On September 8, 1998, HCFA issued proposed rules which would completely change the way in which the Medicare program reimburses hospital outpatient costs. See 63 Fed. Reg. 47,552 (Sept. 8, 1998). The Balanced Budget Act of 1997 (BBA) mandated implementation of PPS for the payment of outpatient services provided by most hospitals, effective January 1, 1999. However, HCFA is delaying implementation until "as soon as possible after January 1, 2000," due to year 2000 systems concerns. A notice will be published in the Federal Register at least 90 days prior to implementation. HCFA anticipates that under the new rules, the average hospital will experience an 8 percent reduction in outpatient Medicare payments and a total Medicare payments reduction of 0.4 percent. The proposed rules also include provisions addressing the elimination of formula-driven overpayments, reductions to hospital outpatient operating costs through January 1, 2000, civil monetary penalty (CMP) provisions for unbundling services, and new requirements for provider departments and provider-based entities. (The proposed regulations for provider departments and provider-based entities are discussed in Tom Coons and my article "New Outpatient and Provider-based Standards Proposed")

Outpatient PPS
Scope
Under the proposed rules, the new system applies to all hospitals participating in the Medicare program except Maryland hospitals paid under a cost containment waiver and critical access hospitals. 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; and (4) certain services to patients of comprehensive outpatient rehabilitation facilities, home health agencies, or hospices.

Services not subject to the new system include: (1) services of physicians, nurse practitioners, physician assistants, certified nurse-midwives, qualified psychologists, anesthetists, clinical social workers; (2) ambulance services; (3) physical and occupational therapy and speech-language pathology services; (4) prosthetics and orthotics; (5) durable medical equipment patients take home; (6) clinical diagnostic laboratory services; (7) end stage renal disease services; (8) services and procedures not safely furnished in an outpatient setting or that require inpatient care; (9) services specific to other sites, e.g., nursing homes; (10) certain services furnished to inpatients at SNFs which are covered under the SNF PPS; (11) services not covered by Medicare; and (12) services not reasonable or necessary for the diagnosis or treatment of an illness or disease. With regard to item 8, HCFA provided a list of the procedures which it asserts should be provided only in an inpatient setting. While it acknowledged having classified some procedures in outpatient groups that may seem closely related to procedures on the inpatient services list, HCFA expects that when these services are performed in the outpatient setting, they will be only the simplest, least intensive cases.

Ambulatory Payment Classification Groups
HCFA proposes to adopt 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 modified the 3M system by establishing 346 mutually exclusive and exhaustive service groups called ambulatory payment classification (APC) groups, each of which is identified by an APC number. The APC groups can be broken into five categories: surgery, radiology, other diagnostics, medical visits, and all other APC groups. HCFA intends to use the same APC groups for the ambulatory surgical center (ASC) payment system, which it proposed on June 12, 1998.

HCFA does not intend to routinely reclassify services and procedures from one APC group to another, but will make these changes if it would improve a group either clinically or with respect to resource consumption. Such changes will be made through notice and comment. HCFA does not intend to create an APC group for an entirely new code, but will assign any new code to an existing group for at least two years while accumulating data on its costs relative to the other APC codes.

Services within the APC system are identified by HCFA Common Procedure Coding System (HCPCS) codes and descriptions. Payment for a service will be based on the group of services in the APC group rather than on the individual service. HCFA is soliciting comments on the appropriateness of coding clinic and emergency visits using Physicians' Current Procedural Terminology (CPT) codes or International Classification of Diseases Ninth Edition, Clinical Modification (ICD-9) codes or a combination of both. HCFA also proposes to create a HCPCS code to bill for screening services where no treatment is provided. Under the new code, if more than one physician is consulted, only one screening bill would be permitted. HCFA further proposes to pay for critical care using CPT code 99291 in place of, but not in addition to, a code for a medical visit or an emergency department service.

Packaged Services - 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 to be "packaged services." HCFA is proposing to use the same packaging for ASC and outpatient services. Packaged services include the operating room, recovery room, anesthesia, medical/surgical supplies, pharmaceuticals, observation, blood, intraocular lenses, casts and splints, donor tissue, and various incidental services such as venipuncture. However, HCFA has created a separate drug group for chemotherapeutic agents, because they were separately identified in 3M's system. HCFA is soliciting comments for allowing other high-cost drugs to be paid for separately but would require HCPCS coding of all such drugs or drug categories in order to gather the data necessary to separately evaluate their cost.

Currently, self-administered drugs are not covered under Part B. HCFA acknowledges that this creates a problem for hospitals, because hospitals can get paid only by the beneficiaries for these drugs but it is often not worthwhile for hospitals to try to collect for them. HCFA proposes to permit hospitals to furnish free self-administered drugs to patients. However, hospitals would not be permitted 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 states that such action would not constitute an inducement in violation of the antikickback rules.

