Proportional pricing: An equitable method of expanding the Prospective Payment System to non-Medicare payers

There has been increased interest in expanding the Medicare Prospective Payment System (PPS) to non-Medicare payers to provide incentives for hospitals to contain costs and to concentrate in those Diagnosis-Related Groups which they can provide efficiently. However, this should not force low-volume, low-cost payers to subsidize high-cost payers and should not penalize low Length-of-Stay, low-cost hospitals. This article proposes a new method – proportional pricing – to expand PPS incentives to non-Medicare payers with equity for payers and hospitals. It would also allow all-payer rate setting and premium price competition among payers to coexist.