HCFA published its final rules addressing the outpatient PPS on April 7, 2000. The final rules take into account both the BBRA statutory changes as well as HCFA's response to the comments received to its proposed rules. Although HCFA in its original publication of the final rule stated a July 1, 2000 effective date for the new PPS methodology, it recently pushed that effective date back one month, to August 1, 2000. In revising the effective date, HCFA asked hospitals not to collect beneficiaries' copayments until the system is fully operational. The effective date for implementation of the final rules addressing provider-based status is October 10, 2000.

The outpatient PPS regulations will result in marked changes both in the way hospitals are reimbursed for outpatient services and in the calculation of beneficiary liability for those services. It also will lead, almost certainly, to a reexamination by providers of their relationships with outside supplier entities (rebundling) and with clinics and other entities that, in the past, may have been included on the provider's cost reports (provider-based status). Finally, just as was the case with inpatient PPS, outpatient PPS in all likelihood will lead providers to study their service mix closely to determine which services can be furnished most economically in relation to the PPS payment rates. Hospitals can then be expected to emphasize those services while de-emphasizing items and services that are more costly in relation to the PPS payment rates.

Hospitals Included in/Excluded from Outpatient PPS (§ 419.20)
The new PPS system applies to all hospitals participating in the Medicare program except Maryland hospitals paid under a cost containment waiver (to the extent services are paid under this waiver) and critical access hospitals.

Services Covered under Outpatient PPS (§ 419.21)
Services subject to the outpatient PPS specifically include: (1) Medicare Part B services furnished to hospital outpatients which are not otherwise excluded; (2) services covered under Medicare Part B when furnished to hospital inpatients who either are not entitled to benefits under Part A or who have exhausted their Part A benefits but are entitled to benefits under Part B; (3) partial hospitalization services furnished by community mental health centers; (4) hospital outpatient services furnished to skilled nursing facility (SNF) beneficiaries for the following services furnished outside the scope of their SNF comprehensive plan: cardiac catheterization, CAT scans, MRIs, ambulatory surgery, emergency room services, radiation therapy, angiography, and lymphatic and venous procedures; (5) certain services (antigens, splints and casts, pneumococcal vaccine, influenza vaccine, hepatitis B vaccines) to patients of comprehensive outpatient rehabilitation facilities, home health agencies, or hospices if outside the scope of those benefits; and (6) certain preventive services.

Services Excluded from Outpatient PPS (§ 419.22)
Services excluded from the new system include: (1) services of physicians, nurse practitioners, clinical nurse specialists, physician assistants, certified nurse-midwives, qualified psychologists, anesthetists, and clinical social workers; (2) ambulance services; (3) outpatient physical and occupational therapy and speech-language pathology services; (4) prosthetic and orthotic devices and supplies (except implantable prosthetic devices (other than dental) including colostomy bags and supplies and replacement of such devices); (5) durable medical equipment that patients take home (except implantable DME); (6) clinical diagnostic laboratory services; (7) end stage renal disease services paid under composite rates and drugs and supplies; (8) designated services and procedures that require inpatient care; (9) services specific to other sites, e.g., nursing homes; (10) outpatient services furnished to inpatients at SNFs which are covered under the SNF PPS and consolidated billing rules; (11) services not covered by Medicare by statute; and (12) services not reasonable or necessary for the diagnosis or treatment of an illness or disease.

Inpatient-only Procedures
HCFA has designated certain procedures (Indicator "C") that represent procedures determined to require inpatient care because of their invasive nature, need for postoperative care, or the underlying physical condition of the patient who would require surgery. The proposed rule assigned 1803 codes to this category. In response to comments, HCFA assigned some of those procedures to ambulatory patient classification (APC) groups. The designated inpatient-only procedures are contained in Addendum E to the regulations. This list represents national Medicare policy and is binding on fiscal intermediaries and peer review organizations as well as hospitals and ambulatory surgery centers (ASCs). Where HCFA has designated a service as inpatient only, it will not pay for that service if performed on an outpatient basis, leaving the beneficiary in that circumstance with substantial liability. Conversely, HCFA has confirmed that services included in outpatient PPS and assigned to an APC may nonetheless be performed on an inpatient basis where the patient's condition warrants inpatient admission.

