Understanding the Inpatient Prospective Payment System

October 26, 2023


In the ever-evolving landscape of healthcare, understanding crucial systems is essential. The Centers for Medicare & Medicaid Services (CMS) Inpatient Prospective Payment System (IPPS) stands as a cornerstone of modern hospital reimbursement. In this blog, we will delve into the purpose, impact, and key components of the CMS IPPS, shedding light on its significance for hospitals.

The Impact on Hospitals and Patient Populations

At its core, the CMS IPPS significantly impacts both hospitals and Medicare beneficiaries. This initiative plays a pivotal role in how hospitals are reimbursed for the care they provide to Medicare beneficiaries. The goal? To ensure that quality care is accessible and affordable.

Under IPPS, hospitals receive fixed payments based on Diagnosis-Related Groups (DRGs), categorizing patients with similar conditions and treatment needs. This structured approach encourages hospitals to optimize efficiency and cost-effectiveness while maintaining high standards of care.

The Financial Landscape

Delving into the financial intricacies of the CMS IPPS reveals a tightly woven system that impacts hospitals. To begin, CMS IPPS directly affects a list of over 3,000 hospitals. Participating in certain programs under CMS IPPS 2024, such as the hospital Inpatient Quality Reporting program (IQR), has a direct bearing on the annual payment updates that these hospitals receive according to the CMS IPPS annual final rule. This creates a financial incentive for hospitals to engage actively in these programs, aiming to enhance their quality of care and patient outcomes in these continuously evolving rulings.

The philosophy of CMS extends beyond mere ideals – it translates into tangible programs that drive change. As of the 2023 final ruling, the hospital Inpatient Quality Program intertwined reimbursement with patient-reported outcomes. Final rules, such as the CMS IPSS 2024 final rule, provide updates to the framework for all CMS inpatient programs, offering updated guidelines that hospitals must adhere to in order to achieve the desired quality care and financial outcomes.

Hospital Inpatient Quality Programs

To uphold healthcare quality, CMS has established a set of quality programs within the IPPS framework. These programs drive hospitals to deliver excellent patient care:

  • Hospital-Acquired Condition (HAC) Reduction Program: Focused on patient safety, this program encourages hospitals to reduce preventable HACs, minimizing adverse events that occur during hospitalization.
  • Hospital Readmissions Reduction Program (HRRP): Aiming to curb unnecessary readmissions, HRRP holds hospitals accountable for post-discharge patient outcomes, incentivizing comprehensive and effective care.
  • Hospital Value-Based Purchasing (VBP) Program: Incentivizing quality, the VBP program adjusts payments based on hospital performance, reflecting the value and outcomes of patient care.
  • Hospital Inpatient Quality Reporting (IQR) Program: This program mandates hospitals to report on specific quality measures, promoting transparency and driving continuous improvement in care delivery.


women in healthcare looking at computer

Evolving Programs: Updates and Recent Changes

The landscape of CMS IPPS programs is not static; it evolves over time to address the dynamic nature of healthcare.
These quality programs are subject to updates and refinements to ensure they remain relevant and effective. The cadence of these updates varies, with some programs undergoing revisions annually, while others may experience changes less frequently. Recent years have witnessed significant adjustments aimed at refining the interplay between reimbursement, quality care, and hospital outcomes.

Notable changes have included the expansion of quality measures within the Hospital Inpatient Quality Reporting (IQR) Program, aimed at capturing a more comprehensive picture of care quality. Additionally, updates to the Hospital Value-Based Purchasing (VBP) Program have been made to enhance the linkage between hospital performance and reimbursement.

This continuous refinement of programs examples CMS’ commitment to aligning payment structures with contemporary healthcare challenges and fostering a system that continually elevates patient care standards. These changes also highlight the need for hospitals to stay informed and adaptable, as the healthcare arena’s ever-changing dynamics continue to shape the contours of IPPS programs.

