Transitional Corridors Delay Outpatient Payment Reductions - Brief Article

Healthcare Financial Management, June, 2000 by Richard L. Gundling

In the recently issued final rule for the outpatient prospective payment system (PPS), HGFA projected that hospital Medicare outpatient payment rates will increase by 4.6 percent in calendar years 2000 through 2001 compared with pre-PPS payment rates. [a] This projection reflects a dramatic departure from HCFAs original prediction of a decline in hospital outpatient payment rates of 5.7 percent.

HCFA attributes much of the 4.6 percent increase to the effects of the transitional corridor payments that were provided for in the Balanced Budget Refinement Act (BBRA) of 1999. The transitional corridor payment rates were created to mitigate the effect of the outpatient PPS on hospitals and will be in effect through 2003. Without these payments, HCFA predicts hospitals, in aggregate, would see only a 0.2 percent increase in outpatient payment rates, and many hospitals' rates would decline.

Many industry groups have disputed HCFAs optimistic predictions, pointing out that HCFA only used a fraction of the 1996 Medicare claims to arrive at its estimates. Yet even if HGFAs predictions are accurate, it is likely the positive effects of the transitional corridor payments will be only temporary. Most healthcare providers eventually could experience significant payment reductions.

How the Payments Work

HCFA will make payment adjustments in the form of additional payments during a four-year transition period to prevent hospitals from seeing an immediate, dramatic decline in Medicare outpatient payments. The BBRA requires that these additional payments be implemented without regard to budget neutrality

The amount of each hospital's payment adjustment depends on the difference between the hospital's PPS payment rate and its pre-BBA rate. In essence, the BBRA defines the PPS rate as the amount payable under the outpatient PPS for the hospital's covered outpatient services, excluding the effects of the transitional corridor adjustments and including coinsurance and deductibles. When calculating the PPS rate, HCFA includes the full coinsurance amounts even if a hospital chooses to reduce the coinsurance for some or all its services.

The pre-BBA rate is defined as the product of the hospital's reasonable cost for covered outpatient department services and the base outpatient department payment-to-cost ratio for the hospital. The base payment-to-cost ratio reflects the hospital's payment rate for covered outpatient services during the cost-reporting period ended in 1996 as compared with the reasonable cost of the services for the same period. The base payment-to-cost ratio will be calculated without the formula-driven overpayment (FDO), which has been in effect since October 1, 1997, but was eliminated by the BBA. The FDO was an element of Medicare's blended payment method for ambulatory surgery facility, radiology, and other diagnostic procedures. The way the FDO was used to offset the beneficiary coinsurance resulted in a greater Medicare payment increase than HCFA intended. The elimination of the FDO greatly reduces payment.

For calendar years 2000 and 2001, transitional corridor payment adjustments are calculated as follows:

* If a hospital's PPS rate is less than 100 percent, but at least 90 percent, of the pre-BBA rate, payment is increased by 80 percent of the difference;

* If the PPS rate is less than 90 percent, but at least 80 percent, of the pre-BBA rate, payment is increased by the difference between 71 percent of the estimated pre-BBA payment and 70 percent of the PPS payment;

* If the PPS rate is less than 80 percent, but at least 70 percent, of the pre-BBA rate, payment is increased by the difference between 63 percent of the pre-BBA payment and 60 percent of the PPS payment; and

* If the PPS rate is less than 70 percent of the pre-BBA rate, payment is increased by 21 percent of the pre-BBA payment.

For calendar year 2002, the following adjustments will be made:

* If the PPS rate is less than 100 percent, but at least 90 percent, of the pre-BBA amount, payment is increased by 70 percent of the difference;

* If the PPS rate is less than 90 percent, but at least 80 percent, of the pre-BBA rate, payment is increased by the difference between 61 percent of the pre-BBA amount and 60 percent of the PPS amount; and

* If the PPS rate is less than 80 percent of the pre-BBA rate, payment is increased by 13 percent of the pre-BBA amount.

Adjustments for calendar year 2003 will be as follows:

* If the PPS rate is less than 100 percent, but at least 90 percent, of the pre-BBA rate, payment is increased by 60 percent of the amount of the difference; and

* If the PPS rate is less than 90 percent of the pre-BBA rate, payment is increased by 6 percent of the pre-BBA amount.

Preparing for Full PPS Implementation

While the transitional corridor payments may lessen the impact of the outpatient PPS for a short time, these adjusted payments will cease January 1, 2004. Providers therefore should evaluate their outpatient service delivery and administrative processes now, before the outpatient PPS goes into effect July 1, 2000. This evaluation should include verifying that the organization's billing and coding processes are ready for the outpatient PPS (including ambulatory payment classifications). In particular, the organization should make sure its charge master is up to date, review the proper use of modifiers, and review data provided on each UB-92 to ensure it is a clean claim.