More than 3,500 hospitals treat Medicare patients for inpatient care, and agree to accept Medicare payments as their full fees under the inpatient prospective payment system (IPPS).
Treatments are classified as diagnosis related groups (DRGs), depending on the particular medical condition and its severity. Each DRG “has a relative weight that reflects the expected relative costliness of inpatient treatment for patients in that group.” There are 751 DRGs. But there is tremendous complexity within the system to account for changes in individual patients' conditions, and the fact that some patients have multiple problems. A DRG is a basic category, and complications can add to the fees and allowances paid under the system. “Clinical conditions are defined by both the patients’ discharge diagnoses, including the principal diagnosis—the main problem requiring inpatient care—and up to eight secondary diagnoses indicating other conditions that were present at admission (co-morbidities) or developed during the hospital stay (complications).”
The goal is to provide consistency, so that all hospitals treating a patient with a particular condition and related complexities will deliver the appropriate treatment and quality of care in return for a standard fee.
The system tells hospitals the average stay for patients with a particular condition, the types of treatments that patients typically receive and the cost of those treatments. There are annual adjustments in the fees paid to hospitals, reflecting “patient conditions, market conditions and other factors recognized under Medicare’s payment system.”
Certain hospitals receive additional operating and capital payments. “Qualifying hospitals include those that operate medical resident training programs, treat a disproportionate share of low-income patients, or are located in a rural area and meet certain criteria. In addition, over 1,300 rural hospitals qualify as critical access hospitals and are paid on a cost basis (incurred costs plus 1 percent) instead of under the IPPS.”
The government paid hospitals about $110 billion under this system in 2009, and that was about 25 percent of total Medicare spending. The money was essential to the hospital industry, providing about 20 percent of total hospital revenues.
Hospitals also provide many outpatient services. They are reimbursed for these services by the CMS under the outpatient prospective payment system (OPPS). Reimbursement for outpatient services is set under the OPPS using a set of relative weights, a conversion factor, and adjustments for geographic differences.
The OPPS pays for each individual outpatient service based on how it is identified under the
Healthcare Common Procedure Coding System. CMS classifies services into ambulatory payment classifications (APCs) on the basis of clinical and cost similarity. Hospitals also can receive extra payments for services that are very high-cost or involve new technology.
