Prospective Payment System (PPS) Hospitals

Prospective Payment System (PPS) hospitals are the traditional model of acute care in the United States. Unlike CAHs or REHs, PPS hospitals are reimbursed under Medicare’s DRG (Diagnosis-Related Group) system, which pays a fixed amount for each patient based on their diagnosis and treatment. This model is designed to encourage efficiency and predictability.

Key Characteristics

  • Full-service hospitals providing inpatient and outpatient care

  • Reimbursed under Medicare’s PPS/DRG system

  • Can be small rural community hospitals or large tertiary care centers

  • Wide range of specialties and services available

  • Subject to value-based purchasing and quality reporting requirements

Benefits

  • Comprehensive medical care, including specialty services

  • Scalability — PPS hospitals can expand facilities and workforce

  • Serve as referral centers for surrounding CAHs and REHs

  • Financial predictability through fixed reimbursement rates

Limitations

  • No special rural cost-based reimbursement (less financial cushion)

  • Higher operational costs than CAHs or REHs

  • Must be efficient to remain profitable under PPS payment structure

  • Vulnerable to changes in federal reimbursement formulas

Impact on Communities

PPS hospitals often serve as regional anchors, providing advanced care, specialty clinics, and higher-level services not available at smaller rural facilities. They form the backbone of healthcare systems, ensuring patients from rural communities have a place to be transferred for more complex needs.

Historical Context

  • Medicare’s Prospective Payment System launched in 1983.

  • Moved hospitals away from cost-based reimbursement toward fixed-rate payments.

  • Uses Diagnosis-Related Groups (DRGs) to pay a set fee for each type of patient case.

  • Became the standard for the majority of U.S. hospitals, both rural and urban.

Quick Facts

  • Size: Ranges from small community hospitals to large regional centers

  • Services: Full inpatient and outpatient care

  • Reimbursement: Fixed DRG payments from Medicare

  • Efficiency Requirement: Hospitals must operate within or below DRG costs to remain profitable

  • Quality Programs: Subject to Medicare value-based purchasing and reporting requirements

Community Impact

  • Often act as regional referral centers for smaller CAHs and REHs.

  • Provide advanced specialties (cardiology, surgery, oncology, intensive care).

  • Serve as major employers and training hubs for medical staff.

  • Help stabilize rural health networks by supporting transfers and higher-level care.

FAQs

How are PPS hospitals paid?

Medicare pays a fixed rate per patient case based on the diagnosis (DRG), regardless of actual costs.

Can PPS hospitals be rural?

Yes. Some rural hospitals are PPS facilities if they are too large or too close to other hospitals to qualify as CAH.

What’s the biggest difference between PPS and CAH hospitals?

PPS hospitals can scale larger and offer more specialties, but they don’t get cost-based reimbursement.

Do PPS hospitals get any special rural support?

Some qualify for add-on payments (e.g., Sole Community Hospital or Medicare Dependent Hospital adjustments), but generally PPS hospitals rely on efficiency.