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Prospective Payment (DRG) and Managed Care

How do prospective payment (DRG) and managed care propose to correct this excess spending? Please provide references.

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Please see response attached, which is also presented below. I also attached a supporting article, which is no longer available on-line. I hope this helps and take care.


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1. How do prospective payment (DRG) and managed care propose to correct this excess spending?

Managed care organizations (MCOs) continue to seek new strategies to help contain rising health care costs, which consumed 16 percent of the nation's total economic output in 2004, the government's latest figures.

Prospective payment (DRG)

One particularly effective strategy being implemented by payers is to leverage the established framework of Medicare's Prospective Payment System (PPS) to decrease the cost of care. This strategy enables payers to "pay as Medicare" pays, which can reduce out-of-network (OON) reimbursement by 60 percent or more, and cut in-network reimbursement costs by 25 percent

PPS provides payers with an effective tool to reduce the cost of facility contracting with providers. With PPS, prices are fixed in advance and payment is tied to the actual services delivered, instead of billed charges. PPS shifts the risk of treating patients to the provider through payment structures that encourage providers to deliver care efficiently and effectively. This is in contrast to the traditional cost containment strategies used by MCOs such as fee schedules and per diems which encourage over utilization or capitation, and which forces payers to shoulder an inappropriate level of financial risk. With PPS, MCOs only retain the risk of underwriting health care utilization for the population of enrollees. By sharing the risk, each group is accountable for that portion of risk that they can effectively manage.

Perhaps the biggest benefit is that PPS is an established methodology. Providers are familiar with using it for billing and reimbursement under Diagnosis-Related Groups (DRG) for inpatient care, and Ambulatory Payment Classifications (APCs) for outpatient care. As ...

Solution Summary

This solution explains how prospective payment (DRG) and managed care propose to correct 'excess' spending. Supplemented with a highly informative article on managed care.