What is the primary function of a prospective payment system?

The primary function of a prospective payment system is to set projected healthcare costs and reimbursement rates. This model operates by establishing predetermined payment amounts for specific services before they are delivered, thus allowing healthcare providers to receive a fixed payment rather than reimbursement based on the actual costs incurred. The approach aims to promote efficiency by incentivizing providers to offer care at lower costs while maintaining quality. This system is commonly used in programs like Medicare, where it facilitates budgeting and financial forecasting for both the government and healthcare institutions. By focusing on pre-established rates, the prospective payment system helps control healthcare expenditures and provides transparency in the reimbursement process.