Prospective Payment Systems (PPS)
The objective of this chapter is to provide an overview of Prospective Payment Systems (PPS). Hospitals provide services to patients for treatment of conditions that are covered under various government-sponsored health insurance plans. Since 1965, when Medicare and Medicaid were created, reimbursement for hospital services has shifted from the traditional cost-based reimbursement to PPS methods that provide predetermined, fixed payments for hospital services. An overview of the evolution of reimbursement provides an understanding of events leading to the implementation of PPS. Today, hospital services provided to beneficiaries of government-sponsored plans are paid based on various PPS methods. A discussion of each PPS used for hospital reimbursement will provide hospital professionals with an understanding of how each system is designed, and the basis for payment under each system. It is critical for hospital billing and coding professionals to understand these systems to ensure compliance and to obtain the appropriate reimbursement.
A Prospective Payment System (PPS) is a method of determining reimbursement to health care providers based on predetermined factors, not on individual services. There are a number of insurance companies and government programs that have adopted PPS reimbursement methods. Prospective Payment System is the term used to describe Medicare’s reimbursement system for services provided by hospitals. Prospective payment is a statistically developed method that identifies the amount of resources that are directed toward a group of diagnoses or procedures, on average, and it provides reimbursement on that basis. For example, after a review of 10,000 inpatient pneumonia cases, it may be determined that patients were hospitalized for an average of 3 to 5 days in the absence of any significant complications or comorbidities. Based on the amount of resources that a pneumonia patient would consume under these circumstances, a fixed amount is assigned to that case. Prospective payment may be based on diagnosis, procedure, or a combination of both.
Historically, payments for health care services were largely based on the provider’s charge for hospital inpatient services. Insurance companies and government programs processed payments for services by using fee-for-service (FFS); fee schedule; usual, customary, and reasonable; percentage of accrued charges; or per diem reimbursement methods, as discussed in previous chapters. These systems are commonly referred to as cost-based systems because they determine reimbursement based on the reasonable cost of providing services. The establishment of government programs and the rising cost of health care were key factors in the development of Prospective Payment Systems (PPS).
From 1965 to 1982, the government became one of the largest payers of health care services with the establishment of the Medicare, Medicaid, and TRICARE programs. Reimbursement to hospitals during this period was made based on accrued charges submitted for a hospital case. Medicare and other payers determined payments based on reasonable costs of the care provided and paid a percentage of those costs. Later, significant changes in reimbursement for health care services were seen as a result of the rising cost of health care and the growing aged and uninsured population.
National health care expenditures increased from $27.4 to $255.7 billion during the period from 1960 to 1980. Public sector (Medicare, Medicaid, and TRICARE) health care expenditures increased to 40.3% during the same period, as illustrated in Figure 12-1. In response to the rising health care costs, the government found it necessary to devise reimbursement methods that provided fixed payment amounts for health care services. One of the more significant changes was the implementation of the Medicare Inpatient Prospective Payment System (IPPS).
The Inpatient Prospective Payment System (IPPS) was established as mandated by the Tax Equity and Fiscal Responsibility Act (TEFRA) in 1983 to provide reimbursement for acute hospital inpatient services. The purpose of the Inpatient Prospective Payment System (IPPS) was to control health care costs through provider incentives to manage the care provided. The system originally implemented under IPPS is known as Diagnosis Related Groups (DRG). Under this system, hospitals are reimbursed a predetermined, fixed rate for services provided based on the patient’s condition and the resources required to treat the condition. The implementation of the DRG system ended hospital reimbursement by government programs based on the amount of charges accrued during the inpatient stay. The DRG system provides incentives for hospitals to ensure cost-efficient care. The original DRG system, now known as CMS-DRG, was replaced with MS-DRG effective October 1, 2007.
During the remainder of the 1980s, payment for hospital outpatient services remained on a cost-based system. Advancements in medical technology increased the number of surgeries performed on an outpatient basis. Congress began to focus on controlling costs for outpatient care through across-the-board reductions of payable amounts for hospital operating costs and capital costs. Different payment methods for specific outpatient services were created, including fee schedules for diagnostic laboratory tests, orthotics, and durable medical equipment.
Outpatient Prospective Payment System (OPPS) is the Prospective Payment System (PPS) implemented effective August 2000 by CMS that provides reimbursement for hospital outpatient services. The system implemented under OPPS is known as Ambulatory Payment Classifications (APC).
