare providers to create predictability in payments. It allows the provider and payer to negotiate and agree upon a prospective payment plan, with fixed payments for services rendered before care is provided. This helps ensure that providers are paid accurately and timely, while also providing budget certainty to both parties. Through prospective payment systems, each episode of care is assigned a standardized prospective rate based on diagnosis codes and other factors, such as patient characteristics or geographic region. A prospective payment system creates an incentive structure that rewards quality care since providers receive a set amount regardless of how much or how little it costs them to provide the service. This helps drive efficiency instead of incentivizing quantity over quality. Ultimately, prospective payment systems seek to balance cost and quality, which can create a better overall outcome for both the provider and patient.

History of Prospective Payment Systems

Prospective payment systems have become an integral part of healthcare financing in the United States. Developed in 1983, PPS in healthcare was designed to create a predictable and budget-friendly system for reimbursing hospitals for their services rather than reimbursements based on actual costs incurred by the hospital. The introduction of prospective payment systems marked a significant shift in how healthcare is financed and provided, replacing the traditional cost-based system of reimbursements. PPS in healthcare has since become a widely accepted payment model across the United States and has facilitated a more standardized approach to healthcare. As hospitals have become accustomed to this type of reimbursement method, they can anticipate their revenue flows with more accuracy, allowing them to plan more effectively. Additionally, prospective payment plans have helped to drive a greater emphasis on quality and efficiency in healthcare provision, resulting in better outcomes for patients.

The prospective payment system has also had a significant effect on other aspects of healthcare finance. By providing a more predictable payment structure for hospitals, prospective payment systems have created an environment where providers can focus on delivering quality care rather than worrying about reimbursement rates. The system also encourages hospitals to reduce costs and pursue more efficient processes, which can have a positive impact on patient outcomes. Additionally, the introduction of PPS in healthcare has led to an increase in the availability of care for historically underserved populations. By providing more predictable reimbursement rates that enable providers to serve these communities without the risk of financial losses, prospective payment systems have helped to reduce disparities in healthcare access.

Why the Need?

“When a system underperforms, stepping back and re-thinking processes can have a dramatic impact. As the entire Medicare program moves towards a risk assumption model and the financial performance of providers is increasingly put at risk, many organizations are re-engineering their HCC risk adjustment coding and data-integrity programs. The results have been surprising" says industry expert Dr. Tom Davis, who strongly believes prospective review will be the industry standard.

Prospective payment systems are designed to incentivize providers to establish delivery systems that offer high quality patient care without overtaxing available resources. Conventional fee-for-service payment systems, in contrast, may create an incentive to add unneeded treatments and therefore expend valuable resources unnecessarily.

As healthcare costs continue to rise, a prospective payment system can offer a viable solution for reducing financial burden. By creating predictability in payments, a prospective payment system helps healthcare providers manage their finances and avoid the financial strain of unexpected payments. Additionally, it helps level the playing field by ensuring all patients receive similar quality care regardless of their ability to pay or provider choice. It allows providers to focus on delivering high-quality care without worrying about compensation rates.

Managed care organizations also known as MCOs produce revenue by effectively allocating risk. An essential attribute of a prospective payment system is that it attempts to allocate risk to payers and providers based on the types of risk that each can successfully manage. Thus, the benefits of prospective payment systems are based on shifting the risk of treating a population of patients to the provider, formulating a fair payment structure that encourages providers to deliver high-value healthcare. 

The rules and responsibilities related to healthcare delivery are keyed to the proper alignment of risk obligations between payers and providers, they drive the payment methods used to pay for medical care. Payers now have a range of choices available to set payment arrangements and roles and responsibilities related to medical administration to assist in managing risk. With improvements in the digitization of health data, a prospective payment system, now more than ever, represents a viable alternative strategy to the traditional retrospective payment system.

The broad focus of prospective payment system PPS on patient care contrast favorably to the “interval care” more prevalent in other long-established payment methods. 

Benefits

The primary benefit of prospective payment systems is the predictability they provide to healthcare providers. PPS in healthcare eliminates the hassle and uncertainty of traditional fee-for-service models by offering a set rate for each episode of care. This also helps prevent providers from overbilling or upcoding, as the prospective rate puts strict limits on what can be charged. Additionally, it creates more efficient use of resources since providers are focused on quality rather than quantity.

Another benefit is that a prospective payment system holds payers and providers responsible for that portion of risk that they can effectively manage. Both payers and providers benefit when there is appropriate and efficient alignment of risk. Thus, prospective payment systems have emerged as a preferred and proven risk management strategy.

