Calculating Pass-Through and Outlier Payments under APCs

Healthcare Financial Management, July, 2001 by Martin Gold, Susan Snodgrass

APC implementation teams should turn their attention to payment for low-volume, high-cost services.

Medicare's outpatient prospective payment system is based on ambulatory payment classifications (APCs) that group services into categories for payment. The relative weight of each APC is based on the median operating and capital cost of the services within the group based on hospital outpatient claims data for 1996. These data, however, do not accurately reflect the cost of innovative medical devices, drugs, and biologicals currently in use. To account for these developments, the Balanced Budget Refinement Act of 1999 (BBRA) established the transitional pass-through payment system to provide additional amounts above the applicable APC rate for innovative medical devices, drugs, and biologicals. The BBRA also established a cost-outlier adjustment. Successfully calculating payments for pass-through and outlier devices requires that financial managers have a thorough knowledge of the medical devices, drugs, and biologicals being used in their outpatient surgery departments.

The transition to Medicare's outpatient prospective payment system (PPS) based on ambulatory payment classifications (APCs) has proven to be a challenge for many hospitals. Adopting the new outpatient PPS is complex because it requires hospitals to implement new information system capabilities, ensure proper coding and documentation of medical services, and manage yet another challenge to financial viability. To meet this challenge, many hospitals have established APC implementation teams whose responsibility is to provide billing and coding training to hospital staff, restructure charge description masters, prepare policies and procedures for the new payment methodology and monitor implementation progress.

Many of these teams have focused initially on high-volume procedures, such as emergency services and radiological and diagnostic procedures. The time is right for these teams to begin focusing on the low-volume services that involve high-cost items to ensure consistent and reliable cash flow. Examples of such high-cost services include those that utilize radioactive seeds, biomaterials, cardiovascular devices, and neurological devices. A team's understanding of how APCs affect these high-cost procedures can have a dramatic impact on the profitability of these services.

Pass-Through and Outlier Payments

An APC represents a group of services that are similar clinically and utilize similar levels of resources. The relative weight of each APC is based on the median cost (operating and capital) of the services within the group. Median costs were developed based on trended hospital outpatient claims data for calendar year 1996. These data, however, did not accurately reflect the cost of innovative medical devices, drugs, and biologicals.

Improvements in technology and surgical expertise since 1996 either have allowed certain procedures performed on an inpatient basis to migrate to outpatient sites of service or resulted in entirely new devices and procedures. To account for these post-1996 developments, the Balanced Budget Refinement Act of 1999 (BBRA), Section 210(b), established the transitional pass-through payment system to provide additional amounts above the applicable APC rate for innovative medical devices, drugs, and biologicals. The BBRA also established a cost-outlier adjustment, similar to the inpatient DRG cost-outlier adjustment.

HCFA developed a list of innovative medical devices, drugs, and biologicals that qualify for a pass-through payment. The items that appeared on the original list were identified by the manufacturer's product name, rather than by device category and had been assigned a HCPCS "C" code specifically for use with the outpatient PPS. On December 21, 2000, then-President Bill Clinton signed into law the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA) of 2000. Section 402 of this act, "Clarifying Process and Standards for Determining Eligibility of Devices for Pass-Through Payments under Hospital Outpatient PPS," requires that new technology eligible for inclusion on the pass-through list be categorized by device type rather than by product name. This new category system went into effect on April 1, 2001.

Currently, only devices previously approved for passthrough status are included on the new category list. HCFA has given hospitals the latitude to bill for a product, even though it may not have appeared on the original list, if the product meets the new technology criteria and falls within an existing category. [a] HCFA also has indicated that billing and coding information provided by manufacturers may be used by hospitals to support coding decisions, though, as always, the ultimate responsibility for proper billing and coding continues to fall upon the hospital. HCFA will develop additional categories for products that do not fall within an existing category, as the need arises.

The pass-through payment system as it relates to a particular item is a temporary payment methodology. The current list of items eligible for pass-through payment is scheduled to expire January 1, 2003. At that time, the APC payment rates associated with the pass-through items will be adjusted to reflect the cost of those items as well.