Navigating the Challenges: Hospitals and Reporting

While the CMS’ IPPS and its associated programs offer a roadmap for improved patient care and financial stability, they also present hospitals with a unique set of challenges. The burden of participating in these programs is not insignificant. Hospitals must navigate a landscape that demands a high degree of specificity in their reporting measures. This entails meticulous attention to detail, comprehensive data collection, and accurate documentation – all of which require a significant allocation of resources and administrative effort.

The intricate web of reporting can be time-consuming and resource-intensive, drawing focus away from core patient care activities. Yet, it’s a necessary investment, as the quality initiatives prompted by IPPS and its programs ultimately contribute to the overarching goal of delivering exceptional healthcare outcomes. Learn more about the mandatory PRO-PM measure impacting APU.

The Hospital Staffing Framework: Supporting Program Success

Behind the scenes of successful IPPS participation is a multifaceted hospital staffing framework that plays a pivotal role in the submission and execution of program requirements. This collaborative effort involves various departments, each contributing their unique expertise to ensure the success of these initiatives.
Several key departments collaborate closely to navigate the intricacies of program submissions:

  • Clinical Departments: Clinical departments, including nursing, medical staff, and allied health professionals, are at the forefront of implementing quality measures and collecting accurate patient data.
  • Administrative Departments: Administrative teams oversee the coordination, documentation, and reporting processes, ensuring compliance with program guidelines.
  • Quality Management: Quality management departments steer the hospital’s commitment to meeting quality benchmarks and implementing performance improvement initiatives.
  • Health Information Management (HIM): HIM professionals manage the accurate documentation, coding, and submission of patient data essential for program reporting.

Why are IPPS and LTCH PPS Rulings Usually Grouped Together?

The relationship between the Hospital Inpatient Prospective Payment System (IPPS) and the Long Term Care Hospital Prospective Payment System (LTCH PPS) unveils a purposeful dichotomy, stemming from their distinct roles in the broader healthcare spectrum. While they share the overarching objective of ensuring accurate reimbursement and maintaining high-quality care, the separation of these programs is rooted in their service to diverse patient populations.

IPPS and LTCH PPS, though both reliant on Diagnosis-Related Groups (DRGs) as a foundational mechanism, cater to unique healthcare niches. IPPS primarily centers on acute inpatient care, focusing on individuals with shorter-term medical needs. On the other hand, LTCH PPS specializes in long-term care, tending to patients with more complex, extended medical requirements.

This separation isn’t just a matter of administrative convenience; it’s a strategic alignment that acknowledges the intricacies of patient needs. By having separate programs, CMS tailors reimbursement structures to suit the specific demands of each population. In essence, the autonomy of IPPS and LTCH PPS signifies a commitment to precision in care delivery, recognizing that different patient cohorts deserve specialized attention for optimal outcomes.

hospital sign pointing to outpatient surgery building

Out-Patient Programs

Beyond inpatient care, CMS has also established out-patient programs that mirror the IPPS’s principles:

  • Out-Patient Prospective Payment System (OPPS): Similar to IPPS, the OPPS governs reimbursement for outpatient services, providing a structured approach to payment.
  • Out-Patient Quality Reporting (OQR) Program: In parallel to the IQR program, OQR encourages transparency and improvement by requiring hospitals to report on quality measures for outpatient care.


CMS’ Inpatient Prospective Payment System (IPPS) stands as a beacon of modern hospital reimbursement, orchestrating efficiency and elevated care through Diagnosis-Related Groups (DRGs) for fixed payments. Its financial intricacies impact hospitals directly, fueling active engagement for improved patient outcomes. Tangible programs like Hospital Inpatient Quality Programs interlink reimbursement and outcomes. Navigating IPPS and its challenges demands meticulous precision, where data orchestrates reporting efforts across hospital departments.

Learn More About The Mandatory PRO-PM Measure Impacting APU

Explore our comprehensive guide to understand the impact of the mandatory PRO-PM measure on your hospital’s Annual Payment Update (APU).