What is IPPS (inpatient prospective payment system) for Medicare?

The purpose of the post is to briefly explain how to calculate operating and capital DRG (diagnosis related groups) payments.

What are DRGs (Diagnosis Related Groups)?

“Under the IPPS, each case is categorized into a diagnosis-related group (DRG). Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG.”


What is the purpose of DRGs?

Prior to October 1, 1983 (FY 1984), providers were reimbursed based on costs. While we delve deeper into cost reports in other posts. This created an incentive for hospitals to maximize costs at the expense of the Federal coffers. In response, DRGs were created to prospectively price claims, regardless of the costs incurred. (This is not altogether true since some DRGs qualify for outlier payments in cases were costs are prohibitively high.)

Who is paid under IPPS?

“All covered hospital inpatient services furnished to beneficiaries during the subject cost reporting periods.” 42 CFR 412.20(a).

Who is not paid under IPPS?

A non-exhaustive list includes:

  1. Inpatient Psychiatric Facility (IPF) or unit. 42 CFR 412.20(b).
  2. Inpatient Rehabilitation Facility (IRF) or unit. 42 CFR 412.20(c)(1).
  3. Long-Term Care Hospital (LTCH). 42 CFR 412.20(d).
  4. Children’s Hospital. 42 CFR 412.20(e) and 42 CFR 412.23(d).
  5. Cancer Hospital. 42 CFR 412.23(f).
  6. Outside of the United States. 42 CFR 412.23(g).
Why does an exclusion from IPPS matter?

We will dive into specifics later, but certain facilities (IPF, IRG,LTCH) are reimbursed under distinct PPS structures, while the others may be reimbursed the ordinary,albeit inflated, IPPS.

What’s more, other hospitals not paid under a distinct PPS or inflated PPS may be reimbursed costs, subject to certain limits:

(b) Cost reimbursement. Except for those hospitals specified in paragraph (c) of this section, and §412.20(b), (c), and (d), all excluded hospitals (and excluded hospital units, as described in §412.23 through §412.29) are reimbursed under the cost reimbursement rules set forth in part 413 of this chapter, and are subject to the ceiling on the rate of hospital cost increases as specified in §413.40 of this chapter. 42 CFR. 412.22(b).
PPS Reimbursement v. Costs — click on the flowchart
DRG v. Cost Flowchart

DRG v. Cost Flowchart

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