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Hospitals do get the Medicare inpatient prospective payment system IPPS for the beneficiaries of the inpatients stays. The hospitals, which furnish the inpatient care, have to accept the rate of IPPS. The benefits usually cover the beneficiary for the first 90 days inpatient and additional 60 days after discharge from the hospital. The discharges are usually assigned to diagnosis-related groups DRG, which is a category with the same illness by which the procedures furnished by the hospital. The determinant of the assignment is the complications of the illness after the secondary diagnosis. Thus, the Medicare has to review the DRG case which requires amount that is similar to the condition to cover the resources of the inpatient. The case of Mrs. Smith, who was hospitalized for a kidney transplant in an urban hospital in San Francisco, where Medicare covered the hospital expenses of $150000.

The payment for the beneficiary is accounted in relation to the severity of the diagnosis and procedures, which are relative to the weight of the cost for treating the illness of the patient. Since Mrs. Smith is an inpatient, her payment derived from the adjustments, which were applied to the capital base rate of payment that are set per discharge base rates. This is the cost, by which the hospital has to incur for Mrs. Smith services. The national operating base for IPPS was $5209.74 and the capital cost includes all the necessary assets and equipment that are necessary in providing services to inpatients, which is $421.42 (Hospital acute inpatient services payment system, 2010). (Wage index *labor related portion + non-labor related portion) = wage index.

150000* 68.8% = $103200 which is the DRG hospital payment.

This improves the compatibility as differences associated with the wage rates are eliminated. The geographical area factor is: (capital base * capital wage) = 421.42* 68.8 translating to$28648.56 determines the capital base and the operating base rates, as they are adjusted to reflect the local labor market. This classification aids Medicare in allocating the wage index applied to the share of labor in operating base rate. The rate is 68.8 percent as the share of labor, which is applied to wage rates that are higher than 1.0000.

Hospitals that care for patient with acute illness do get a 75 percent of reimbursement to cater for debts, which resulted due to non-payment by the beneficiaries. Mrs. Smith was in a hospital, which catered for acute illness, and thus there was payment of a 75 percent to cater for her services at the hospital during her stay. There are other policy amounts, which are paid to the hospitals through direct and indirect training of medical graduates as they reflect the cost, which is incurred by the programs of training (Acute Care Hospital Inpatient Prospective Payment System). Hospitals that train medical graduates, who are getting additional payments to cater for training, which is determined by the intensity of the hospital to train them. They also get an additional amount by treating patients of low income, which is adjusted through specially developed methods. The total payment for the hospital is; 5209.56+ 421.42= $169104. Those hospitals which are under the Medicare department receive an additional amount which is based on the specific payments of the hospital, location, its capacity and the number of the inpatient days which are attributed to the beneficiaries entitlement to Medicare.

Medicare also uses the outpatient payment system OPPS, when providing services to the patients. The OPPS is the payment of Medicare that is approximately 50 percent paid to hospitals for outpatients. The payment is individual, and is based on the services weight and the geographical difference in the input price and the conversion factor. More payments can be advanced to these facilities due to use of new technologies, which has seen a reduction in hospital payments in relation to cost based system (Hospital Outpatient Prospective Payment System). The payments for outliers are usually made to cases, which are found to be extremely costly, and are identified through comparison of their operating and the capital costs, which gives it a fixed cost of $22385. This promotes high quality care to patients, as the hospitals are paid 80 percent of the costs that is above the loss threshold. The post acute care is also included in the transfer policy for the home care when the patient has to receive care, which is clinically related after the hospital stay. The list of services for outpatient has been expanded to give the hospitals more incentives to consider the cost incurred to treat an outpatient, and this helps in reducing spending by Medicare.

The payments for outpatients are set in a way that they are separable to the medical and surgical services by the established relative weight of the services offered at the clinic. The geographical difference will then be established and accounted together with the labor payment rates, which are then adjusted by the wage index of the hospital (Outpatient hospital services payment system, 2010). The payments are additional to the cost of individuals that would have increased the cost of the hospital than the rate of payment for the services, and payment to specific drugs and service delivery equipments. The OPPS do have payment for hospitals that are lower than those of other policies, which they provide additional payments to make the difference. When all these payments to the hospital inpatient services and outpatient services were added together, it amounted to the cost by which Mrs. Smith incurred at the hospital catered for by Medicare.

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