PPS stands for “Prospective Payment System.”
This means that facilities such as skilled nursing facilities, home health agencies, hospices, most hospitals, and soon federally qualified health centers are not reimbursed based on actual costs, but rather on how much CMS decides prospectively what is a fair price for the services.
(Even on PPS cost reports, occasional exceptions are made. The most notable exception would be vaccine costs, as certain facilities are reimbursed for the actual costs of the vaccines.)
Regardless of receiving prospective or “actual cost” reimbursement, the facility still reports its actual expenses on the cost report. The cost report also reports numbers of patient visits, for facilities whose reports are based on visits, such as home health agencies and federally qualified health centers, or patient days, for facilities whose reports are based on number of days, such as hospices and nursing homes.
In a nutshell, the cost report calculates per visit or per diem (per day) costs by dividing expenses by number of visits/ days. Cost report preparers review per diem/ per visit costs before submitting the cost report to make sure that they look reasonable, meaning that expenses and statistics were accurately reported. Though these calculations will not directly affect the facility’s reimbursement, CMS could use this information to determine future reimbursement rates for all facilities.
A facility receives Medicare reimbursement only for the number of Medicare visits/ Medicare patient days for the cost report year. However, all expenses and visits/ days must be reported in order to come up with a correct determination of how much the per visit/ per diem costs were.
Prospective reimbursement is adjusted by geographic area to reflect differences in labor costs. These geographic areas are known as CBSA (Core Based Statistical Areas) and are represented by a 5 digit code. For example, Rural Alabama is represented by a 99901 code, while Boston is represented by 14454. Prospective reimbursement is also adjusted for patient acuity, such as RUG scores (Resource Utilization Groups) for patients of a SNF (skilled nursing facility). Reimbursement for labor is affected by wage index, with facilities in areas where the wage index is below the national average receiving less, and those in areas with an above-average wage index receiving more.