Are PPS payments adequate? Issues for updating and assessing rates

Declining operating margins under Medicare's prospective payment system (PPS) have focused attention on the adequacy of payment rates. The question of whether annual updates to the rates have been too low or cost increases too high has become important. In this article we discuss issues relevant to updating PPS rates and judging their adequacy. We describe a modification to the current framework for recommending annual update factors. This framework is then used to retrospectively assess PPS payment and cost growth since 1985. The preliminary results suggest that current rates are more than adequate to support the cost of efficient care. Also discussed are why using financial margins to evaluate rates is problematic and alternative methods that might be employed.