Understanding Medicare’s Inpatient Prospective Payment System (IPPS)

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This article was written by James Cagliostro.
Over the last few decades, countless advancements in healthcare have been made in this country. Along with these advancements, the cost of healthcare has risen and the complexity of payment for care has risen too. Advancements, higher cost, and higher complexity, however, do not necessarily lead to better value. It is in a healthcare organization’s best interest to understand changes that are taking place that will affect its reimbursement from the Centers for Medicare and Medicaid Services.
“The Medicare Inpatient Prospective Payment System (IPPS) was introduced by the federal government in the 1980’s as a way to change hospital behavior through financial incentives that encourage more cost-efficient management of medical care.” (https://www.ahd.com/ip_ipps08.html)
The over 3,000 US hospitals in the IPPS are paid/reimbursed based on the diagnostic category (Medicare Severity-adjusted Diagnosis Related Group, or MS-DRG) in which each patient is placed based on clinical data. The clinical data used includes:

  • Principal Diagnosis
  • Complications and Comorbidities
  • Surgical Procedures
  • Age
  • Gender
  • Discharge Destination

Reimbursement is based on paying the average cost for treating patients in the same MS-DRG.
Much has changed since the 1980s, including the way in which the Centers for Medicare and Medicaid Services (CMS) reimburses hospitals. Click To Tweet
Healthcare organizations/providers are still being paid fee-for-service, but adjustments to reimbursement amounts are now being made based on value metrics. Value can be defined as “the health outcomes or quality achieved in relation to the costs of the care provided.” (Porter ME. What Is Value in Health Care? N Engl J Med. 2010;363:2477–2481. doi: 10.1056/NEJMp1011024). A healthcare organization can increase value by improving outcomes and quality, reducing costs, or by doing both.
CMS ultimately determines the value of a hospital’s services. The Hospital Value-Based Purchasing Program, which was implemented by CMS in October 2012, reduces a hospital’s base operating DRG payments to fund value-based incentive payments to those hospitals based on their overall performance on a set of quality measures. Hospitals are able to earn back more than, all of, or less than the applicable percent reduction for a given year based on quality metrics. (https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/acutepaymtsysfctsht.pdf) .
The quality measures used to determine a hospital’s Total Performance Score (TPS) can be found in the four domains set out by CMS for the Fiscal Year 2018:

  1. Clinical Care Domain
  2. Patient and Caregiver-Centered Experience of Care/Care Coordination Domain*
  3. Safety Domain
  4. Efficiency and Cost Reduction Domain

*Name of this domain will change to “Person and Community Engagement” for FY 2019

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