Bundling outpatient costs - Health Care Financing Administration's plans to expand prospective payment system to outpatient care with formation of Ambulatory Patient Groups - column

Business & Health, July, 1991 by Joyce Frieden

The Health Care Financing Administration, fresh from its success with a Prospective Payment System for Medicare hospital inpatients, wants to expand the concept to outpatient settings. On September 1, HCFA is due to precent a report to Congress outlining plans for Ambulatory Patient Groups. Since many private payers take their cue from Medicare, the result could be a change in the way all outpatient services are reimbursed.

HCFA would use 297 Ambulatory Patient Groups, or APGs, to form a visit-based outpatient prospective payment system similar to the diagnosis-related groups, or DRGs, now used by Medicare to pay for inpatient stays.

The goal is to save money, says a HCFA official who is helping develop the APG system, and who along with most others interviewed on this still-developing story, asked not to be named. With DRGs, inpatient costs went down, he notes. If a similar reaction occurs with APGs, "Medicare will be able to pay hospitals less in future years, while still allowing them to make money," he says.

Hospital adjustments

Another boon of APGs will be standardized payment systems for Medicare's fiscal intermediaries--those contractors--mostly insurers--paid by the government to administer Medicare claims in various regions of the country. FIs use 11 different payment systems, says the HCFA official.

In some ways, hospital billing would not change much with APGs; for instance, in treating a broken arm, the hospital might still bill for setting the arm and for the X-ray. In such a case, Medicare would combine two APGs into one, and pay that way.

Those outside the government are watching HCFA carefully. Says an American Medical Association spokesperson, "Since at the moment APGs appear principally to affect hospitals, we have not taken a position as yet."

The American Hospital Association was a little more vocal. "As it stands now, it's pretty burdensome administratively to pay hospitals the way they're being paid," says an AHA spokeswoman, noting that a single visit to a hospital outpatient department can trigger four different payment systems. "Everyone, including Congress and the hospitals, realizes there has to be some sort of change."

AHA is proposing a new ambulatory payment system, but unlike APGs, which concentrate on bundling all outpatient charges into a single payment, the AHA proposal is a procedure-based fee schedule. "The larger the bundle, the more difficult it is to capture individual differences," she says. "That means that some hospitals may feel the payment doesn't represent the time and resources devoted to the procedures. But a procedure-based scale does not seem to be the way the government is going." Either system will involve changes in hospital computer systems and administration, she adds.

The resulting system is likely to be a compromise between the two, say observers. For instance, a person with a broken ankle might have several procedures done, from getting the ankle set to getting X-rays to getting a cast put on. All these things would be bundled into a "broken ankle" APG, which would be based on the procedures done to the patient, not on the diagnosis, as with DRGs. "A procedure-based scale is not necessarily inconsistent with bundling," says one HCFA-watcher.

Insurer interest

What do private health insurers make of APGs? Are they likely to follow suit? "Our analysis so far has been on the Resource-Based Relative Value Scale [Medicare's new physician payment system]," says Don White, spokesman for the Health Insurance Association of America. HIAA is "aware" of APGs, he adds, noting that while the government has the authority to institute such a system, it's harder for private insurers. "Private insurers don't have the market clout to do it, with the exception of some Blue Cross plans that are the only game in town," says White.

Indeed, Blue Cross/Blue Shield plans are taking great interest in APGs, says Bob Snyder, director of payment policy and special projects at the Blue Cross and Blue Shield Association of America. "We certainly will be interested in what the government does."

Snyder notes that 26 Blues plans are using a DRG-type system to pay for inpatient care. Each plan sets its own local rates, he adds.