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Prospective Payment

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Reacting to rapidly increasing costs to Medicare, the Tax Equity and Fiscal Responsibility Act (TEFRA) passed in 1982 mandated the Prospective Payment System (PPS) to control health care costs. For Medicare Part A services, PPS uses Medicare's administrative data to develop and continually refine PPS payments based on diagnosis‐related groups (DRGs), that is, patients with similar diagnoses. The PPS is a method of reimbursement in which Medicare payment is made based on a predetermined, fixed amount for reimbursement to acute inpatient hospitals, home health agencies, hospices, hospital outpatient and inpatient psychiatric facilities, inpatient rehabilitation facilities, long‐term care hospitals, and skilled nursing facilities. For Medicare Part B services, the Resource‐Based Relative Value Scale (RBRVS) is used to determine reimbursement amounts for practitioner services. The major problem that the CMS has encountered with funding prospective payment is DRG creep, in which health care providers up code or over bill a patient to indicate a need for financial reimbursement for more expensive health care services to recoup what the health care provider believes is a more equitable payment.

Kelly Vana's Nursing Leadership and Management

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