The Pps Financial Impact of Medicare Rates on Health Service Organisation



The PPS Financial Impact of Medicare Rates On Health Service Organization

Medicare rates refer to specified amount of funds which financial institutions set to cater for health insurance covers (Calderwood et al, 2014). It is therefore the role of Medicare management team to establish a reasonable rate as per the state constitutional laws. The financial impact is directly implicated to health service organizations(HSO) which are responsible for the provision of the health services. The relationship or the business link between the Medicare and HSO is based on contract terms and condition, this is because, the two are separate entities which offering different services but focusing on a common interest. Particularly, the Medicare health insurance covers give the financial insurance services to cover health whereas HSO stands on a separate ground to provide the tangible medical service directly to the patients.According to Calderwood et al (2014), the major financial impact is argued on the basis medical prospective payment system (PPS). Due to the limitation of the data, this paper will use descriptive approach to explore all the features of PPS and its financial impacts to HSO and service providers among other medical beneficiaries.
The implementation process of the new system which has replaced the older one triggered a lot of changes hence; the procedures must be gradual to avoid disruption of sudden change. It has also been noted the widespread implementation processes developed analytical challenges since there is no suitable control system to link between pre-PSS ns post-PSS. Investigation from healthcare sector have also revealed that, the gradual implementation of PSS has equal impact to both social and economic aspects which in turn has led to development of behavioral responses to adapt to the new system (Jha et al, 2012). The mass increase of the medical human resource in the system has contributed to increased creativity and innovation of the financing services to improve the healthcare services. In reference to this, finance and medical researchers have intensively invested in studies to identify the cause-effect of the financial impacts together with appropriate resolutions. Jha et al (2012) explains that, the current level which has been observed regarding the new PPS gives sufficient confidence for accomplishment for the targeted objectives.
Background on hospital prospective payment
Before the amendment of the public law which focuses on social security, patients used to obtain the health services from Medicare sector through affirmed retrospective basis of payment(Jha et al, 2012). Specifically, there was little control of the payment system and hospital used to charge patients based on the value of the services offered. Therefore, due to lack of a defined regulation, there were little incentives. The high cost of charges led to reimbursement increased level. Sources also show that, increased healthcare cost did not match with the low demand in the market, which consequently contributed to increased rate of national inflation.According to Calderwood et al (2014), the American government and health agencies made several policies to reduce the increased rate of crisis in the market which destabilized the US economy. This is because the retrospective cost system of reimbursement was not promising to build better living conditions for everyone.
Therefore, the American authority through legislation process, established interim changes to reverse the medical reimbursement procures under the public state law 98-250 which focused mainly on fiscal responsibility policies and the tax equity which was enacted in during the healthcare revolutionary era in 1980s(Zimlichman et al, 2013). Later in the same era, organizations which deal with human health services developed a comprehensive plan which would introduce a better prospective payment in HSO and also design a Medicare rate which incorporates incentives for efficient medical services. The enacted law was later approved for implementation as a prospective payment system to cater for both outpatient and inpatient Medicare services as whole. Since the establishment of the PPS, there have been series of technological innovation which has led to introduction of the new PPS system. Each of the incentive comes with new Medicare rate hence impact the management activities and strategies engaged by HSO (Brunelli et al, 2013).
The aim of the new Medicare prospective payment system is to develop an innovative Medicare rates to relieve both patients and HSO from his cost of medical services. In addition, the purported Medicare rates allow all beneficiaries to access quality healthcare at a low cost unlike the previous time. This objective is going look for a single flat pay according the hospital discharge depending on the level of the HSO and the category of the discharge(Calderwood et al, 2014. The Medicare rates are designed based on the Diagnosis-Related Group (DRG) which helps to classify clients into various categories according the clinical homogeneity. The designed Medicare rates meet the equitable payment across all the HSO which are eligible in offering the medical or healthcare services. The new Medicare rates under the new prospective payment have defined characteristics which include;
