Health Affairs September 6, 2023
When Medicare was created, hospitals were reimbursed based on costs for inpatient care. Cost-based reimbursement was massively inflationary: Per-beneficiary spending on inpatient hospital care increased 14.5 percent annually between 1967 ($165 per beneficiary) and 1982 ($1,261 per beneficiary). In response, the Centers for Medicare and Medicaid Services (CMS) introduced the Inpatient Prospective Payment System in 1983, which de-linked hospital costs with payments. Under prospective payment, hospital fees for inpatient stays were determined by patient diagnoses.
Prospective payment successfully constrained hospital spending growth. It remains in place today and has been emulated in health care systems across the world.
Yet, the scope of hospital prospective payment has always been limited. Prospective payment does not include physician fees, does not incorporate postacute...
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