Medicare PPS finally hits outpatient sector HCFA pulls surprise on APGs
Drastic change in ASC rates also pending; some payments will fall
Congress and White House officials have finally made good on a promise to pull the plug on Medicare outpatient retrospective payments. After years of often thorny debate, the government has given Medicare officials a historic green light to proceed with a hospital outpatient prospective payment system (PPS).
For providers, the implications are enormous. Not since Medicare DRG-based payments were introduced more than a decade ago has Medicare taken such a drastic turn to rein in cost-based reimbursements.
Affected under the new system will be virtually all hospital-based ambulatory services paid for under Medicare, including routine emergency department visits and hospital-based ambulatory surgeries. The change, which was passed in the recent federal Balanced Budget Act of 1997, is expected to become effective Jan. 1, 1999.
In an unrelated but no less significant development, Medicare officials recently disclosed that they have undertaken a broad restructuring of the key ambulatory surgery center (ASC) payment schedule. The change will include these key features:
• The controversial eight-tiered ASC list, under which about 1,500 single same-day surgery centers are reimbursed by Medicare, will be expanded from the existing eight to an as yet undetermined number of total groupings. (Some sources speculate there will be as many as 14 tiers total.)
• Surgical procedures currently listed within the eight groups will be redistributed throughout the new payment levels and will be reimbursed in most cases at amounts higher than the current rates. Presently, the rates range between $312 and $900 per procedure. The top rate also will be increased beyond $1,000.
The basis for the new rates will be a sweeping 1994 Medicare ASC cost survey. According to the Health Care Financing Administration (HCFA) in Baltimore, the change is being implemented to better reflect present ASC costs and resource use.
• The new list will attempt to eliminate existing payment defects. Providers have long attacked the present schedule for statistical flaws and glitches that have resulted in low, unrealistic payments and errors that have addled financial departments.
The revised ASC schedule will be ready by mid-1998. HCFA has promised a notice of proposed rule-making by this December. (For what outpatient professionals think of both the hospital and ASC plans and a chart showing the evolution of the hospital PPS, see story, p. 75 and the chart, p. 76.)
Costs will overshadow charges
For hospitals, the historic new outpatient PPS is expected to dramatically alter the way thousands of acute-care facilities get paid under the $85 billion-a-year Medicare hospital-payment program.
Meanwhile, providers interviewed by Outpatient Reimbursement Management are assuming a "watch-and-wait" posture until HCFA provides more detailed explanations of the new hospital and ASC payment policies.
Most observers, including HCFA officials, believe that providers will initially be permitted to submit claims to their Medicare carriers as usual.
Regardless, many advise managers to begin honing their financial staff’s CPT-4 coding skills and assessing their automated information systems as early as possible.
"For awhile, the change will absolutely involve a new, unprecedented set of behaviors for coders and billers. But once your systems are in place, the process will be less nitty-gritty," says Robin L. Rojka, CPAM, director of patient financial services, Southwest General Hospital in Middleburg, OH.
Columbus-based Medical Mutual of Ohio has been paying providers prospectively using ambulatory patient groups (APGs) since January.
For hospitals, there are additional implications:
• Under the new system, acute-care facilities will no longer be paid according to a formula based on hospital-specific costs and charges as they do now. Instead, they will be paid a specific dollar amount for procedures and supplies according to a fixed schedule.
Payment rates will be based on aggregate rather than individual hospital costs. Unaffected will be lab and renal dialysis services, which already are paid under a fee schedule.
• Medicare officials as yet don’t know the effect the PPS will have on actual payments. But according to an analysis conducted by the accounting firm, Ernst and Young in Washington, DC, interim cost-based payments are likely to fall gradually until the new PPS is fully implemented.1
The new rates will be based on relative weights currently under development by HCFA. The weights will be determined by cost and charge data gleaned from Medicare cost reports for the years between 1993 and 1996. But in no case will total Medicare outpatient expenditures be any higher than they would have been in fiscal 1999 under the present system, according to HCFA.
• HCFA officials will update the entire payment schedule annually according to the market-basket increase (which is projected to be 3.5% from 1999 through 2001 and 3.4% in 2002) minus one percentage point in each of those years.
• APGs will play a crucial but as yet unclear role in the new PPS. For years, industry officials have been gearing up for prospective payment under the belief that the new system will employ an APG-based payment methodology. However, HCFA has stopped short of saying whether the current APG model, which was developed specifically for the Medicare PPS, will be the one used when the program kicks off in 1999.
"The [system] will be based on the 3M version 2.0 but with significant changes," according to a HCFA official who asked not to be identified. 3M Health Information Systems is the Murray, UT-based technology firm originally contracted by HCFA to develop the APG program.
• Although the payment methodology will resemble to some extent the 3M-devised model, the system may ultimately be referred to as something other than APGs, according to the HCFA official. The agency is said to be concerned that using the term APG for a modified 3M model will confuse providers. But industry observers believe any drastic deviation from the original 3M version, regardless of what it’s called, will inevitably confuse providers.
• The outpatient PPS effectively eliminates formula-driven overpayments (FDOs). HCFA has long wanted to end a payment problem that has cost Medicare $1.2 billion a year in overpayments. Due to an error in the way beneficiary coinsurance is computed (based on charges instead of the actual blended cost-charge calculation, which is lower than charges), both beneficiaries and Medicare end up paying facilities more than Medicare law allows.
Prospective payment now abolishes FDOs. (For a more detailed explanation of FDO’s, see ORM, March 1996, pp. 22-23.)
• The budget act also changes the way beneficiary copayments are calculated. Copays will be determined by a facility’s median costs instead of the present method of "whatever appears on the claim," says James Matthews, a policy analyst with the Washington, DC-based Prospective Payment Assessment Commission, a government-funded Medicare think tank.
Presumably, this means that facilities will see smaller copays in general. But not only will the coinsurance be smaller, "the payments are likely to be lower because now they’ll be based on a combination of aggregate median costs and charges," Matthews speculates.
Industry insiders expect payment levels to fall initially and grow by extremely narrow margins in the next five years. "The problem isn’t just Medicare. It’s the slew of private payers who’ll be coming afterward with their own APG-based systems," says Kate McComb, Medicare reimbursement analyst with Highline Community Hospital in Seattle.
Reference
1. Ernst and Young, LLP. Balanced budget shifts risk to providers and health plans. Direct Connection 1997; 97:2-9.
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