1. Every hospital has full mandate to keep gains or loses based on different rates and the value of services offered per unit cost of care.
2. It must have a fixed fiscal rate span of time which the Medicare rates should apply under full consent of HSO.
3. The rates for the payment for every patient are not automatically determined the engaged pattern together with cost of charges.
Designed Features
The DRG is used to develop each Medicare rate which falls under the category A in the deigned hospital insurance cover. Zimlichman et al (2013) pointed that; it is illegal action for the HSO relatedinstitution to request beneficiaries more amount of charge than the saturated amount as per the government regulations. The routine services which is rated as per DRG involves, the intensive care, ancillary services and the general health assessment among other healthcare services which might be required. Special attention is given to critical cases whose capital is directly reflecting the medical education cost. This involves the cost for inquiring the kidney in case of transplant is recommended. The other category is part B which is referred to as supplementary medical insurance cover.
Brunelli et al (2013) points out that, the new PPS is applicable to all HSO who have registered to the Medicare program; however, there is exception of the hospital that got excluded at the beginning of the program. The new payment systems have deployed a prospective plan which was seeking to be implemented for a span of three years in which was to abide to the Medicare rates. The specific rate of Medicare should also incorporate the federal formula, so as to compute satisfying rate with minimal biasness. In the given period of three years, the diminishing law applies particularly, the declining part of the Medicare or prospective payment rate is based on the history of the hospital relating the charging and costs(Zimlichman et al, 2013).
The history of HSO can be directly obtained from combine system which incorporates the federal rate for the purpose raising appropriate Medicare rates according to the levels either on regional or national basis. According to healthcare financial report, there are eighteen categories for both national and regional rates. However, urban and cities are grouped into the national rate level according to the nine census. In reference to this, the Medicare rates for inpatients including the cost of operations are strictly determined by the rural and urban rate as per the engaged discharge record or regulation(Jha et al, 2012). . Any adjustments relating to Medicare rates must be standardized by the prospective payment board based on the index and the location area of the HSO or the hospital.
Quality control and utilization
To ensure quality, fairness and justice of the healthcare services there are control programs which are reviewed under the Peer Review Organization (PRO) this program is an initiative of improvement act of the public law (Zimlichman et al, 2013). It is the mandate of this program to oversee how the Medicare rates are imposed and the social response from all healthcare stakeholders. In addition, PRO program observes as it safeguards perfection and essentiality of the healthcare service. This involves approval of various policies on the quality of the services offered to the patient and the payment rates.However, each stakeholder has lawful obligation to give an opinion in case of changes.
Financial impact on hospitals
In the period when PPS was established it was expected that the new system would introduce paying per case rather than the older method of paying per diem basis, it was opted that this would increase the number of people admitted in hospitals facing the burden of paying large amounts required per case which could be untimely and demanding a lot of funds (Baugh et al, 2012). Since admission of a larger number of people would increase the amount of revenue received by the hospital it was expected that consideration of the amount of funds received would encourage admission of any case for which the cost of treatment should be less than relevant DRG payment rate. In addition, with the expected decline in the in the period taken by patients in hospital an incentive would exist to fill the rising number of empty beds.
The annual number of Medicare short-stay hospital admissions for the period 1978-84 and the rate of admissions per 1,000 Part A enrollees are shown in the table below.
Medicare short-stay hospital admissions, rate per 1,000 hospital insurance enrollees, and percent change: 1978-84
Admissions in thousands
Percent change
Enrollment in thousands as of July 1
Admissions per 1,000 enrollees
Percent change

