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Prospective pricing and DRGs.

Even before Medicare's Prospective Payment System (PPS) for hospitals went into effect, it was already a cliche that the new system was the most significant change since the program's inception. More important, PPS may become the model for similar payment schemes involving private sector payers and covering physician and outpatient services as well. Under PPS a hospital is paid a fixed, predetermined price for a Medicare inpatient case, based on the patient's Diagnosis Related Group (DRG). If the hospital's actual costs for treating that patient are below the DRG price, the difference is retained; if its costs are higher, the hospital absorbs the loss. This new element of risk reverses the hospital's traditional incentive to maximize its costs; now, the hospital and physician must work together to minimize them.