Medicare and prospective payment systems Discussion Questions

Answer each question in current APA Format, atleast 600 words per prompt and use atleast 2 scholarly sources and 1 biblical reference.

Prompt 1– Explain the history of Medicare and the prospective payment systems that are in use today. In your answer be sure to provide examples of the payments systems currently in use today.

Prompt 2– Differentiate between the prospective payment systems for outpatient, home health, physician and non-physician practitioners, and ambulatory surgical settings. In your response ensure that you compare and contrast payment systems for each of the categories listed.

Prompt 3– Describe the importance of revenue cycle management in the acute care environment and the impact it can have on the healthcare organization. In your description be sure to identify the consequences of improper revenue cycle management as it pertains to the healthcare organization as a whole.

Prompt 4– Identify the impact of Pay-for-Performance on the healthcare organization and discuss the impact of Value Based Purchasing on the organization.

Prompt 5– Explain the history and purpose of the Recovery Audit Contractor (RAC) demonstration project, as well as the process of the RAC as it pertains to its impact on healthcare organizations.

Expert Solution Preview


The healthcare industry is highly complex, and its financial management plays a key role in the success of the organizations. This paper will cover various aspects of the healthcare industry’s payment system, including a history of Medicare, payment systems used in different healthcare settings, revenue cycle management, Pay-for-Performance, Value-Based Purchasing, and the Recovery Audit Contractor (RAC) demonstration project.

Prompt 1 – History of Medicare and Prospective Payment Systems

Medicare is a government-sponsored health insurance program that was established in 1965 under the Social Security Act. It was created to provide coverage to individuals aged 65 and older, as well as younger people with disabilities and those with End-Stage Renal Disease. The program is divided into various parts, with Part A covering inpatient hospitalizations, Part B covering outpatient services, and Part D covering prescription drugs.

In the early years of Medicare, payments for services were based on the traditional fee-for-service (FFS) system. The FFS system paid providers based on the number and types of services they provided, with the fees being determined by individual providers. This payment system was criticized for promoting overuse and waste of healthcare services, leading to the development of prospective payment systems (PPS).

PPS is a payment methodology that reimburses healthcare providers based on a fixed rate for a specific healthcare service or episode of care, rather than the number of services provided. It was developed to reduce healthcare spending, promote cost-effective practices, and improve the quality of care. Examples of PPS used today include Diagnosis-Related Groups (DRGs) for inpatient hospital care, Ambulatory Payment Classifications (APCs) for outpatient hospital care, and the Physician Fee Schedule (PFS) for physician services.

Prompt 2 – Differentiation of Prospective Payment Systems for Various Healthcare Settings

The PPS used in different healthcare settings differ in their structure, methodology, and payment rates. In the outpatient setting, the APC system is used to pay hospitals for the services they provide to patients on an outpatient basis. The APC system categorizes services into groups based on their clinical and resource characteristics and assigns each group a payment rate. Hospitals are paid a fixed amount for each APC group, regardless of the actual cost of providing the service.

In home healthcare, the PPS is based on the Home Health Prospective Payment System (HHPPS), which reimburses providers for episodes of care provided to homebound patients. The HHPPS is similar to DRGs in that it groups patients into specific case-mix categories and assigns a fixed payment rate for each category.

For non-physician practitioners such as nurse practitioners and physician assistants, the Medicare PFS is used to reimburse for services they provide to patients. The payment rates for non-physician practitioners are generally lower than those for physicians.

Finally, the ambulatory surgical setting uses a payment system based on Ambulatory Surgical Center Payment System (ASCP), which reimburses ambulatory surgical centers for the procedures they perform. The ASCP uses a fixed payment rate for each procedure, and the payment is adjusted based on the location of the center.

Prompt 3 – Importance of Revenue Cycle Management and Its Impact on Healthcare Organizations

Revenue cycle management (RCM) is the process of managing the financial aspects of the patient experience, including billing and collections, coding, and claims management. Effective RCM is critical to the financial health of healthcare organizations, as it directly impacts their bottom line. Improper revenue cycle management can result in lost revenue, decreased cash flow, and a damaged reputation.

RCM has a direct impact on the healthcare organization, including the ability to pay for staff, equipment, and supplies. A poorly functioning RCM process increases the likelihood of denied claims and delayed reimbursements, which directly impacts an organization’s financial health. Poor RCM processes can also impact the patient experience, leading to disgruntled patients who may end up leaving negative feedback online.

Prompt 4 – Impact of Pay-for-Performance and Value-Based Purchasing on Healthcare Organizations

Pay-for-Performance (P4P) is a payment methodology that incentivizes providers to meet certain quality metrics. P4P programs offer financial rewards to providers who meet or exceed certain performance standards, such as improving patient outcomes or reducing the cost of care. The impact of P4P on healthcare organizations is that it encourages providers to focus on improving the quality of care and reducing unnecessary expenses.

Value-Based Purchasing (VBP) is another payment methodology that ties payment to quality metrics. In VBP, providers are reimbursed based on the quality of care they provide, as measured by specific outcome metrics. VBP is intended to improve the quality of care while reducing unnecessary expenditures. The impact of VBP on healthcare organizations is that it incentivizes providers to improve patient outcomes while reducing healthcare costs.

Prompt 5 – History and Purpose of the Recovery Audit Contractor (RAC) Demonstration Project

The RAC demonstration project was created to identify and recover improper payments made by Medicare to healthcare providers. The program was initiated in 2003 as a pilot program, with the goal of identifying improper payments made in the fee-for-service system. The RAC program was made permanent under the Tax Relief and Health Care Act of 2006.

RACs work by identifying improper payments made by Medicare to healthcare providers. They do this by reviewing claims data and identifying potential errors in billing or coding. When errors are identified, RACs notify the healthcare provider and request a repayment of the improper payment. The purpose of the RAC program is to reduce improper payments and promote proper billing practices among healthcare providers.


In conclusion, effective financial management plays a vital role in the success of healthcare organizations. The payment methodologies used in healthcare settings, including DRGs, APCs, PFS, HHPPS, and ASCP, are intended to promote cost-effective practices and improve the quality of care. The effective revenue cycle management process is crucial to the financial health of healthcare organizations. Payment methodologies such as P4P and VBP are incentivizing providers to focus on improving quality while reducing healthcare costs. Finally, the RAC program is intended to reduce improper payments and promote proper billing practices among healthcare providers.

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