During the 1990s legislation was passed that mandated the implementation of a PPS for hospital outpatient services for members of government-sponsored health plans. The Omnibus Budget Reconciliation Act (OBRA) of 1986 paved the way for development of a PPS for hospital outpatient services. OBRA legislation included a mandate for hospitals to report services provided on an outpatient basis using the Healthcare Common Procedure Coding System (HCPCS). This information was used by the Centers for Medicare and Medicaid Services (CMS) for the development of the PPS. Revisions to OBRA in 1990 mandated CMS to develop a proposal to replace the existing hospital outpatient payment system with a PPS system. The Balanced Budget Act (BBA) of 1997 required CMS to implement the Outpatient Prospective Payment System (OPPS) effective January 1, 1999. The final rule outlining the establishment of an outpatient PPS was published by CMS in the Federal Register. CMS implemented the OPPS, effective August 2000. OPPS provides reimbursement for hospital outpatient services based on predetermined fixed rates. Table 12-1 outlines legislation that contributed to the development and implementation of PPS systems.
|Date||Legislation||Effect on Reimbursement|
|1965||Creation of Medicare and Medicaid|
|1967||Creation of TRICARE||Government share of health care costs increased|
|1970-1980s||Implementation of managed care plans|
|1982||Tax Equity and Fiscal Responsibility Act (TEFRA)||Established methods of controlling the cost of the Medicare program, set a limit on reimbursement, and required development of a Prospective Payment System (PPS)|
|1983||The Social Security Amendments of 1983||Mandated 3-year phase-in of Prospective Payment System (PPS) for hospital inpatient services|
|Implementation of the Diagnosis Related Groups (DRG)||Reimbursement for hospital acute inpatient care reimbursed based on predetermined fixed payment assigned to DRG groups|
Note: DRG is now referred to as CMS-DRG
|1986||Omnibus Budget Reconciliation Act (OBRA)||Required hospitals to report claims for services using the Healthcare Common Procedure Coding System (HCPCS); data will be used to create a Prospective Payment System (PPS) for hospital outpatient services|
|1990||Revision of Omnibus Budget Reconciliation Act (OBRA)||Required CMS to develop and replace cost-based reimbursement for hospital outpatient services with a Prospective Payment System (PPS)|
|1997||Balanced Budget Act (BBA) Section 443||Authorized CMS to implement a Prospective Payment System (PPS) for hospital outpatient services|
|2000||Implementation of the Outpatient Prospective Payment System (OPPS)||Reimbursement for hospital-based outpatient services including ambulatory surgery|
|2007||Implementation of MS-DRG||MS-DRG system replaced the CMS-DRG system|
|2014||MS-DRG groups converted from ICD-9 to ICD-10||Reimbursement for hospital acute inpatient services based on ICD-10-CM and ICD-10-PCS coding systems|
In an effort to control the rising cost of health care, CMS implemented PPS for services provided by other facilities and providers. In accordance with the BBA of 1997, the Balanced Budget Refinement Act (BBRA) of 1999, and the Benefits Improvement Act (BIPA) of 2000, the following PPS systems were established:
It is important for hospital personnel involved in billing and coding to understand the PPS system that will be used to determine reimbursement for hospital services by government and other payers. The guidelines for coding and PPS assignment vary for each system.
The following section provides an overview of the development, structure, coding, and payment calculations under Medicare’s Inpatient Prospective Payment System (IPPS) for hospital inpatient services.
Medicare’s Inpatient Prospective Payment System (IPPS) is a reimbursement system for hospital acute inpatient care under which the facility is paid a fixed amount for the stay based on the patient’s diagnosis and procedure. Medicare’s IPPS was implemented in 1983 as a measure to control rising health care costs. Under this system hospitals are no longer paid based on charges accrued. Payment for the patient’s stay is fixed, regardless of charges accrued. When hospital care provided during the stay costs less than the IPPS payment, the hospital saves money. However, if the cost of care is greater than the IPPS payment, the hospital will experience a loss of revenue. Under this system, hospitals are required to manage care to ensure that resources used during the stay are efficient.