Ambulatory Payment Classification Groups (§§ 419.2, 419.31, 419.50)
HCFA has adopted a system which groups together services that are comparable clinically and with respect to the use of resources. The system is based on an outpatient services classification system developed by 3M-Health Information System (3M), which uses Ambulatory Patient Groups. The 3M system combines procedure codes and diagnosis codes into clinically related groups and analyzes claims data to determine if the codes are clinically similar. HCFA has developed mutually exclusive and exhaustive service groups called APC groups, each of which is identified by an APC number.

HCFA expanded its original proposal for 346 APC groups to 501 APC groups, to comply with BBRA requirements to limit the variation of costs within an APC group. The BBRA established that, with limited exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (elected by the Secretary of Health and Human Services, as opposed to the mean) cost item or service within a group is more than two times greater than the lowest median cost item or service within the same group. There are five criteria that are fundamental to the definition of a group within the APC system: resource homogeneity, clinical homogeneity, provider concentration, frequency of service, and minimal opportunities for upcoding and code fragmentation.

HCFA has designated 20 APC groups that are exceptions to the "two times" requirement. These exceptions are based on factors such as low procedure volume, suspect or incomplete cost data, concerns about inaccurate or incorrect coding, or compelling clinical arguments.

Services within the APC system are identified by HCFA Common Procedure Coding System (HCPCS) codes and descriptors. Payment for a service is based on the group of services in the APC group rather than on the individual service. HCFA has assigned payment status indicator codes for every HCPCS code. The table below lists types of services, the payment status indicator code assigned to each type of service, and the basis for Medicare payment for the service.

The BBRA requires at least annual review of the APC groups, relative payment weights, and the wage and other adjustments to take into account changes in medical practice, the addition of new services, new cost data, and other relevant information and factors. The BBRA further requires HCFA to consult with an expert outside advisory panel of providers to review the clinical integrity of the groups and weights.

Packaged Services (§ 419.2(b))
Those services which contribute to the cost of services in an APC group but are not paid for separately from the APC payment are considered "packaged services." Packaged items or services include use of an operating suite, procedure room, or treatment room; use of a recovery room or area; use of an observation bed; anesthesia; medical and surgical supplies and equipment; surgical dressings; supplies, and equipment for administering and monitoring anesthesia or sedation; intraocular lenses; capital-related costs; costs incurred to procure donor tissue other than corneal tissue; and various incidental services, such as venipuncture. In response to comments to the proposed rule, HCFA agreed to made separate payment for corneal tissue acquisition costs, based on a hospital's reasonable costs. However, HCFA stated in the preamble to the final rule that it intends to review this policy after it has acquired updated data on corneal procedures. Generally, the costs of drugs, pharmaceuticals, and biologicals are packaged into the APC payment rate, with the exception of additional payment under the transitional pass-through provisions discussed below.

The final regulations do not package the costs of the following items and services into an APC rate for another procedure or service: blood and blood products, including anti-hemophilic agents; casting, splinting, and strapping services; immunosuppressive drugs for patients following organ transplant; and certain other high cost drugs that are infrequently administered. Rather, HCFA has established new APC groups for these items and services, which allow separate payment for them.

Self-administered Drugs
Curiously, there is no mention of self-administered drugs in the final rule. Self-administered drugs currently are not covered under Part B. In the preamble to the proposed rule, HCFA acknowledged that this creates a problem for hospitals, because they can get paid for these drugs only by the beneficiaries but it is often not worthwhile for hospitals to try to collect for them. HCFA proposed to permit hospitals to furnish free self-administered drugs to patients. Hospitals would not be permitted, however, to advertise the benefit or in any other way induce patients to use the hospital's service in return for forgoing payment. Under these circumstances, HCFA stated, such action would not constitute an inducement in violation of the anti-kickback rules. HCFA's failure to finalize this proposal leaves hospitals still at risk.

Clinic and ED Visits
APC payment for medical visits to clinics and emergency departments will be determined by using only the Physicians' Current Procedural Terminology (CPT) codes, not by diagnosis code. However, diagnosis codes from the International Classification of Diseases, Ninth Edition, Clinical Modification (ICD-9) must be included on all claims, as HCFA will continue to assess the value of using patient diagnosis for future application to the payment system. HCFA acknowledged that while HCPCS codes are intended to represent different levels of physician effort, they do not reflect nonphysician resources. HCFA instructs hospitals to develop a system for mapping the provided services or combination of services furnished to the different levels of hospital resources represented by the HCPCS codes.

