Medicare outpatient payment reforms are approaching

Healthcare Financial Management, Feb, 1998 by Richard Gundling

The Medicare outpatient prospective payment system (PPS) has

been under discussion for years. Now, with the passage of the Balanced

Budget Act of 1997, it will become a reality Along with the outpatient PPS,

many other hospital outpatient provisions have been included in the

Balanced Budget Act. These include eliminating the formula-driven

overpayment language and extending the 5.8 percent reduction in operating

costs and 10 percent reduction in capital costs. The way beneficiary

coinsurance is computed also has been affected.

Ambulatory Payment Classifications

Medicare will institute a classification system for outpatient services

called ambulatory payment classifications (APCs) that will be based on the

3M/HIS ambulatory patient group (APG) classification system. There will be

about 300 APCs, which will include hospital outpatient services, hospital

inpatient services (if Part A coverage is exhausted), and outpatient

psychiatric services.

As with APGs, APCs will assign procedures, medical visits, and ancillary

services to groupings or classifications. The services within each APC will

be similar to each other, both clinically and in relative resource use.

Initially, the number of services included under one APC grouping will be

minimal. Ambulance services and physical, occupational, and speech therapy

services are excluded from these groupings.

Unlike DRGs, which are used to pay for inpatient services, payment for

multiple APCs resulting from a single outpatient encounter will be possible.

HCFA anticipates that APCs will require no changes in coding or billing

forms.

HCFA hopes that APCs can be used as an analytical tool for both payers and

providers. To build its APC database, HCFA is using 1996. claims and the

most recent cost reports to calculate the median hospital costs for each

grouping and determine APC weights. A conversion factor will be established

to convert weights to payment rates, which will be based on projected 1999

payments under the current system. Rates will be adjusted for area wage

differences. Multiple surgical procedures will be discounted.

Some issues are still under consideration, including whether to pay for

outliers, how to control volume increases anticipated under an outpatient

PPS, and what types of adjustments should be made for specific types of

hospitals. Impact analyses will be done to compare the effects of the

legislation on hospitals with demographic differences, eg, urban versus

rural, bed size, and teaching status. Exempt cancer and eye and ear

facilities and hospitals that are exempt from inpatient PPS also will be

analyzed. Hospitals that are exempt from inpatient PPS will not be exempt

from outpatient PPS.

The proposed rule on the weights and payment rates is scheduled to be

published in April or May of 1998. A 60-day comment period will follow

publication, with the final rule to be published by October 1, 1998. The

rule will take effect January 1, 1999. HCFA has noted that it could start

APCs for ambulatory surgery centers before January 1999. Annual increases to

payment rates will equal the hospital market basket minus 1 percent for

years 2000 through 2002. A specific market basket may be developed for

hospital outpatient services.

Unfortunately, until the proposed rule on APCs is published, healthcare

financial managers will not know specifically how the new rates will affect

their organizations. To facilitate their impact analyses once the rates are

known, financial managers should analyze their organizations' current

Medicare outpatient demographics.

Formula-Driven Overpayments

Currently, Medicare beneficiaries pay 20 percent coinsurance on most

hospital outpatient services, with every dollar in beneficiary coinsurance

resulting in a corresponding dollar decrease in Medicare's payment. However,

under formula-driven overpayment (FDO), an anomaly that occurred under

Medicare's blended payment methodology for hospital outpatient radiology

services and ambulatory surgery center procedures, Medicare payment amounts

actually increased.

Exhibit 1 illustrates the savings to [TABULAR DATA FOR EXHIBIT 1 OMITTED]

the Medicare program to be achieved by eliminating FDOs. Assume a hospital

charges $1,000 for an ambulatory surgery service. The hospital's costs are

$750, the ambulatory surgery center's payment rate is $585, and the

beneficiary coinsurance is $200 (20 percent of charges). Medicare payment is

calculated as the lower of reasonable costs, customary charges, or the

blended amount (net of any coinsurance or deductibles). Under the previous

blended method, Medicare would pay $502 for this surgery, but under the new

method, Medicare would pay $454 ($654 - $200).

Beneficiary Coinsurance

In 1999, the Medicare coinsurance amounts will be reduced so that eventually

equals 20 percent of each APC payment instead of billed hospital charges.

When the coinsurance is based on billed charges, the amount paid by the