The Inpatient Prospective Payment System (IPPS) implemented in 1983 by CMS and other payers for reimbursement to hospitals for acute inpatient care is known as the Diagnosis Related Groups (DRG). DRG is a payment classification system that defines patient categories based on diagnosis, procedure, and other clinical factors. Each DRG is a grouping of patient cases that are clinically similar and that require a similar level of resources during the stay. Under the DRG system, the facility is paid a fixed fee based on the patient’s condition and relative treatments.
Diagnosis Related Groups (DRG) classifications were developed by a group of researchers at Yale University in the late 1960s. The classification system was used as a tool to help clinicians and hospitals monitor quality of care and use of services. Medicare adopted the system for use as the basis of the IPPS in 1983. The development of this system required analysis of a large number of actual inpatient cases from hospitals throughout the United States. A database was developed with information regarding inpatient cases including diagnoses, length of stay, procedure(s) performed, and cost. The database was analyzed and used to develop DRG groups that represented average resources required by hospitals to treat conditions included within that group. Significant changes were made to the DRG system to “better account for severity of illness and resource consumption for Medicare Beneficiaries,” as published in the CMS Acute Care Hospital Inpatient Payment System Fact Sheet. This system is the basis of the new Medicare Severity-Diagnosis Related Groups (MS-DRG) system. The old DRG system is now referred to as CMS-DRG.
Medicare Severity-Diagnosis Related Groups (MS-DRG) is the Inpatient Prospective Payment System (IPPS) implemented in 2007 to provide reimbursement for hospital inpatient services. MS-DRG replaced the CMS-DRG system effective October 1, 2007. The MS-DRG system was implemented and transitioned in during a 2-year period with a final implementation date of October 1, 2009. A CMS fact sheet on MS-DRG can be viewed at www.cms.hhs.gov/MLNProducts/downloads/AcutePaymtSysfctsht.pdf.
The MS-DRG system classifies hospital inpatient cases based on the patient’s diagnosis and the procedures required to treat the patient’s condition. There are more than 900 MS-DRG groups classified into categories based on the patient’s diagnosis, referred to as Major Diagnostic Category (MDC). There are two types of MS-DRG payment groups: surgical and medical. Each MS-DRG group contains related principal diagnoses and procedures where appropriate. MS-DRG assignment is determined based on the principal and secondary diagnoses that describe the patient’s condition and complications and comorbidities. The following elements are assigned to each MS-DRG payment group: geometric mean length of stay (GMLOS), arithmetic mean length of stay (AMLOS), and relative weight (RW). Figure 12-2 illustrates the ICD-10 MS-DRG 339 “Appendectomy with complicated principal diagnosis with CC.” The illustration highlights the DRG elements: MS-DRG number, type, and description, Major Diagnostic Category (MDC), principal diagnoses, and procedures for the group. It is important to note that many reference manuals refer to the MS-DRG as DRG.
• Geometric mean length of stay (GMLOS) is a value assigned to each MS-DRG to represent an adjusted value for all cases, making allowances for outliers, transfer cases, and negative outlier cases that normally skew data. GMLOS is used to calculate reimbursement for the MS-DRG.
• Relative weight (RW) is a value assigned to each MS-DRG to reflect relative resource consumption for the group. The relative weight is used to calculate the total payment for the case. MS-DRG groups with higher relative weights are paid more than those with lower relative weights.
Information for these values was compiled using Medicare inpatient stay data from all U.S. hospitals. These values are used to calculate the MS-DRG payment for the hospital inpatient case. CMS updates the relative weight (RW), length of stay, and national average charge for each MS-DRG on an annual basis. MS-DRG groups are organized into categories based on the patient’s condition, referred to as Major Diagnostic Categories (MDC).
A Major Diagnostic Category (MDC) is a grouping of hospital inpatient cases based on body system, which is used to further categorize MS-DRG groups. MDCs were developed to further categorize more than 900 MS-DRG groups into smaller groups. Each MDC is based on conditions related to specific organ systems. All principal diagnoses within the MS-DRG system are grouped into 25 MDC categories. Some MS-DRG groups may relate to any of the MDCs, referred to as “All MDC”, such as MS-DRG 981. Table 12-2 illustrates MDC categories along with the related MS-DRG ranges.
