Prospective Payment Compared to Special Medicare Payment Provisions
Profitability of Rural Hospitals Paid Under Prospective Payment Compared to Rural Hospitals with Special Medicare Payment Provisions overview
The Medicare Prospective Payment System (PPS) was introduced by the federal government in October, 1983. Under PPS, hospitals are paid a pre-determined rate for each Medicare admission. Each patient is classified into a Diagnosis Related Group (DRG) on the basis of clinical information. Except for certain patients with exceptionally high costs (called outliers), a hospital is paid a flat rate for the DRG, regardless of the actual services provided. Concerns about the use of PPS for rural hospitals arose in the 1990s. Rural and small hospitals face factors, such as diseconomies of scale, which could hinder financial performance in comparison to urban and larger hospitals. For these reasons, Federal law makers created and modified special payment classification under the Medicare program to address the challenges faced by different types of rural hospitals, recognizing that many rural hospitals are the only health facility in their community and their survival is vital to ensure access to health care. There are currently four classifications of rural hospitals that can qualify for special payment provisions under Medicare: Critical Access Hospitals (CAHs), Medicare Dependent Hospitals (MDHs), Sole Community Hospitals (SCHs), and Rural Referral Centers (RRCs). Some hospitals may have more than one designation. Recently, stakeholders have reported continued financial difficulties for many rural hospitals (both those that qualify for special Medicare payment provisions and those that are reimbursed under PPS). Several parties, in and outside of Congress, have proposed expanding the cost-based reimbursement that is available to CAHs to other rural hospitals. In the Medicare Modernization Act (2007), Congress instituted a demonstration project of cost-based reimbursement for a few hospitals with 25-50 beds. An evaluation of the RCH Demonstration Program is not complete, but there continue to be proposals to expand cost-based reimbursement to rural hospitals other than CAHs.