Prospective Payment System (PPS)
A Prospective Payment System is a reimbursement methodology in which payment amounts are determined in advance based on predetermined rates for categories of services — DRGs for inpatient, APCs for outpatient — rather than the actual cost of care provided.
What is a Prospective Payment System?
Under a Prospective Payment System (PPS), CMS sets payment rates in advance by service classification rather than reimbursing actual incurred costs. This creates financial incentives for efficiency — providers that deliver care below the predetermined rate retain the difference as margin; those that exceed it absorb the loss. Major CMS PPS types: IPPS (Inpatient Prospective Payment System — using Medicare Severity DRGs, or MS-DRGs, for acute hospital inpatient stays); OPPS (Outpatient Prospective Payment System — using Ambulatory Payment Classifications, or APCs, for hospital outpatient services); MPFS (Medicare Physician Fee Schedule — RVU-based payment for physician services); HH PPS (Home Health — now PDGM, the Patient-Driven Groupings Model); and SNF PPS (now PDPM, the Patient-Driven Payment Model). Under MS-DRG payment, each inpatient stay is classified into one of 750+ MS-DRGs based on principal diagnosis, procedures, complications, and comorbidities, each carrying a relative weight. Payment equals that weight multiplied by the hospital's base rate, adjusted for geographic and other factors. Case Mix Index (CMI) is the average MS-DRG relative weight across all discharges — a rising CMI means more complex patients and higher average payment per admission.
Why It Matters for Healthcare Analytics
CMI trends directly drive total inpatient revenue independent of volume. A hospital that loses 0.1 CMI points due to coding quality deterioration or payer mix shift toward lower-weight DRGs loses the same amount as treating fewer patients. Tracking DRG distribution, CMI by service line, and high-weight vs. low-weight case mix shifts is foundational to hospital financial management.
How Vizier Tracks PPS Performance
Upload your discharge and claims data and ask "What is our Case Mix Index trend by service line and how does our DRG distribution compare to last year?" — Vizier calculates CMI by quarter, identifies DRG distribution shifts, and quantifies the revenue impact of case mix changes.