Partial Hospitalization - With regard to partial hospitalization, HCFA proposes to use a per diem payment methodology. Its current data would set the per diem rate at $208.25, of which $46.77 is the beneficiary's copayment. HCFA solicits information to assist it in refining the median cost for a day, and information regarding the mix of services that constitute a typical partial hospitalization day. HCFA is considering whether to establish a half-day partial hospitalization group, whether to adopt a minimum number of requisite services for payment, and whether to require periodic physician recertification of the need for continuing services.

Discounted Surgical Procedures - 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 the procedure is 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 that a pattern of canceled procedures will prompt medical review.

APC Group Weights and Rate
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 most recent available hospital cost reports. 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 will be used as the source of an adjustment factor for geographic wage differences. HCFA asserts that updates will be made on a calendar basis.

These procedures resulted in a median cost for each APC group weighted by procedure volume. All the relative payment weights were scaled to APC 91336, a mid-level clinic visit for cardiovascular services, because it is one of the most frequently performed services. APC 91336 was assigned a relative payment weight of 1.0. HCFA is soliciting comments on how frequently it should recalibrate the weights and what method and data should be used. Such updating must be in a budget-neutral manner.

HCFA's next step was to convert 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 calculated a conversion factor that would result in payments to hospitals under the PPS in 1999 equaling the total projected payment specified in section 1833(t)(3)(A) of the Social Security Act.

Calculation of Medicare Program Payment Amount and Copayment Amount
Currently, copayment for hospital outpatient department services is 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 BBA and corresponding proposed regulations include a mechanism designed to eventually achieve a beneficiary copayment level equal to 20 percent of the prospectively determined payment rate established for the service.

Hospitals 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 hospital outpatient PPS amount. Such an election must be made in writing to the fiscal intermediary no later than 90 days prior to the start of the calendar 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. 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.

Adjustments for Outliers or Specific Classes of Hospitals
HCFA asserts that no adjustments need to be made for outliers or certain classes hospitals. HCFA does, however, express concern about the potential impact of the outpatient PPS on low-volume rural hospitals that are sole community hospitals or Medicare-dependent hospitals. Due to their high costs, HCFA is considering phasing-in the outpatient PPS for these entities by paying a portion of the payment based on PPS rates and a portion based on the current payment system. It is also considering the option of phasing-in outpatient PPS if one such entity has a negative Medicare margin for outpatient services.

Claims Submission and Processing
Hospitals must assign HCPCS codes to services. The diagnosis identified on the claim need not be the "principal" diagnosis, as required under inpatient PPS. Under outpatient PPS, the diagnosis is the reasons for the visit as identified at the time of the visit. For clinic and emergency department visits, the diagnosis on the claim should relate to the reason for the visit. A patient who attends several different clinics in one day should have separate claims submitted for each clinic visit, since at this time only one diagnosis can be associated with each claim. HCFA intends to amend the UB-92 to allow for the submission of multiple diagnoses.

HCFA proposes to apply its Correct Coding Initiative to ensure that the most comprehensive of a group of codes is billed instead of the component parts. It would 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. To control for the possibility of an increase in costs due to an increase in volume, the statute and regulations permit an adjustment to the update factor. Specifically, HCFA intends to establish a base expenditure target for calendar year (CY) 1999, which estimates the aggregate amount payable for hospital outpatient services in that year. That amount would be calculated by adding the amounts payable from Medicare, without regard to the PPS, to copayment estimates to be paid by beneficiaries under PPS. The resulting target amount would be updated to CY 2000, based on the conversion factor (i.e., adjusted by the hospital inpatient market basket percentage increase less one percentage point), estimated changes in volume and intensity of services, and estimated changes in beneficiary enrollment. HCFA will then compare the target amount for CY 2000 to an estimate of actual CY 2000 costs. If HCFA concludes there have been unnecessary volume increases, it will adjust the CY 2002 update to the conversion factor. The adjustment will equal the percentage by which the estimated payments exceeds the target. HCFA is considering other options to control for volume in years after CY 2000.

Prohibition Against Administrative and Judicial Review
The proposed 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; and (4) establishment of a separate conversion factor for cancer hospitals.

Other Affected Areas
Elimination of Formula-driven Overpayment
Prior to enactment of the BBA, the blended payment formulas for outpatient surgical procedures, radiology, and other diagnostic services did not recognize the full amount paid by the as "formula-driven overpayments." The BBA and proposed regulations are intended to correct this. Effective for services rendered on or after October 1, 1997, payment for outpatient surgery, radiology, and other diagnostic services under blended payment methods will be calculated by subtracting the full amount of copayment due from the beneficiary, based on 20 percent of the hospital's billed charges.

Extension of Reduction to Hospital Outpatient Operating Costs
The statutory provisions for cost reductions to amounts otherwise payable for hospital outpatient operating and capital costs, 5.8 percent and 10 percent, respectively, were scheduled to expire at the end of 1998. The expiration date has been extended to December 31, 1999.

Civil Money Penalties for Unbundled Services
The proposed rule increases the fine from $2,000 to $10,000 per violation for any individual or entity who knowingly and willfully presents a bill for nonphysician or other bundled services not provided directly or under an arrangement with the hospital. This includes unbundling of inpatient and outpatient services.