Calendar year:



+ 3.6
+ 0.8

+ 6.6
+ 4.5

+ 4.1
+ 2.2

Fiscal year:

+ 3.3
+ 1.6

+ 4.2
+ 2.3


When the table is analyzed admissions are found to have risen steadily during the entire period prior to the implementation of PPS, the annual increase is observed to rise without falling below 3.3 percent (Calderwood et al, 2014). The figures for fiscal year 1984, however, indicate a decrease in admissions of 1.7 percent, which is quite contrary to a priori expectations, as well as previous experience. The fiscal year 1984 decrease in admissions per 1,000 enrollees was estimated at 3.5 percent. It is likely that the increase in admissions that was opted for in response to PPS has not materialized. Why this reversal in the historical trend toward increasing admissions might not be clear at this time (Baugh et al, 2012). However, it may reflect the changing role of the hospital in our health care system, with an increasing emphasis on ambulatory care, as rising inpatient costs make it desirable and improvements in technology make it feasible to provide more health care in alternative settings.
Impacts on other payers
Medicare program accounts for almost a third percent of all expenditures on hospital care in the United States, clearly establishing Medicare as the largest single consumer of hospital services .Considering that the main role of Medicare, and the dramatic change in the way that Medicare pays for hospital services under PPS, would not be unreasonable to expect that the whole hospital payment environment could be altered by the new system (Baugh et al, 2012). Those who are mostly affected directly by such a change are those who pay the bulk of the remaining portion of the Nation’s hospital bill, the greatest being the State Medical programs (on the public side) and the Blue Cross (on the private side) but the private side is more pressing.
With the enactment of Public Law 97-335, the Omnibus Budget Reconciliation Act of 1981 (OBRA), the authority of the States to modify their methods of hospital payment was expanded. This authority relived the States of the requirement that their Medicaid programs follow Medicare’s retrospective reasonable cost-based reimbursement principles, and gave them the ability to trailer their programs more specifically to their own policy needs (Calderwood et al, 2014). In regard to the enactment of OBRA, several States began experimenting with prospective payment and other alternatives to retrospective reimbursement. When PPS was implemented, States’ activities in changing their hospital payment methodologies have increased.
Sometimes back 33 States and one territory had some form of prospective payment methodology in effect for hospital inpatient services (Baugh et al, 2012). There have been other plans implemented that impact on other payers since established of PPS, which have adopted prospective pricing systems that use DRG’s. Moreover some plans have adopted prospective pricing without DRG’s and others utilize DRG’s but not within a prospective pricing system (Calderwood et al, 2014). There has been recent trend toward the development of health maintenance organizations (HMO’s) and preferred provider organizations (PPO’S) BY Blue Cross and Blue Shield plans. However there are some changes in financial Medicare which have not been ascertained, but several factors are being considered which include:
? Cost and utilization controls being used by Blue Cross/Blue Shield plans, as well as alternate delivery systems such as Blue Cross/Blue Shield PPO’s and HMO’s.
? Changes in payment systems being used by the States.
? The impact of PPS.
? Other changes in the overall structure of the health care system.
Impact on service providers
Other payers are also affected by the system of Medicare. As hospitals respond to the system of incentives created by PPS, their decisions regarding the treatment of Medicare patients may have on other providers of health care, particularly physicians and nursing homes. Nowadays physician payment is based on Medicare payment rates limited by the Medicare Economic Index (Baugh et al, 2012). Therefore, the benefits provided by prospective payment do not apply directly to physicians. SNF’s are currently reimbursed for routine costs per Medicare patient day, subject to an upper reimbursement limit, with hospital-based SNF’s having higher limits than do freestanding SNF’s.
With hospitals seeking to reduce lengths of stay for Medicare patients under PPS, an increase is anticipated in the rate of transfer of Medicare cases to long-term care providers. Some preliminary indicators appear to reveal a tendency under PPS increase the care provided to patients in other than inpatient settings, PPS may be seen as encouraging overall efficiency in the health sector (Calderwood et al, 2014).
. To the extent that it represents reluctance on the part of hospitals to offer patients the amount of care that they require, PPS may be viewed as a program necessary for health care. By considering the courtesy of Medicare service providers PPS is rated as being considerate on the level of provision and care taken to admitted patients is very special to ensure them quick recovery at the least cost of their funds.
