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

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

There is no question that the system currently used by Medicare to pay for outpatient services is complex. Some services are paid based on a fee schedule. Others are paid at cost. Yet others use a blended rate. At year's end, a provider's total costs are reviewed and are reimbursed - a "hold harmless" provision. (This reimbursement process can take several years.) A huge change will occur in 2000 as the "hold harmless" provision is eliminated.

With the new system, payments are set in advance. In effect, outpatient providers will be sharing the risk of treating Medicare patients. If costs exceed the predetermined payment, the provider will suffer the loss. If, however, services are delivered at a lower cost than the defined payment, the provider will realize a profit, This means, of course, that under the new PPS, efficient facilities will enjoy an advantage over higher-cost providers in their markets.

The APC system is designed to define and explain the amount and type of resources used during a single outpatient visit. The ambulatory payment classifications are divided into surgical, medical, and ancillary-only groups, with a total of 347 classifications defined. Therapies (physical, speech, and occupational), laboratory services, ambulance, screening mammography, durable medical equipment, partial hospitalization, and end-stage renal disease dialysis are to be paid on a fee schedule.

In arriving at a final payment amount for each visit, the new system packages or "bundles" certain predefined services performed during the same visit. These services include those that do not require significant added time and resources or that are routinely performed with certain diagnoses and/or procedures, such as X-raying and casting a fracture.

The new system provides incentives to encourage facilities to make good management decisions. For instance, the prospective payment established for a certain type of outpatient visit, including the routine services associated with such a visit, will provide outpatient facilities with an incentive to evaluate and possibly change the number of services they provide.

Once the APCs are assigned for a single visit, each receives a relative weight based on national averages and the relative value of the effort needed and the resources used for that APC. All of the weights for the visit are added and multiplied by a base rate to convert the relative weights to a dollar value for reimbursement. Supplies or services that have been packaged as part of the patient visit - anesthesia, observation, drugs (excluding chemotherapy), and medical/surgical supplies - have no separate payments applied to them. A discount, estimated at about 50 percent, is applied to certain significant procedures on the second and subsequent occurrences. The total payment for a claim includes fee-schedule services in addition to APC payment.

BENEFITS OF THE APC SYSTEM

Even though this change in the way Medicare will handle outpatient payments may at first cause feelings of unease, the system is likely to provide managers with an effective tool for efficiently managing their facilities and augmenting profitability. When DRGs were put into effect in 1983 for inpatient reimbursement, some experts predicted that the new PPS would prove disasterous for hospital finances. The reality, however, based on data from HCFA and the American Hospital Association, show that the intervening years have seen a net improvement in operating margins for hospital inpatient services.