How are hospitals reimbursed under the inpatient prospective payment system (IPPS)?

Hospitals are reimbursed under the inpatient prospective payment system (IPPS) according to a predetermined rate for each discharge. This payment system establishes a fixed payment amount for hospital services based on the patient’s diagnosis and the severity of their condition, categorized by Diagnosis Related Groups (DRGs). Each DRG has a specific payment amount that reflects the expected costs of the services provided for that group of patients.

This system incentivizes hospitals to manage their resources efficiently, as the fixed payment means that any costs exceeding the predetermined rate are absorbed by the hospital. Conversely, if a hospital can provide care at a lower cost than the predetermined rate, it can retain the difference as profit, leading to a focus on cost containment and efficient care delivery.

The other options provided do not accurately represent how reimbursement is structured under the IPPS. Variable costs and hospital profits are not the basis for determining payments; instead, the payments are established ahead of time based on the DRG system. Although patient demographics may influence the DRG assignment, they do not directly dictate the payment structure. Lastly, fee-for-service payments are characteristic of a different reimbursement approach, primarily applied in outpatient and certain specialized services, rather than specifically under the inpatient prospective payment system.