Final answer:
The Skilled Nursing Facility Prospective Payment System uses a patient-driven payment model, which allocates funding based on the individual care needs of patients rather than services performed, aiming to incentivize tailored care and address adverse selection.
Step-by-step explanation:
The Skilled Nursing Facility Prospective Payment System (SNF PPS) uses a patient-driven payment model. This payment system stands as an alternative to the traditional fee-for-service system, where providers are compensated for each service they perform. In contrast to a cost-based model which aligns reimbursement with the cost of services rendered, or managed care systems like Health Maintenance Organizations (HMOs), which pay providers a set fee per patient, the SNF PPS model bases reimbursement on the care needs of the patients.
Under this model, payment rates are determined by the characteristics of the patients receiving care, including conditions like comorbidities and functional status, so payments reflect the expected costs of care. This shift towards a patient-driven payment model aims to incentivize care that is tailored to individual patient needs and reduces the potential for over-utilization of services, thereby addressing issues of adverse selection. Adverse selection occurs when there is asymmetric information between insurance buyers and the insurance company regarding risks, potentially resulting in the mispricing of insurance products.