Outpatient encounters in which critical care is furnished must be coded using HCPCS code 99291 in place of, but not in addition to, a code for a medical visit or an emergency department service. If a patient dies in the emergency department, fiscal intermediaries are instructed to make payment under the outpatient PPS for the services furnished. If the emergency department or other physician orders the patient to the operating room for a surgical procedure and the patient dies in surgery, payment is to be made as follows: (1) if the patient was admitted as an impatient, payment will be made under the hospital inpatient PPS; (2) if the patient was not admitted as an inpatient, payment will be made under the outpatient PPS; and (3) if the patient was not admitted as an inpatient and the procedure is an inpatient-only procedure, no Medicare payment will be made for it, only for the emergency department services. Other services, such as surgery, x-rays, or cardiopulmonary resuscitation, furnished on the same day as critical care services may be billed separately by the hospital.

Partial Hospitalization
With regard to partial hospitalization program (PHP) services provided by a hospital outpatient department or a community mental health center (CMHC), the final rules use a per diem payment methodology to cover all PHP services except those professional services separately billable to a carrier (e.g., physicians, clinical psychologists, etc.). APC 0033 will have a per diem rate of $202.19. HCFA expects to refine this methodology now that hospitals and CMHCs have recently started to include line item dates of service on their claims. HCFA determined not to establish a half-day partial hospitalization group, and did not adopt a minimum number of requisite services for payment.

The final rule also includes a change, based on inpatient certification requirements, to the periodic physician recertification of the need for continuing PHP services. In addition to the initial certification upon admission, the first recertification is required on the 18^th day of service, and subsequent recertifications at least every 30 days (§ 424.24(e)).

Discounted Surgical Procedures (§ 419.44)
When multiple surgical procedures are performed during a single encounter, payment will be calculated by allowing full payment for the most expensive procedure and half the full amount for all other covered procedures. If a surgical procedure is terminated prior to completion due to extenuating circumstances that threaten the well-being of the patient, payment will be based on the full amount if the procedure is discontinued after the induction of anesthesia or after it has been started. Only half of the full payment will be made if the procedure is discontinued after the patient is prepared for surgery and taken to the room where the procedure is to be performed, but before anesthesia is induced. HCFA warned in the proposed rule that a pattern of canceled procedures will prompt medical review.

Pass-through for Innovative Medical Devices, Drugs and Biologicals (§ 419.43(e))
As a result of changes to the statute created by § 201(b) of the BBRA, the final rule provides for additional "pass through" payments to hospitals for: (1) current orphan drugs; (2) current drugs, biologicals, and brachytherapy devices used for cancer treatment; (3) current radiopharmaceutical drugs and biologic agents used in nuclear medicine for diagnostic, therapeutic, or monitoring purposes; and (4) new medical devices, drugs, and biologic agents whose costs were not paid for as hospital outpatient services as of 1996 and whose cost is "not insignificant" in relation to the hospital PPS payment amount. The pass-through payment for each product will be made for a period of at least two, but not more than three, years.

The additional payment for drugs and biologicals equals the amount by which 95 percent of the average wholesale price exceeds the applicable outpatient department payment amount that the Secretary determines is associated with the drug or biological. The additional payment for devices is the amount by which a hospital's charges for the device, adjusted to costs, exceed that portion of the outpatient department payment amount that the Secretary determines is associated with the device.

Total pass-through payments for a given year cannot be projected to exceed an "applicable percentage" of total payments, which for years before 2004 is 2.5 percent, and, for years 2004 and later, is 2.0 percent. If the pass-through payments exceed these percentages, the Secretary must reduce all pass-through payments to keep payments below the cap.

HCFA has placed some significant restrictions on pass-through payments. First, it has excluded from the definition of "new medical device" equipment, instruments, apparatuses, implements, and items that are generally used for diagnostic or therapeutic purposes, that are used for more than one patient, and that are not implanted or incorporated into a body part. These items, according to HCFA, are part of the hospital overhead and depreciation costs already recognized as part of the APC payments. HCFA acknowledges that there are certain new services that are dependent on new technology multi-use equipment, but states that it will reimburse the services related to those technologies through new technology APCs.

Second, HCFA has defined the term "not insignificant" to bar many items from qualifying for pass-through treatment. Under HCFA's standard, a new technology will have to satisfy the following three tests in order to qualify for pass-through treatment:

1. The reasonable cost of the drug, biological, or device must equal at least 25 percent of the total APC payment for the related service;
2. The reasonable cost of the new item must exceed the portion of the APC payment that HCFA determines is associated with the new item by at least 25 percent; and
3. The difference between the expected reasonable cost of the item and the portion of the APC payment associated with the item must exceed the total APC payment by at least 10 percent.

