Inpatient Prospective Payment System (IPPS)
Medicare's payment system for acute-care hospital inpatient stays, paying a fixed amount per MS-DRG rather than reimbursing each individual service.
Inpatient Prospective Payment System (IPPS) is a term from U.S. hospital cost and quality reporting — the field that produces the CMS Hospital Compare program, the Medicare Inpatient Payment files, and the patient-facing tools built on top of them. The definition below covers what the term means in CMS files, what it does not mean, and how it interacts with the other measures CMS publishes. On the LakeQuality value rubric, Inpatient Prospective Payment System (IPPS) is one of the inputs (directly or indirectly) to the combined cost-and-quality grade. Understanding how the term is computed at CMS — what counts and what does not — is part of reading hospital pages defensibly.
Each hospital page on LakeQuality surfaces the specific Inpatient Prospective Payment System (IPPS) value for that facility (when CMS reports one), so the general definition here translates into a concrete data point on the per-hospital pages you actually use.
How It Works
IPPS was enacted by the Social Security Amendments of 1983 and has fundamentally shaped U.S. hospital economics for more than four decades. Before IPPS, Medicare reimbursed hospitals retrospectively for their reasonable costs, creating no incentive for efficiency. Under IPPS, CMS prospectively sets a payment rate for each MS-DRG and hospitals keep the savings when they treat a patient for less than the payment and absorb the loss when they spend more. The payment formula starts with a national standardized amount, then applies the MS-DRG relative weight, then adjusts for the area wage index (ranging from about 0.70 in low-cost rural areas to 1.80+ in San Francisco and Manhattan), Indirect Medical Education (IME) add-ons for teaching hospitals (5-10% of base DRG payment depending on resident-to-bed ratio), Disproportionate Share Hospital (DSH) payments for hospitals serving large low-income populations, and outlier payments for extraordinarily expensive cases. The FY2025 IPPS final rule set the standardized operating amount near $6,700 with a market basket update of 2.9% minus productivity adjustments. IPPS covers approximately 3,300 acute-care hospitals; critical access hospitals, long-term care hospitals (LTCHs), inpatient rehabilitation facilities (IRFs), and psychiatric facilities are paid under separate prospective payment systems. Commercial insurers frequently anchor their inpatient contracts to IPPS, paying a multiplier of 150-250% of the Medicare DRG rate. IPPS has succeeded at slowing cost growth but has produced side effects including pressure to reduce length of stay, migration of cases to outpatient settings, and strong incentives to capture severity through complete documentation.
Related Terms
- Diagnosis Related Group (DRG), A classification system that groups hospital inpatient stays into categories based on diagnosis, procedures, and patient complexity, used by Medicare to determine how much a hospital gets paid.
- MS-DRG (Medicare Severity DRG), The severity-adjusted version of the DRG system used by Medicare since 2007, expanding groupings to capture complication and comorbidity burden and refine payment accuracy.
- Case Mix Index (CMI), A measure of the average complexity and resource intensity of a hospital's Medicare patients, calculated as the average MS-DRG relative weight across discharges.
- Centers for Medicare & Medicaid Services (CMS), The federal agency within the Department of Health and Human Services that administers Medicare, Medicaid, CHIP, and the ACA marketplace, setting hospital payment rates, quality standards, and the data that HospitalCostData uses.
- Disproportionate Share Hospital (DSH) Payments, Supplemental Medicare and Medicaid payments to hospitals that serve a disproportionate number of low-income patients, totaling approximately $28 billion annually across both programs.
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About This Definition
This definition is part of the HospitalCostData Hospital Pricing Glossary, 47 terms explaining hospital costs, quality ratings, and healthcare billing. Written for patients, journalists, researchers, and healthcare professionals.