Toward a prospective payment system for ambulatory surgery

Health Care Financing Review, Spring, 1990 by Joanna Lion, James Vertrees, Alan Malbon, Ann Collard, Peter Mowschenson

Toward a prospective payment system for ambulatory surgery

Introduction

The purpose of this article is to evaluate the feasibility of using diagnosis-related groups (DRGs) for a prospective payment system for hospital outpatient ambulatory surgery for Medicare beneficiaries. Although the DRGs were neither designed nor intended for this purpose, the simplicity of their use in this context, if feasible, would be of obvious appeal. In addition, an assessment of this option was of interest to staff in the Executive Office of Management and Budget and must therefore be reckoned with in designing any prospective payment system.

Background

This analysis is especially timely because Congress has mandated that the Health Care Financing Administration (HCFA) design a prospective payment system for ambulatory surgery to be implemented in 1990. (This system was initially mandated by the Omnibus Budget Reconciliation Act of 1986 (OBRA 86) for April 1, 1989, with recommendations concerning implementation of a full prospective payment mechanism for ambulatory surgery services by October 1, 1989. An interim system is in place pending development of a final system.) Extension of the prospective payment system to all hospital outpatient ambulatory care provided to Medicare patients is required by 1991.

Although the initial prospective payment system is limited to ambulatory surgery in hospital outpatient departments (OPDs), a reimbursement system for ambulatory surgery cannot be designed in a vacuum. This is because at least four additional issues, three of them also mandated for congressional examination, impact on the design of a payment system for hospital-based ambulatory surgery.

The first congressional requirement is that a "blended rate" be used in reimbursing hospital OPDs for doing surgery that is also done in freestanding ambulatory surgery centers. Until October 1987, payment for hospital OPDs was on a cost basis. Current payment is based on the least of the hospital's reasonable cost, customary charges, or a blend of the hospital's reasonable cost and the ambulatory surgery center's prospective payment rate. Since October 1988, this blend has been 50-50.

Effective October 1, 1988, payment for OPD radiology is also based on a similar blended amount that is the lowest of cost, charges, or 62 percent of the radiologists' global fee schedule. Effective October 1, 1989, approximately 100 other diagnostic services--such as EKGs--are paid on the least of cost, charges, or a 65-35 blend of OPD cost and the technical component of physician's office charges.

Meanwhile, the Prospective Payment Assessment Commission (ProPAC) has suggested that a regional factor in ambulatory surgery reimbursement be included so that payment would be made one-third on national hospital cost estimates, one-third on the hospital's own cost estimates, and one-third on the ambulatory surgery center blended rate. Despite all these changes in reimbursement methodology, there is obviously still considerable financial incentive for hospitals to deliver as much care as possible on an outpatient basis although this incentive is not as strong as in the first 4 years of the prospective payment system.

The second congressional mandate is, of course, the extension of a prospective payment system to all hospital outpatient department care for Medicare beneficiaries by 1991. Although hospital-based ambulatory surgery is highly visible, it actually accounts, in both volume and cost, for a minority of the care delivered to Medicare beneficiaries in hospital OPDs. In 1985, visits involving a surgical procedure were estimated at about 5 percent of all visits and about one-quarter of all billed charges (Bowen, 1988). For fiscal year 1989, ambulatory surgery as a percent of total billed charges had increased to approximately 35 percent of all hospital OPD care (Brandeis University, 1990).

The third congressionally mandated requirement involves the whole issue of reimbursement for physicians' fees. This broad issue is currently the subject of a large HCFA-funded project at Harvard. Investigators of the physician fee project are in the process of attaching relative values to the entire range of services performed by physicians--including, of course, surgery performed in an ambulatory setting (Boyle, 1988; Hsaio, 1988). This mandate does not technically affect the first and second mandates, because the first two are specific to the facility component of hospital OPD care, whereas this one is specific to the professional component of all care rendered across all settings, whether hospital inpatient, hospital outpatient, or physicians' private offices. Nevertheless, the issues do overlap, to some extent, because physicians doing surgery in their private offices (rather than setting up ambulatory surgery centers) pay all of their expenses out of the professional component instead of billing separately for both facility and professional components as hospital OPDs and freestanding surgery centers do.