An outpatient prospective payment system can make prepayment smoother and support a steady income that is less likely to be affected by times of uncertainty. COVID-19 has shown firsthand how a disruption in care creates less foot traffic, less mobile patients, and in-turn, decreased reimbursements in traditional fee-for-service models. The retrospective payment system model requires an in-person visit or a telemedicine visit for conditions that allow for remote treatment.

The prospective payment system rewards proactive and preventive care. Fee-for-service has traditionally focused on reactive care and the result is that the USA is not a leader in chronic care management for diseases like diabetes and asthma. The prospective payment system stresses team-based care and may pay for coordination of care. These value-based care models promote doctors, hospitals, and other providers to work together to receive value-based reimbursements from CMS.

Additionally, the benefits of prospective payment systems vs a retrospective payment system are becoming increasingly clear to the healthcare industry due to the fact that diagnosis code-based reimbursement creates incentives for more accurate presentation of the disease burden of a population of patients. The integration of risk adjustment coding software with an EHR system can help to capture the appropriate risk category code and help get more appropriate reimbursements.

Lastly, by creating a predictable prospective payment plan structure with standardized criteria, PPS in healthcare helps providers manage their finances while also helping to ensure patients receive similar quality care. By limiting payments based on standardized criteria, PPS in healthcare helps eliminate disparities in care that may result from financial considerations. Prospective payment systems can help create a more transparent and efficient healthcare system by providing cost predictability and promoting equitable care.

Examples

One prospective payment system example is the Medicare prospective payment system. A federal program using Medicare risk adjustment that assigns fixed payments for services rendered to patients covered by Medicare, based on diagnosis code and other factors. This helps create budget certainty for both providers and the government while incentivizing quality care instead of quantity. Additionally, it helps promote greater equity in care since all patients receive similar quality regardless of their provider choices.

With Medicare Advantage, we’ve already seen prospective payment system examples in use over the last 10 years, without any negative impact on Medicare Advantage enrollment growth. In fact, Medicare Advantage enrollment is growing because payer, provider and patient incentives are aligned per the rules of the Medicare prospective payment system.

Challenges

Although prospective payment systems offer many benefits, there are also some challenges associated with them. One issue is that it does not always accurately reflect the actual cost of care for a patient episode; this may cause providers to incur losses if their costs exceed what is reimbursed. Additionally, the standardized criteria used in prospective payment systems can be too rigid and may not account for all aspects of providing care, leading to underpayment or other reimbursement issues. Finally, the transition from fee-for-service models to PPS can be difficult for both healthcare providers and patients as they adjust to a new system. The transition from fee-for-service models to prospective payment systems is a complex process, but one that holds immense promise for healthcare providers and patients alike. Despite these challenges, PPS in healthcare can still be an effective tool for creating cost savings and promoting quality care.

Implementation

The implementation of a prospective payment system is not without obstacles, however. Providers must make sure that their billing practices comply with the new rates as well as all applicable regulations. In addition, providers may need to adjust existing processes and procedures to accommodate the changes brought about by the new system. Nevertheless, these challenges are outweighed by the numerous benefits that a prospective payment system can provide for healthcare organizations and the patients they serve.

When implementing a prospective payment system, there are several key best practices to consider. First, it is important to determine what types of services are included in the PPS model to ensure accurate reimbursement levels. Second, it is essential to have a system in place that can adjust for changes in the cost of care over time. Third, it is important to set up systems to monitor spending and utilization rates to ensure that the PPS model is not being abused or taken advantage of. Finally, it is important to provide education and training for healthcare providers on how to use the system effectively. By following these best practices, prospective payment systems can be implemented successfully and help promote efficiency, cost savings, and quality care across the healthcare system.

Looking Forward

Prospective payment systems offer numerous advantages that can benefit both healthcare organizations and patients alike. From reducing administrative tasks to prompting more accurate coding and billing practices, these systems have the potential to improve financial performance while ensuring quality of care. 

All in all, prospective payment systems are a necessary tool for creating a more efficient and equitable healthcare system. By providing financial predictability and limiting payments based on standardized criteria, these systems help reduce costs while still promoting the best care. Despite the challenges associated with implementation, a prospective payment system can be effectively implemented with the right best practices in place. Integrating these systems has numerous benefits for both healthcare providers and patients seeking to optimize their operations and provide the best possible service to their patients. 

ForeSee Medical’s risk adjustment software for Medicare Advantage supports prospective workflows, integrates seamlessly with your EHR, and gives you accurate decision support at the point of care or before. Start capturing every appropriate HCC code and get the reimbursements you deserve for serving complex populations.

Blog by: The ForeSee Medical Team