Which statement correctly differentiates cost-based reimbursement and prospective payment systems?

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The main distinction is how reimbursement is determined after care is delivered. Cost-based reimbursement pays the provider for the actual costs incurred to deliver care, covering the precise dollars spent on labor, supplies, overhead, and related expenses (often with some allowed markup). Prospective payment systems, by contrast, set a predetermined, fixed rate for a defined episode or service in advance, so the provider receives that fixed amount regardless of the actual costs.

This difference shapes incentives: cost-based payments reduce financial risk if costs run high, but they can reduce pressure to control costs. Prospective payments encourage efficiency because spending more than the fixed rate cuts into profit, while spending less increases it. A real-world illustration is hospital payment history versus DRG-based systems, where admissions are paid a fixed amount by diagnosis group rather than reimbursement tied to exact costs.

The other statements don’t fit because they mischaracterize how these methods work or introduce self-pay as the basis, which isn’t what differentiates cost-based from prospective payment.