Healthcare payers can use either retrospective or prospective payment systems to pay healthcare providers for services provided.
Prospective payment systems are payment methods in which the payer sets a rate for specific services or procedures. This rate is established in advance and is based on factors such as the type of service provided, the geographic location of the provider, and the payer’s own policies and guidelines. Examples of prospective payment systems include the Medicare prospective payment system, which sets predetermined payment rates for hospital services based on the patient’s diagnosis.
Retrospective payment systems, in contrast, are payment methods whereby the payer reimburses the healthcare provider once the services have been rendered. They do this based on actual costs. Healthcare providers typically get paid for their services on a fee basis. The payer reimburses the provider for actual costs of the procedure or service. Traditional fee-for-service payment arrangements are an example of a retrospective payment system.
One of the key differences between retrospective and prospective payment systems is how the payments are made. The payment rates for prospective systems are set in advance prior to the service being rendered. Retroactive payment systems make the payments after they have been performed, according to actual costs.
The use of prospective payment systems is often to incentivize healthcare providers to deliver better care at a lower cost. Providers receive a flat rate of payment for every service rendered, regardless of actual expenses. However, retrospective payment systems can be used to incentivize providers for providing more services, or performing more expensive procedures. Providers are reimbursed the cost of the service.
Overall, both prospective and retrospective payment systems have advantages and disadvantages, and the choice of payment system used by a healthcare payer depends on a variety of factors, including the payer’s goals, the type of healthcare services being provided, and the healthcare market in which the payer operates.