Under a prospective payment system, how are reimbursement amounts determined?

Under a prospective payment system (PPS), reimbursement amounts are established in advance, taking into consideration the setting in which care is provided, the type of service rendered, and the severity of the patient’s condition. This system is designed to provide predictability for both health care providers and payers by setting fixed rates for services rather than reimbursing based on actual costs incurred during a patient's treatment.

The approach of determining payment amounts in advance helps to control costs and promote efficiency in healthcare delivery. It shifts financial risk to providers, as they are tasked with managing within the established reimbursement rates to deliver care for various patients with different severity levels. This method contrasts with retrospective payment systems, where reimbursement is based on the actual services rendered and costs incurred after care has been provided.

By focusing on key variables such as service categorization and patient severity, the prospective payment system incentivizes providers to optimize resource allocation and improve care quality, aligning with broader objectives of cost containment and efficiency in healthcare management.