Economic control seems to be shifting from the providers to the purchasers of health care (Calderwood et al, 2014). Although this shifting of market power is useful, in that it has and will continue to encourage efforts to control health care costs, several cautions must be expressed (Baugh et al, 2012). It must be remembered that, in the health care market, the purchaser is frequently not the consumer of the product. Thus, an increase in the purchaser’s market power does not necessarily represent an increase in the consumer’s welfare. For this reason, access and quality must be carefully monitored in the new health care environment
Impact on Medicare Beneficiaries
Continued access to appropriate health care as well as maintenance high quality of the provided health care is one of the major concerns under PPS for all Medicare beneficiaries(Jha et al, 2012). Within the Medicare population, the vital issues are easy access and quality and are considered as the most vital aspects by the Medicare beneficiaries. According toBaugh et al (2012), Medicare beneficiaries’ population who consider easy access and quality of the accessed Medicare includes the renal patient, the disabled, and the old and aged poor.
These groups under the Medicare beneficiary population are considered to be more vulnerable to the incentives offered by the current payment system as they have special socioeconomic and health features(Calderwood et al, 2014). These groups require intensive Medicare which is expensive for a certain inpatient episode; this makes hospitals to consider them under the prospective payment as potential money losers. Some of incentives under PPS on the other had serves as a means of bringing about in access of Medicare as well as enhancing quality of Medicare (Jha et al, 2012). These incentives improve the management of the Medicare which in turn results to enhanced efficiency of health care.
When the integration of PPS health care delivery is increased, it also makes the provided health care more effective and appropriate. Hospitals are also urged to consider specializing in procedures and services that are aimed at providing the most effective outcomes in certain cases as found out in a study by (Zimlichman et al, 2013). The incentives that are aimed at eliminating unnecessary services improve the quality of the health care(Zimlichman et al, 2013). In addition, shorter hospital stays should reduce risks which elderly people are vulnerable to such as nosocomial infection as well as other iatrogenic events.
In reference to Baugh et al (2012), PRO program is the key provision when monitoring access and quality under the prospective payment. This program is put in place to show the efforts of HCFA in intensifying the Medicare claims review(Jha et al, 2012). This ensures the care provided by a hospital is of acceptable quality, necessary and appropriate. Each pro is supposed to be accountable for five quality and three admission objectives.
Admission objectives include;
1. Shifting to outpatient setting from inappropriate inpatient admissions.
2. Reducing admission procedures which are unnecessary.
3. Minimizing unnecessary admissions of patients by some specific physicians and hospitals.
The five quality objectives include;
1. Reducing unnecessary admissions.
2. Ensuring that mortality rate cause by some specific problemis reduced.
3. Eliminating unnecessary invasive procedures.
4. Ensuring post-procedural complications are reduced.
5. To have an assurance that all patients will provided with complete treatment and adequate ancillary services.
HCFA’s certification program and survey is adopted to ensure that all nursing facilities and hospitals comply with the safety and health requirements all the requirements of taking part in Medicare program(Baugh et al, 2012). All hospitals and skilled nursing facilities should either be accredited by Joint Commission on the Accreditation of Hospitals all complying with the Medicare Conditions(Jha et al, 2012). This ensures that the Medicare population has an access to high quality health care.
The conditions governing participation in Medicare provision should be revised to by placing a lot of emphasis on outcome-oriented criteria to anticipate for an increase in the need of monitoring health care provision under PPS(Calderwood et al, 2014).
A new quality assurance policy has been put in place to ensure that all hospitals have an appropriate and effective program of identifying and resolving setbacks that interfere with the quality of patient care. According to Calderwood et al (2014This new assurance policy incorporates the existing conditions of quality maintenance to ensure it serves as an appropriate means ensuring quality health care for patients. Under PPS the Inspector General Officer under the department of Human and Health services is working to monitor access and quality by(Jha et al, 2012);
1. Identifying health providers who engage in fraudulent practices.
2. Examining the effect of coverage policy and reimbursement on some selected health care services.
