Method of payment mandated by the Balanced Budget Act of 1997 (BBA) that changed Medicare hospital payments from cost based to prospective, based on national average capital costs per case. Examples of PPS include Medicare’s physician fee schedule and for inpatient diagnosis-related groups (DRGs) that set a predetermined, fixed dollar amount for a principal diagnosis. PPS helps Medicare control its spending by encouraging providers to furnish care that is efficient, appropriate, and typical of practice expenses for providers. Patients and resource needs are statistically grouped, and the system is adjusted for patient characteristics that affect the cost of providing care. A unit of service is then established, with a fixed, predetermined amount for payment. Sometimes called prospective reimbursement. Also see outpatient prospective payment system (OPPS).