What Are Advantages & Disadvantages of Prospective Payment System?

In the United States, a tension often exists in how healthcare centers are managed, regulated and paid for. Typically a hybrid of public support and consumer revenue flows help healthcare facilities exist, but both of these systems can change over years through political developments. The prospective payment system is one such example of how healthcare centers, specifically inpatient hospital services, should be calculated according to Congress. The system, like many others, has both its good and bad points.

Accounting for Factors

With the prospective payment system, or PPS, the provider of health care, such as a hospital, receives one fixed payment for a particular type of care over a particular period of time. The system tries to make these payments as accurate as possible, since they are designed to be fixed. As a result, the formula to make the prospective payments is highly complex and accounts for many different factors, including statistical variance, teaching-related costs and other situations.

Ongoing Changes

The PPS is not purely static. Because it is based on government regulation, it can be changed. Congress can vote in new factors and change old factors to make the system more accurate. This is very useful when accounting for changes in money value due to inflation, or when accounting for new technology, drugs and hospital processes. The PPS is updated frequently to stay on top of the healthcare industry.


Because so many factors are present, the PPS formula is highly complex. This means that it is very difficult for anyone but professionals to understand, including patients, doctors and those in Congress voting on changes. This can lead to misunderstandings and the miss-classification of medical procedures within the formula. The formula cannot easily account for quality or safety, for example, because those factors simply cannot yet be accurately expressed in figures.

Political Constraints

While the PPS can be changed through voting and regulatory changes, it is not always changed in the right way. While the goal is to update the system for inflation and other changes, voting is often influenced more by political motivation than the desire to better the system. As a result, changes can sway back and forth with political leanings, becoming unpredictable.