Prospective Payment

Faced with rising budget deficits and the expected doubling of Medicare costs within the next five years, Congress directed in 1982 that Medicare develop a prospective payment system for reimbursing hospitals. The establishment of that system, popularly known as DRGs (diagnosis-related groups), marked a dramatic turning point in the payment of hospitals by Medicare. By severing the direct link between the provision of services and payment for them, prospective payment reversed the incentives for hospitals, offering the reward of increased profits rather than reduced revenue for cost-effective care. Proponents of prospective payment argued that the new system would trim an.