3. Determining the effectiveness of HCFA’s programs by monitoring their contractors in their assurance in maintenance of the right payments.
The total number of days one stays in hospital under admission for health care reduces an individual’s chances of his or her health deterioration.
Impacts Concerning the Medicare Expenses
The major motivation for the Congress to enact the prospective payment for the Medicare inpatient hospital services was mainly to limit the use or consumption of the Medicare Trust Funds(Zimlichman et al, 2013). This means that the primary success or failure of the PPS indicator may be how it affects both the volume and growth rate of the Medicare program expenditures.There has been tremendous growth of the Medicare benefit payments over the history of the program since it was initiated(Calderwood et al, 2014). The Inpatient hospital payment has significantly risen over the years. After the imposition of the TEFRA restriction the price controls and the temporary wages were scraped off (Jha et al, 2012). This meant that there was a reduction to the Medicare hospital expenditure. This also affected the estimated rate of the increment in the PPS.
Through the historical analysis of the outpatient hospital services under the medical benefits payment scheme, we realize an increment in payments for its services rendered(Calderwood et al, 2014). The pre-TEFRA annual rate also experienced a significant increment to the outpatient hospitals payments sectors when compared to the PPS and TEFRA period. As a matter of fact both the real and the nominal terms revealed a smaller percentage change in the entire program history since its initiation (Brunelli et al, 2013). Despite this negative factual analysis result, the approximated outpatient hospital payments for the Medicare benefits still outgrew the inpatient hospital payments scheme.
There is also an increase to the physicians’ medical benefits payment over the past years. At the real terms the physicians’ benefits payments still escalates eight times(Zimlichman et al, 2013). Although the physician increment hits its lowest, it is still about the inpatients payment scheme. The unclear PPS effects led to the “freezing” of the physician payment scheme hence cause a change in the growth pattern of the Medicare payment. The Medicare physicians’ payment service rate was put on a temporary “freeze” as directed by the public law(Jha et al, 2012). The effect resulting from this is the dampening of the Medicare benefits payment plan for the physicians.
The expected effects of PPS incentives were to encourage hospitals to discharge their patients to the post-hospital care more often and at their starting stages of recuperation (Brunelli et al, 2013). This meant that the payments for the skilled nurses would increase under the PPS. The benefit payments in both the supplementary medical insurance (SMI) and the Medicare hospital insurance (HI) appreciated annually for 20 percent during pre-TEFRA period (Baugh et al, 2012). The growth rate of the HI benefit payments however, significantly reduced under TEFRA period and both the SMI and HI benefit payments increased during the first years of PPS.
In general, there is a shift of the economic control to the health care purchasers from the providers. This kind of market power shift is useful, as it has and it will always try to encourage efforts in controlling of the health care costs and several cautions must be issued. It should be noted that, at the health care market, purchaser are often not the products consumer. This implies that an increase to the market power of the purchaser does not necessarily guarantee the increase to the consumer’s welfare. In regards to this reason, the access and quality should be strictly monitored in a new environment of health care. Health care should also be taken into account as nonmarket activities, so that the research functions and teaching are not assumed on the basis of them lacking value and not recognized at the market. The availability of health care to those who cannot afford the health care must also be carefully monitored to counteract the pressure imposed by the market forces to neglect or abandoned these individuals.
In this context, some of the preliminary conclusions may be extracted on the impact of PPS during its first year. These new system seems to have been implemented very smoothly and to have championed significant changes to the hospital behaviors and some major groups in the sector of health care. Most of these changes are in line to the expectations made by those who designed and enacted the PPS. Some of the changes specifically the decline in the Medicare admissions was not expected at all. Furthermore, the decline of the inpatient hospital payment under the PPS was due to the decrease of the Medicare benefit payment growth. It is early to judge on the PPS impact on the quality and the access to health care. Despites all that, this new system has greatly achieve its defined objectives without encountering a lot of challenges.

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