Report to Congress Prospective Payment System for Inpatient Services in Psychiatric Hospitals and Exempt Units

Historically, Medicare reimbursed health care facilities on the basis of costs. Cost based reimbursement methods have long been criticized because they are often complex, provide few incentives for furnishing care efficiently, and result in unpredictable payments. Because of the rapid rate of growth in outlays for inpatient hospital care, Congress first directed implementation of a prospective payment system (PPS) for acute care hospitals in 1983 with the enactment of Pub.L. 98-21. The key feature of a technically sound PPS is a prospectively determined fixed payment rate for a specific bundle of services for clinically similar patients requiring resources objectively measured. This reduces the incentive to add unnecessary services to a particular episode of care. Providers able to keep costs below their payment rate can retain the difference, encouraging efficiency. A PPS also increases predictability in health care spending, through recognition of historical base period costs and specified updates applied to those costs to determine the payment rate for each unit of service. Although Pub.L. 98-21 required a study to determine whether and how hospitals excluded from the PPS could be paid prospectively, policymakers looked to PPSs for other types of health care providers. The Balanced Budget Act of 1997 (BBA) (Pub.L. 105-33) 3 greatly accelerated these efforts, requiring the Centers for Medicare and Medicaid Services (CMS) to replace cost based methods of reimbursement with new PPSs for many types of providers operating in the traditional fee-for-service program. The BBA established a demanding schedule for implementing PPSs for skilled nursing facilities, hospital outpatient departments, home health agencies, and rehabilitation facilities. A PPS for skilled nursing facilities was implemented effective July 1, 1998. Payments for hospital outpatient, home health, and inpatient rehabilitation services were made prospective beginning August 1, PPSs from acute to post acute settings, certain types of hospitals and distinct part units of hospitals initially exempt from prospective payment have continued to be paid on a cost basis. PPS-exempt facilities presently include long-term care, children's, cancer, psychiatric hospitals, and psychiatric units in acute care hospitals. These providers are paid in accordance with a method first established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Under TEFRA each of these facilities is paid its actual reasonable costs subject to a target rate of increase limit. This target amount is based on the provider's historical base year costs per discharge updated to the payment year. Providers incurring costs below …