A Prospective Payment System (PPS) is a method of reimbursement where Medicare payments are made based on a predetermined  amount that is fixed.   It has been in use since October 1, 1983. The initial concern under this system was the management of the cost outlier cases, which could have a profound impact on hospital finances. The government, directed by Congress to pay for the Medicare population, chose to assume this risk through a stop loss program for these outlier cases.

CMS strongly believes that to get   meaningful change in efficiency and care for patients, the Accountable Care Organization (ACO) needs to be exposed to some risk of shared losses.   CMS expects cost savings to be realized over time via this provision.  Therefore, under ACO concept this risk will be assumed by the organization delivering care.

Therefore, to protect against this high risk of significant financial loss, the ACO should plan at its inception for methods of payment and/or protection for these cases, such as secondary coverage (insurance). This is especially important, as the majority of these programs will initially be enrolling the Medicare population rather than the lower risk, “working well”, as seen in the successful Kaiser model.

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