Finally, HCFA will not authorize pass-through payments until the new item has been approved by FDA and been assigned a HCPCS number by HCFA.

APC Group Weights and Rate (§§ 419.31, 419.32, 419.43(b), (c))
Pursuant to the BBA, HCFA was required to develop relative payment weights for covered groups of hospital outpatient services. HCFA developed the weights based on median hospital costs, using 1996 hospital outpatient claims and the hospital cost reports from the periods beginning on or after October 1, 1996, and before October 1, 1997. HCFA calculated median costs for services within an APC group using only the single-procedure bills.

The portion of payment and copayment attributable to labor-related costs is adjusted for relative differences in labor and labor-related costs across geographic regions. Costs are standardized for geographic wage variation, using 60 percent to represent the portion of costs attributable, on average, to labor. The hospital inpatient PPS wage index is used as the source of an adjustment factor for geographic wage differences. HCFA asserts that updates will be made on a calendar basis. These calculations yield a median cost for each APC group weighted by procedure volume. All the relative payment weights were scaled to APC 601, a mid-level clinic visit, because it is one of the most frequently performed services. APC 601 is assigned a relative payment weight of 1.0.

HCFA converted the relative weights determined for each APC group into payment rates. The prospective payment rate set for each APC group is calculated by multiplying the APC group's relative weight by a conversion factor. HCFA was required to calculate a budget-neutral conversion factor that would result in total estimated payments to hospitals under the PPS in 1999 equal to the total estimated payments that would have been payable from the Trust Fund in 1999 if PPS had not been enacted plus estimated beneficiary coinsurance for the same services during the same period.

Copayments (§§ 419.41, 419.42)
Currently, copayments for hospital outpatient department services are based on 20 percent of the hospital's billed charges. Those charges have increased faster than costs. As a result, the copayments for some services have accounted for 50 percent or more of payments to hospitals. The final regulations include a mechanism designed eventually to achieve a beneficiary copayment level equal to 20 percent of the prospectively determined payment rate established for the service. At the outset, the coinsurance for each APC will be frozen at 20 percent of national median charges billed in 1996 for the services in that APC. As the APC payment rate increases due to market basket increases, the coinsurance will become a smaller percentage of total payment, until it decreases to 20 percent of the APC rate. Thereafter, it will increase along with overall payment increases, so that it remains at 20 percent.

One wrinkle in this mechanism is that the BBRA provided that the copayment amount for each hospital outpatient procedure cannot exceed the inpatient deductible for that year ($776 in 2000). Any copayment in excess of this amount will be paid to hospitals by the Medicare program.

Hospitals (not CMHCs) may elect to offer a reduced copayment amount for some or all hospital outpatient department services, at an amount not less than 20 percent of the APC hospital payment rate outpatient PPS amount (§ 419.42). Such an election must be made in writing to the fiscal intermediary by June 1, 2000, and, for calendar years beginning 2001, by December 1 of the preceding year. The election must specifically identify the APC groups to which the hospital's election will apply and the copayment level that the hospital has selected for each group. The election will apply to all services within the APC group and will apply without change for the entire year. Hospitals may advertise reduced copayment levels, but must specify that the reductions apply only to specified services of that hospital. Deductibles cannot be waived. HCFA advises hospitals to consider that the national copayment amount under the new PPS system, based on 20 percent of national median charges for each APC group, may yield copayment amounts that are significantly higher or lower than the copayment that the hospital has previously collected. Elections to reduce copayments will not be taken into account in calculating transitional corridor payments (discussed below).

The proposed rule created anomalies in coinsurance for particular chemotherapy drugs, creating situations where the coinsurance would be many times the hospital's cost to purchase that drug. That situation was eliminated in the final rule, due to the fact that each chemotherapy drug is assigned to a separate APC. The unadjusted coinsurance amounts for these APCs is calculated as 20 percent of the APC payment rate.

Adjustments for Outliers (§ 419.43(d))
The BBRA required the final rule to include an outlier adjustment. An outlier payment will be made when calculated bill costs exceed PPS payments on a claim by more than 2.5 times until 2004, at which time the threshold increases to 3.0 times. Until 2002, outliers will be identified on a bill basis, using an overall hospital cost-to-charge ratio to calculate costs.

