Prospective Payments: Will DRG Compensation Reduce Medical Costs?

Abstract

The buzzword in the health care field today is “prospective payment.”  Hospitals are phasing in a new system of Medicare reimbursement which covers some 26 million Americans; the system embodies the concept of the hospital knowing in advance exactly what the government will pay for a given patient (hence the term “prospective”). 

Hospitals which provide treatment under the fixed prospective rate may keep the change; those hospitals exceeding the prospective rate must absorb the costs themselves.  Because many administrators believe such a prospective payment plan will not only cover Medicare patients (as it does now) but most hospital patients in the not-too-distant future, hospitals are beginning to use sophisticate systems to monitor individual physician resource consumption, payor activity and diagnostic trends.  In short, the hospitals feel they are coming under new pressure to be cost-conscious.