Preparing for Medicare's APC system - Ambulatory Payment Classification - Cover Story

Healthcare Financial Management, July, 1999 by Donn G. Duncan

The imminent arrival of Medicare's Ambulatory Payment Classification (APC) system, HCFA's new outpatient prospective payment system (PPS), is expected to have as significant an effect on out-patient health care as the Diagnosis-Related Groups (DRG) system had on inpatient health care when it was launched in the early 1980s. Unlike the inauguration of the DRG system, however, the APC program is not expected to be as forgiving to organizations unprepared to implement the new prospective payment systems. Since the APC program will be put into effect, HCFA says, "as soon as possible after January 1, 2000," healthcare financial managers should be preparing now.

For hospital outpatient departments, Medicare's new outpatient prospective payment system, the Ambulatory Payment Classification (APC) system is sure to mean a transformed healthcare landscape, full of opportunity and risk. The new system, authorized by the Balanced Budget Act of 1997, was first detailed in HCFA's proposed regulation published in the Federal Register September 8, 1998.(a) Although the original implementation date of January 1, 2000, has been delayed as HCFA has shifted its priorities to ensure it achieves information systems compliance for the year 2000, implementation is to "occur as soon as possible after January 1, 2000." Meanwhile, HCFA also has extended the period for commentary several times. [Editor's note: As this issue of HEALTHCARE FINANCIAL MANAGEMENT goes to press, the most recent extension for commentary was scheduled to end June 30, 1999.]

Some experts predict, however, that the APC system will not be as forgiving as the DRG system was to organizations that were slow to respond to the requirements of the new system as it was put into effect. There are no mechanisms within the proposed regulations to protect organizations from significant swings in payments. Organizations providing a significant volume of outpatient services may require from six months to a year to adequately prepare for the APC system; failure to do so may put them at financial risk. Exhibit 1 (page 43) compares some of the differences between inpatient PPS and outpatient PPS.

Not all providers of outpatient services will be negatively affected by the APC system. Facilities that are highly competitive and understand the outpatient product lines in their markets may find the APC system provides unexpected windfall opportunities. Those providers that have high costs associated with their outpatient services, however, could well find themselves in trouble, especially if they have not prepared well in advance of the system's implementation. The APC system will not facilitate high-cost providers with cost-based Medicare payments. Financial managers will want to begin examining the ramifications of the APC system to their organizations, if they have not begun the process already.

AN INCENTIVE FOR GREATER EFFICIENCY

An outpatient prospective payment system has, perhaps, been inevitable because of the effectiveness of the inpatient DRG payment system in substantially reducing Medicare expenditures for inpatient services. A 1989 Brookings Institution study estimated that Medicaid program savings would be $18 billion lower in 1990 than had been projected prior to implementation of the DRG system.(b) With 1995 total Medicare outpatient payments five times greater than 1983's total payments, the demand for a similar limit on Medicare payments in the outpatient arena could not be denied.

With the APC system, hospital-sponsored day surgery and free-standing ambulatory surgery centers soon will have a greater financial incentive to help keep Medicare costs down. According to David Fee, 3M Health Information Systems product manager, many states will alter their Medicaid payment structures to prospective payment systems as well, and many other third-party insurers probably will fall in line.

The payment classifications of the APC system are modeled on Ambulatory, Patient Groups (APGs), a system developed in 1990 by 3M Health Information Systems under contract with HCFA. The system will affect virtually every hospital-based ambulatory service paid for under Medicare, including emergency department visits and day surgeries performed using hospital facilities. The APC system also forms the basis for a reimbursement system being developed by HCFA for surgeries performed in ambulatory, surgery centers. Almost all free-standing, Medicare-licensed ambulatory surgery centers and hospital outpatient departments (with the exception of critical care facilities) will be required to implement the system in 2000.

Many outpatient departments will have to undergo a significant transformation in the way they operate if they expect to operate successfully under the APC system. Much of this change, however, which often will require an organization to improve its documentation and coding and modify its information systems, would appear to be a function of good management practices. Hospital outpatient and free-standing surgery center managers who worked with the APC system's predecessor, the APG system, have discovered that such a change affords an opportunity to upgrade their organizations' financial management practices. In fact, a number of managers contend that the APC system could be a blessing in disguise for administrators of outpatient services departments.