|1||Diseases/Disorders Nervous System||020-103|
|3||Diseases/Disorders Ears, Nose, Mouth, Throat||129-159|
|4||Diseases/Disorders Respiratory System||163-208|
|5||Diseases/Disorders Circulatory System||215-316|
|6||Diseases/Disorders Digestive System||326-395|
|7||Diseases/Disorders Hepatobiliary System/Pancreas||405-446|
|8||Diseases/Disorders Musculoskeletal System/Connective Tissue||453-566|
|9||Diseases/Disorders Skin, Subcutaneous Tissue, Breast||573-607|
|10||Endocrine, Nutritional, Metabolic Diseases/Disorders||614-645|
|11||Diseases/Disorders of the Kidney/Urinary Tract||652-700|
|12||Diseases/Disorders Male Reproductive System||707-730|
|13||Diseases/Disorders Female Reproductive System||734-761|
|14||Pregnancy, Childbirth, Puerperium||765, 782, 998|
|15||Newborns, Neonates with Conditions Originating in Perinatal Period||789-795|
|16||Diseases/Disorders Blood, Blood-Forming Organs/Immunological||799-816|
|17||Myeloproliferative Diseases/Disorders and Poorly Differentiated Neoplasms||820-849|
|20||Alcohol/Drug Use/Drug-Induced Organic Mental Disorders||894-897|
|21||Injuries, Poisonings, Toxic Effect Drugs||901-923|
|23||Factors Influencing Health Status, Other Contact Health Services||939-951|
|24||Multiple Significant Trauma||955-965|
|25||Human Immunodeficiency Virus Infections||969-977|
Data from Ingenix Encoder ProP 2013, and Centers for Medicare and Medicaid Services Web site, www.cms.gov.
There are many MS-DRG groups associated with each MDC. For example, MDC 1 contains MS-DRG payment groups 020 to 103 that represent diseases or disorders of the nervous system. MDC 4 contains MS-DRG payment groups 163 to 208 that represent diseases or disorders of the respiratory system. Figure 12-3 illustrates examples of MS-DRG groups associated with Major Diagnostic Categories (MDC) 1 and 4.
Within each MDC the groups are further categorized as surgical or medical. Surgical MS-DRG includes conditions that require surgical intervention. Medical MS-DRG includes conditions that do not require surgical intervention.
Principal diagnoses requiring one or more surgical procedures are assigned to a surgical MS-DRG. Surgical MS-DRG groups are further classified based on the principal procedure, anatomic area, and the presence of complications or comorbidities. Procedures within the MS-DRG are further categorized as either major or minor operating room (OR) procedures.
Principal diagnoses that do not require surgery are assigned to a medical MS-DRG. Medical MS-DRG groups are further classified based on the principal diagnosis, and the presence of complications or comorbidities. Figure 12-4 illustrates the ICD-10 surgical MS-DRG 117, which illustrates the operating room procedures and code ranges categorized within the MS-DRG along with the GMLOS, AMLOS, and RW. The same illustration highlights the medical MS-DRG 122 and the related principal diagnoses along with the GMLOS, AMLOS, and RW.
A decision-making tree was developed for each MDC. The decision tree follows the logic of MS-DRG assignment. Decision trees illustrate the surgical and medical partition. The surgical partition is followed if a surgical “OR procedure” is performed. The medical partition is followed when surgery is not required. The tree branches off to various MS-DRG groups based on the procedure, diagnosis, and the presence of complications and comorbidities. The relative weight (RW) for each MS-DRG is listed on the tree. Figure 12-5 illustrates an MS-DRG decision tree for MDC 2 “Diseases and Disorders of the Eye.”
MS-DRG assignment is performed when the patient is discharged, and it is determined based on variable information pertaining to the hospital inpatient case. Information regarding the principal and secondary diagnoses, discharge status, patient’s sex, complications and comorbidities, and the birth weight of neonates is captured and used to determine the MS-DRG for the case. The principal diagnosis and/or procedure are key factors in MS-DRG assignment.
The principal diagnosis assigned to a hospital case determines what MDC is used in assigning the MS-DRG. To obtain accurate reimbursement, it is essential to assign the correct principal diagnosis. An incorrect principal diagnosis could lead to an MS-DRG that reimburses the hospital at a lower level. In addition to the principal diagnosis, the admitting and secondary diagnoses may be assigned, including complications and comorbidities, which generally contribute to a higher MS-DRG assignment. For example, the decision tree for MDC 2 indicates that a patient with a principal diagnosis of “Other Disorders of the Eye” with no major comorbidities or complications leads to the assignment of MS-DRG 125, with RW 0.6859. If the disorder of the eye is a neurologic disorder, a principal diagnosis of “Neurological Disorders” in the same MDC leads to an MS-DRG assignment of 123, which carries a relative weight (RW) of 0.7144, as illustrated in Figure 12-5.
