Home > Free Essays > Health & Medicine > Healthcare Financing > Hospital Outpatient Prospective Payment System

Hospital Outpatient Prospective Payment System Coursework

Exclusively available on IvyPanda Available only on IvyPanda
Updated: Nov 26th, 2020


Healthcare facilities use various systems to pay the healthcare providers. To choose an appropriate system, these organizations consider various factors, especially advantages and disadvantages. Despite the various systems, each of them has its advantages and disadvantages. Therefore, this paper explores various systems of payment applied by various healthcare organization to pay their service providers. The discussion presented in this paper gives healthcare organizations an insight about selecting an appropriate payment scheme.

Advantages and Disadvantages of the Following Payment Systems

Per Diem

This system of payment sets an amount of money to pay each worker on the daily basis (Medicare Payment Advisory Commission, 2010a). In other words, it is a fixed daily payment that does not change with the level of services offered. This incentive aims at increasing the duration of hospitalization and healthcare expenditures. Hospitalization extends by increasing the number of admissions and the duration of stay, which increase the level of bed occupation.

In addition, this scheme offers incentives to reduce the amount of services given during each day of hospitalization. Medicare Payment Advisory Commission (2010b) notes that the cost of hospitalization increases with the stay. A notable advantage of this system is that it is simple to manage and increases attention given to the patient. Therefore, it increases positive outcomes of the healthcare services. However, a potential disadvantage of per diem payment system is that it increases the number of admissions and the duration of hospitalization. As a result, it is not a cost-effective healthcare payment system.


In this system, service providers get their payment for each service they offer (Centers for Medicare and Medicaid, 2010). This system of payment offers a strong incentive to increase the number of services offered. However, it is not a good system to contain costs because service providers focus on increasing their income. Therefore, healthcare providers offer lucrative resources and services to increase their incomes at the expense of quality of care.

Other countries have given patients the freedom to select physicians and healthcare services to attend. Therefore, this system may improve the quality of services. According to Medicare Payment Advisory Commission (2010b), this system motivates healthcare workers to improve the quality of their services to attract more clients. Furthermore, amid competition, it provides good quality of services. However, its shortcoming relates to increasing the cost of administration.

The DRG-Based Payment System

Diagnosis-Related Group scheme of payment categorizes patients based on their economic and medical characteristics. It uses this classification to assist in sharing medical materials to reduce the cost division of resources. It also uses a fixed rate of payment in therapy and discharge. Therefore, DRG based payment is an effective system for cost containment in the provision of medical services. Service providers get motivation from this scheme, because the costs relate to the procedure of therapy.

However, there are concerns of early discharge, because doctors strive to keep the patients for the shortest time possible. In addition, there is an issue of selecting low-cost patients to minimize the cost of medication (Centers for Medicare and Medicaid, 2009).

According to the article published by the Centers for Medicare and Medicaid (2009), this system may increase admissions, which overwhelm the facility’s resources, since the operation of the DRG scheme is complex to manage. It also requires a lot of data to manage the activities and the costs of services. Furthermore, it has negative impacts on the stand-alone facilities, as they cannot obtain the required number to maintain their operations.

However, according to Medicare Payment Advisory Commission (2010b), the DRG system is an efficient mechanism for cost containment and to provide cost-effective services. In addition, its classification system is significant in reducing the unnecessary care. This reduces the cost of services.


This system develops payments based on healthcare services on each healthcare provider, and for a definite time period (Mechanic and Altman, 2009). Therefore, each healthcare organization receives an estimated expenditure on the residents. Healthcare facilities monitor the system of payment that is developed by a high authority. This system is data-extensive during the estimation of the capitation payment rate for each facility. Therefore, the focus of capitation is to reduce inefficiency and increase coordination.

The risk-sharing mechanism controls the cost, because healthcare workers shift their focus to coordination of services (Mechanic and Altman, 2009). Thus, they provide services at the lowest cost while increasing the productivity of the doctors. In addition, this scheme helps the healthcare organizations to prescribe cost-effective drugs and be entrepreneurial. However, this mechanism alone may fail to improve coordination or healthcare services.

It requires other incentives to enhance coordination. Mechanic and Altman (2009) add that this method promotes preventive strategies to reduce the future costs of healthcare services. Capitation payment rate may also reduce costs because of its innovative nature. In addition, it improves treatment outcome and patient contentment. However, this system uses financial incentives to limit access to services. This is because patients are referred to other specialist to reduce expenditure on resources. The cost of healthcare service increases, because the additional service means an increase in the cost of resources.

Differences between Prospective and Retrospective Payment System

In a prospective payment plan, there is a fixed rate of payment for each category of treatment. The categorization of treatments relates to set factors. The rates of payment may be adjusted periodically to reflect the changing nature of the economy, such as the effects of inflation, changes in the living standards and other macroeconomic trends. However, this moderation does not happen to reflect the needs of individual patients.

Each healthcare worker receives an equal rate of payment for each category of treatment. Several treatments of a similar kind receive an equal rate in multiple categories relative to the number of services. However, the amount of each payment does not change. Therefore, cases that require several therapies receive multiple payments. Each treatment has a corresponding rate of payment. Medicare is an example of the prospective payment plan.

This payment uses parameters such as per stay or per diem. Secondly, this payment has a predetermined classification of treatment. It has two parts where the second section relates to fee-schedule of the doctor. Medicare is an example of a DRG payment system (Office for Oregon Health Policy and Research, 2008).

On the other hand, a retrospective payment scheme gives healthcare workers remunerations relative to their real charges (Office for Oregon Health Policy and Research, 2008). According to the retrospective payment plan, the healthcare worker treats the patient and records the charges. Therefore, the healthcare providers issue an itemized bill to the insurance agent. The insurance provider may accept or reject an item on the bill or the entire bill. However, according to Mechanic and Altman (2009), the healthcare worker gets payment for all services offered. An example of this payment plan is fee-for-service. In this case, a doctor receives payment for each service he offers. Therefore, the healthcare workers itemize all services and bill them to the insurance company for payment.


Despite the existence of various plans of payment, there is no appropriate system that can satisfy the healthcare providers. Each scheme has advantages and disadvantages. Whereas the prospective payment plan gives payment according to categories of treatments, the retrospective one is purely based on the actual charges presented by the provider. Therefore, healthcare organizations should select a payment scheme based on its suitability.


Centers for Medicare and Medicaid. (2010). . Web.

Centers for Medicare and Medicaid. (2009). . Web.

Mechanic, R., & Altman, S. (2009). Payment Reform Options: Episode Payment Is A Good Place to Start. Health Affairs, 28, W262-W271. Web.

Medicare Payment Advisory Commission. (2010a). Medicare Payment Basics: Hospital Acute Inpatient Services Payment System. Web.

Medicare Payment Advisory Commission. (2010b). Medicare Payment Basics: Outpatient Hospital Services Payment System. Web.

Office for Oregon Health Policy and Research. (2008). Healthcare Payment Reform & Provider Reimbursement: A Summary of Strategies for Consideration by the Oregon Health Fund Board. Web.

This coursework on Hospital Outpatient Prospective Payment System was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Coursework sample written from scratch by
professional specifically for you?

801 certified writers online

Cite This paper
Select a referencing style:


IvyPanda. (2020, November 26). Hospital Outpatient Prospective Payment System. https://ivypanda.com/essays/hospital-outpatient-prospective-payment-system/


IvyPanda. (2020, November 26). Hospital Outpatient Prospective Payment System. Retrieved from https://ivypanda.com/essays/hospital-outpatient-prospective-payment-system/

Work Cited

"Hospital Outpatient Prospective Payment System." IvyPanda, 26 Nov. 2020, ivypanda.com/essays/hospital-outpatient-prospective-payment-system/.

1. IvyPanda. "Hospital Outpatient Prospective Payment System." November 26, 2020. https://ivypanda.com/essays/hospital-outpatient-prospective-payment-system/.


IvyPanda. "Hospital Outpatient Prospective Payment System." November 26, 2020. https://ivypanda.com/essays/hospital-outpatient-prospective-payment-system/.


IvyPanda. 2020. "Hospital Outpatient Prospective Payment System." November 26, 2020. https://ivypanda.com/essays/hospital-outpatient-prospective-payment-system/.


IvyPanda. (2020) 'Hospital Outpatient Prospective Payment System'. 26 November.

Powered by CiteTotal, best citation generator
More related papers