What is Medicare's Prospective Payment System (PPS) and how does DRG classification affect reimbursement?

• A. PPS pays based on actual costs incurred during the encounter.
• B. PPS pays a fixed rate per admission based on DRG; DRGs determine payment.
• C. PPS pays per day with DRG weights controlling length of stay.
• D. PPS has no relation to DRGs.

Answer: (B)

Medicare’s Prospective Payment System for inpatient stays uses a fixed, predetermined amount for each admission rather than reimbursing actual costs. Each hospital stay is categorized into a diagnostic-related group (DRG) based on the patient’s diagnoses, procedures, age, comorbidities, and discharge status. That DRG carries a specific payment rate (base rate times the DRG’s weight), with adjustments for factors like local wage levels, hospital teaching status, and other modifiers. The idea is to standardize payments across cases with similar resource use and to encourage efficiency, since the payment is set in advance and not tied to the hospital’s actual costs. There are outlier provisions for exceptionally costly cases, but the core link is that the DRG determines the fixed payment under the PPS.