Part 2: Prospective Payment Systems: An Historical View
What happens with Prospective Payment Systems (PPS) is that we are paid a flat rate for each Diagnostic Related Group (DRG), rates that were determined after extensive research into the cost of treatment for specific diagnoses. What the PPS system did was identify a huge number of diagnostic categories based on research that determined the average cost required for hospitals to treat patients with various diagnoses. The individual diagnoses were grouped into related categories for which reimbursement was standardized. A length of stay was identified for each diagnosis and daily activities identified during the stay that were required to provide care for individuals with that diagnosis. Average cost of providing the treatment was identified per day and a total amount specified, one that is now what hospitals are paid. For example, a total hip replacement is worth $XXX per day and allocated a length of stay of X.x days. All costs related to the care of that patient are included. The same is true for the diagnosis of pneumonia, but the cost was determined to be less so the DRG payment is less.
As a consequence, we know in advance exactly how much we will be paid for each patient when he or she is admitted, based on his or her diagnosis. Comorbid conditions that carry additional diagnoses provide increased payments as do complications that occur while the patient is in the hospital. If we are able to discharge the patient in fewer than the number of days for which we are paid, we get to keep the extra money. However, if the patient exceeds the predetermined length of stay, we must absorb the cost...and the loss. That is why you notice such scrutiny on length of stay and so many initiatives aimed at reducing averages even by a tenth of a day!
Therefore, if the patient's care costs less than the amount we are paid, we keep the difference and the money is used to fund the cost of improvements, repairs, patients who have no insurance, etc. If the costs exceed the payment, we absorb the difference. As the greatest correlation exists between length of stay and cost of care, our efforts have focused on reducing length of stay as well as on the most appropriate use of resources. Furthermore, patients often do better at home, as some research has demonstrated. Beyond that, when a patient who develops complications we are going to be paid more as we are able to request money for secondary diagnoses and other ancillary conditions.
Currently, the other key issue is quality. The days of cutting costs at the price of quality are long gone as payers and other stakeholders are far too aware of the importance of quality. We are constantly required to demonstrate higher levels of quality while conserving valuable resources. It is honestly my opinion that the managed care initiatives of the last 20 years have required us to improve quality vastly over what existed under the old fee-for-service model. Case management allows us to provide patients with the right care, at the right time, in the right setting and mandates that we do so with our eyes constantly on the patient and patient-related outcomes.