CMS Pub. 100-16, ch. mc86c17b, § 290

The Social Security Amendments of 1983 (P.L. 98-21) provided that, effective with cost

reporting periods beginning on or after October 1, 1983, most Medicare payments for

Part A hospital inpatient operating costs are to be made prospectively on a per discharge

basis. Part A Inpatient Hospital operating costs include costs (including malpractice

insurance cost) for general routine services, ancillary services, and intensive care type

unit services. However, they exclude capital-related costs incurred prior to October1,

1991, when capital-related costs began to be paid based on a separate prospective

payment rate and direct medical education costs (which are paid using a different

method). Part B inpatient ancillary and outpatient service will continue to be paid

retrospectively on a reasonable cost basis.

The following hospitals and hospital units are exempt from the PPS:

• Hospitals located outside the 50 States and the District of Columbia;

• Psychiatric hospitals;

• Rehabilitation hospitals

• Long term hospitals;

• Children’s hospitals;

• Psychiatric and rehabilitation units of general hospitals which meet the separate

entity requirement of the Provider Reimbursement Manual, Part I, or §§1814 or

1886(c); of the Act; and

• Hospitals subject to State rate setting authority operated under §§1814 or 1886(c)

of the Act.

These hospitals will continue to be paid on the basis of reasonable costs, subject to

applicable target rate ceilings contained in §1886(b) of the Act.

NOTE: The exemption is not optional on the part of the provider but is required as long

as the hospital or hospital unit meets the definition for exemption.

In addition, other entities are paid on a prospective basis (including SNFs, Outpatient

Hospitals, etc.) under §1888(d) of the Act. Payments made for services will be governed

by the same rules that are used for Medicare beneficiaries not enrolled in a HMO/CMP.

For a detailed discussion of the PPS provision, see the Provider Reimbursement Manual

and the Intermediary Manual.