Medicare hospital outpatient services and costs: implications for prospective payment

Health Care Financing Review, Winter, 1992 by Mark E. Miller, Margaret B. Sulvetta

Introduction

Congress has mandated the development of a Medicare prospective payment system (PPS) for HOPD services. In this article, we present a descriptive analysis of Medicare HOPD services, including analysis of the procedures most frequently provided to Medicare beneficiaries, the types of services that account for HOPD volume and spending, and variations in charges, costs, and case mix by hospital type.

Although movement toward the outpatient setting began in the late 1970s, more recently there has been unprecedented growth in outpatient services generally, and HOPD services specifically. Perhaps the most important force behind this growth is the technological advances allowing procedures to be performed outside the inpatient setting. However, the implementation of the Medicare inpatient PPS in 1983 appears to have added momentum to this process.

The growth in HOPD services is reflected in changes in hospital organization, utilization, and revenues. In 1981, 41 percent of hospitals had organized outpatient departments, compared with 69 percent by 1987 (Prospective Payment Assessment Commission, 1990). In the 5 years preceding implementation of the inpatient PPS (1979-83), the number of outpatient visits in all community hospitals increased by about 6 percent. In the 5 years following PPS implementation (1984-88), outpatient visits in these same hospitals increased 27 percent (American Hospital Association, 1990). The Prospective Payment Assessment Commission (ProPAC) reports that hospitals received 12 percent of their revenues from outpatient services in 1979, compared with 21 percent in 1989 (Prospective Payment Assessment Commission, 1990).

The rapid growth in HOPD services for all patients is mirrored by Medicare's experience. HOPD services are the fastest growing Medicare service. The Health Care Financing Administration (HCFA) Office of the Actuary estimates that in 1980 inpatient hospital services accounted for 66 percent of total Medicare payments, compared with HOPD services, which accounted for 5 percent. By 1989, inpatient hospital services accounted for 54 percent of total Medicare payments, and HOPD services accounted for 8 percent of the total (Prospective Payment Assessment Commission, 1990). The average annual increase in Medicare inpatient payments from 1983 through 1986 was 6 percent; during the same period, Medicare HOPD payments grew at an average annual rate of 17 percent. The success of the inpatient PPS and the continuing high growth rate of Medicare HOPD expenditures have spurred interest in an outpatient PPS.

Data

The data base constructed for this analysis comes from two primary sources, the Hospital Outpatient Bill (HOP) file and the Part B Medicare Annual Data (BMAD) file. The HOP file contains facility bills, and the BMAD file reports Part B (primarily physician) bills. Both files are random 5-percent samples of beneficiaries in calendar year 1987. (The BMAD file contains 100 percent of claims for end stage renal disease beneficiaries.) These two files were merged on the basis of beneficiary identification number and date of service. That is, for a given beneficiary on a given date of service, the file contains HOPD facility bills and related physician bills.

The reason for merging these data bases is to correct coding deficiencies in the 1987 HOP file. Hospitals reconcile with HCFA at the end of the year at the facility level, which is why precision at the claims level, particularly in 1987, is lacking. HCFA has been moving toward use of the HCFA Common Procedure Coding System (HCPCS), which incorporates the full range of Current Procedural Terminology, 4th Edition (CPT-4) (American Medical Association, 1987) codes as well as HCFA-created codes.(1) As a result of coding changes taking place at different points in 1987, there are three coding deficiencies in the HOP file: Many procedures (particularly medicine) are not HCPCS-coded at all, certain surgery claims have ICD-9-CM procedure codes only, and radiology, laboratory, and pathology claims are HCPCS-coded for only part of the year. (ICD-9-CM is the International Classification of Diseases, 9th Revision, Clinical Modification [Public Health Service and Health Care Financing Administration, 1981].) In contrast, the BMAD file contains complete HCPCS coding. A merged HOP-BMAD file allows us to use HCPCS procedure codes from the BMAD file to correct HOP file coding deficiencies.

There are a total of 1,993,246 claims in the 1987 HOP file. BMAD claims are composed of line items representing different services. Screening records (e.g., for duplicates, invalid dates of service, zero-charge claims) and merging the HOP and BMAD files results in 1.2 million HOP claims linked with 2.5 million BMAD line items for about 545,000 beneficiaries. If one makes the assumption that the HCPCS code reported on the associated physician bill approximates the missing code on the HOP claim, HCPCS codes from the physician bill can be used to fill in missing codes on the HOP claim. HOP claims are generally linked to few physician line items: 51 percent of HOP claims are linked to one BMAD line item; another 25 percent are linked to two BMAD line items.