Transitional Corridors (§ 419.70)
The BBRA requires the Secretary to make payment adjustments during a transition period to limit the decline in payments under the outpatient PPS system for hospitals. These additional payments are to be made without regard to budget neutrality, and are in effect through 2003. To receive a transition payment, a hospital's payment-to-cost ratio for outpatient services must be less than a set percentage of its payment-to-cost ratio in its cost reporting period ending in 1996. The set percentages decline each year. HCFA asserts these changes in policy result in improved payments under PPS relative to the pre-BBRA law for nearly all classes of hospitals. Overall, hospitals receive an additional 4.6 percent in payment under PPS compared to pre-PPS law.

The BBRA provided that the ten cancer centers that are excluded from inpatient PPS are permanently held harmless with respect to their pre-BBA amount. For hospitals in rural areas with no more than 100 beds, the BBRA provided a special "hold harmless" provision through 2003, under which small rural hospitals will be paid a predetermined pre-BBA amount for services covered under outpatient PPS if payment under PPS would be less than the pre-BBA amount.

Claims Submission and Processing
Hospitals must assign HCPCS codes to services. HCFA decided not to use diagnoses to determine payments for clinic and emergency visits, and therefore the UB-92 will not be revised to require line item diagnosis. This means that separate claims do not need to be submitted for multiple clinic visits on the same day. HCFA has incorporated all current Correct Coding Initiative edits, except for laboratory and anesthesiology edits, to ensure that the most comprehensive of a group of codes is billed instead of the component parts. It will also check for mutually exclusive code pairs.

Volume Control Measures
Congress was concerned that the new system would result in inappropriate increases in the volume of outpatient services provided. HCFA proposed a volume control measure for FY 2000, but did not include that provision in the final rule. HCFA is delaying this provision to give hospitals time to adjust to PPS.

Prohibition Against Administrative and Judicial Review (§ 419.60)
The rules incorporate the statute's prohibition against administrative or judicial review of the (1) development of the APC system, including establishment of groups and relative payment weights, wage and any other adjustment factors, and methods for controlling unnecessary increases in volume; (2) calculation of base amounts; (3) periodic adjustments; (4) establishment of a separate conversion factor for cancer hospitals; (5) outlier payments adjustment factors; (6) marginal cost of care on applicable total payment percentages; and (7) factors used to determine additional payments for medical devices, drugs, and biologicals, including the duration of additional payments.

Prohibition Against Unbundling (§§ 410.42, 412.50)
In 1986, Congress extended the prohibition against unbundling of hospital services specifically to include outpatient services. Although HCFA published proposed regulations in 1988 to implement this provision, those regulations had never been finalized. HCFA nonetheless took the position that the prohibition on unbundling on hospital outpatient services was in effect, even in the absence of regulation.

The 2000 final outpatient PPS regulations at long last include the final regulations prohibiting the unbundling of hospital outpatient services. This means that Medicare will not pay for nonphysician services furnished to hospital patients (both inpatients and outpatients), unless the services are furnished by the hospital, either directly or "under arrangements." For outpatient services, the rule specifies that Medicare will not pay for an item or service furnished to a "hospital outpatient" during an "encounter" by an entity other than the hospital, unless that item or service is furnished "under arrangements." The preamble to the rule states that a freestanding entity may bill for services to beneficiaries who do not meet the definition of a "hospital outpatient." This appears to indicate that if a hospital outpatient goes to a non-hospital-based provider to receive a service ordered during an encounter, the patient is not considered a hospital outpatient for purposes of that service.

This prohibition on unbundling does not include the following services: (1) physician services payable under the physician fee schedule; (2) services of physician assistants, nurse practitioners, clinical nurse specialists, certified nurse mid-wives, qualified psychologists, and anesthetists, which can be billed separately; and (3) services furnished by a hospital to residents of a SNF that are part of a SNF comprehensive care plan and are covered under the SNF consolidated billing requirements. SNF consolidated billing rules do not apply to cardiac catheterization, CAT scans, MRIs, ambulatory surgery involving the use of an operating room, emergency room services, radiation therapy, angiography, and lymphatic venous procedures and, therefore, these hospital services and procedures are subject to the hospital bundling requirements. In response to comments, HCFA noted that laboratory tests must be provided directly or under arrangements by the hospital, and only the hospital may bill for those services.

The final regulations (§§ 1003.102 - 1003.103) also implement the statutory authority permitting the Office of the Inspector General to impose civil monetary penalties not to exceed $2,000 for each bill or request for items and services furnished to hospital patients in violation of the bundling requirements.