Present on admission (POA) indicators have an impact on MS-DRG payments. When assigning diagnosis codes for an inpatient case, a present on admission (POA) indicator must also be recorded. All inpatient cases require the reporting of a POA indicator to identify hospital-acquired conditions (HAC). In accordance with the Inpatient Prospective Payment System (IPPS) guidelines, hospitals will not receive additional payment for Medicare cases involving hospital-acquired conditions (HAC).
Principal and other procedures are identified and coded for the case to describe significant procedures performed during the hospital stay. The principal procedure is the procedure performed for definitive treatment of the principal diagnosis or the procedure that most closely relates to the principal diagnosis. Principal procedures are illustrated on the decision tree based on body areas. If the wrong principal procedure is selected, it could lead to incorrect MS-DRG assignment.
Complications are conditions that arise during the admission that may require additional treatment and increase the length of stay. Comorbidities are preexisting conditions that have an impact on the principal condition being treated. Comorbidities may increase the length of stay for the admission. Complications and comorbidities (CC) affect the level of care required and therefore may increase resources used for the admission. Complications and comorbidities are factored into MS-DRG assignment and may contribute to a higher reimbursement. As published in the CMS Acute Care Hospital Inpatient Payment System Fact Sheet, there are three levels of severity in the MS-DRG based on secondary diagnosis codes:
In accordance with provisions outlined under HIPAA, the standard code set required today includes HCPCS, ICD-9-CM, and NDC. Inpatient services and procedures are reported using the HCPCS and ICD-9-CM Volume III procedure codes for significant procedures performed during the inpatient stay. NDC codes may also be required. Diagnoses are reported using ICD-9-CM Volumes I-II.
In accordance with HIPAA provisions, the ICD-9-CM will be replaced with the International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) and the International Classification of Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS). The compliance date for implementation of ICD-10 was set for October 1, 2013. However, the Department of Health and Human Service (DHHS) has published a final rule that delays the ICD-10 compliance date to October 1, 2014.
MS-DRG groups were developed based on the patient’s condition and resources required to treat the condition. Accurate diagnosis and procedure coding is critical to ensure the correct MS-DRG is assigned. The principal diagnosis is the condition determined after study to be chiefly responsible for the hospital admission. The principal diagnosis code assigned to the patient case essentially drives the MS-DRG assignment. Inaccurate code selection for the principal diagnosis can lead to an incorrect MS-DRG assignment, resulting in lost revenue. Figure 12-6 illustrates correct versus incorrect MS-DRG assignment for Patient Case 1 using the ICD-10-CM coding system. The case involves a patient who is diagnosed with pneumonia due to anaerobic gram-negative bacilli. Secondary diagnoses emphysema and chronic bronchitis are also documented.
Inaccurate code selection – The coder selected J18.9 “Pneumonia, unspecified organism” along with the secondary diagnoses of J43.8 “Emphysema” and J42 “Chronic bronchitis.” Based on this coding, MS-DRG 195 is assigned, which provides reimbursement to the hospital in the amount of $3,949.66.
Accurate code selection – The coder assigned J15.8 “Pneumonia, due to other specified bacteria” as the principal diagnosis. The coder also assigned the following secondary diagnoses codes: J43.8 “Emphysema” and J42 “Chronic bronchitis.” This code assignment leads to the correct MS-DRG 179, which provides reimbursement in the amount of $5,488.67.
Health Information Management (HIM) coding personnel abstract information from the patient’s medical record for the purpose of coding and MS-DRG assignment. HIM coders must follow inpatient coding guidelines as outlined in the coding manuals. Some facilities use a coding worksheet or other form to abstract and code information in the patient’s record. Figure 12-7 illustrates a sample HIM coding worksheet. Coding worksheets may include the patient’s name, medical record number, race, sex, address, admission date, discharge date, admitting physician, and operating physician name. Most facilities use a computer program called an encoder or grouper for coding and MS-DRG assignment. The steps to coding for MS-DRG assignment are outlined below: