Medicare's Coming Fee Clampdown: What it Means to You

Ever since ambulatory surgery centers first came to be, they have competed with hospitals for outpatient surgical cases. Now, changes in Medicare reimbursements could put these service sites on a more level playing field by doling out payments under similar systems, increasing the number of procedures that can be done in ASCs, and obliging both hospitals and ASCs to take a hard look at their costs. In the very near future, hospitals will have to start adopting the same cost-cutting and efficiency-increasing strategies that ASCs have employed from day one, while ASCs will have to hone these strategies even more.

Changes to the reimbursement system were set in motion in 1998, when the Health Care Financing Administration (HCFA) published two proposed rules concerning payment for outpatient surgical services. The first came in June and concerned payment for services provided in ASCs. It proposed sweeping changes to existing Medicare payment rates, methodology, and policies for ASC services. The second, published just three months later, proposed comparable changes for outpatient services, including surgical services, provided in hospitals. This latter rule proposed to replace Medicare¹s existing cost-based reimbursement system for hospital outpatient services with a prospective payment system (PPS). These two proposed rules, if implemented, will vastly alter payment for and delivery of outpatient surgical services.

Why is this happening? When will it all take place? And how will it affect you? In this article, we'll explain the legislation behind these changes and try to answer these pressing questions.

PPS Comes to the Outpatient Department

Medicare's payment methodology for hospital outpatient services has changed little since the program's inception more than 30 years ago. While hospital inpatient services came under a PPS in 1983, Medicare has continued to pay for outpatient services through a retrospective cost-based system. The Balanced Budget Act of 1997, however, set the wheels in motion to change all that, requiring that Medicare begin using a PPS to pay for outpatient services.

HCFA unveiled the new payment system in September 1998. Like the hospital inpatient PPS, the proposed outpatient PPS would classify services into numerous payment groups. Currently, inpatient services are grouped by Diagnosis-Related Groups, or DRGs, which classify patients based on their principal diagnosis, comorbidities, complications, and age. The outpatient classification methodology, called Ambulatory Payment Classification (APC) Groups, seeks to categorize procedures based on time, type of service, body system involved, and the costs of performing the procedure. HCFA proposed to assign every outpatient procedure to one of 346 APC groups.

For each APC, HCFA determined and assigned a payment weight. Under the new system, the payment due a hospital for performing an outpatient procedure would be the product of the payment weight of the APC to which the procedure is assigned, a dollar-based conversion factor (which likely will be about $50), a geographic adjustment factor to account for area labor cost differences, and any other adjustments applicable to the hospital or case, e.g., payments to adjust for outlier cases.

What About ASCs?

Whereas hospitals will have to adjust to a fixed payment system for outpatient services, ASCs have been reimbursed by Medicare under a PPS since they began receiving payment from the federal program in the early 1980s. Nonetheless, ASCs also are in store for big changes, since HCFA is proposing to use APCs to classify ASC procedures as well.

The existing system classifies the approximately 2,500 surgical procedures approved for the ASC setting among eight payment groups, each with its own payment rate. The new system would spread the 2,500 procedures among the 105 APCs which represent the subset of hospital APCs that include surgical services (the remaining 241 hospital APCs do not include surgical procedures and are not relevant to ASCs).

Moreover, ASCs also will have to contend with new payment rates for procedures. As with the hospital outpatient payment system, each ASC procedure will be assigned to an APC, and each APC will have a corresponding dollar payment rate. The new classification system potentially allows for a closer connection between Medicare reimbursement and facility costs, as well as a wider range of reimbursement rates. The net effect is to enable historically under-reimbursed procedures to be paid more, but also to reduce payment for over-reimbursed procedures. For example, the lowest and highest payment rates currently available in the ASC setting are $314 and $941, respectively. The lowest payment rate that would be available under the new payment structure is $53 (APC 207, closed treatment fracture/finger/toe/trunk), while the highest rate is $2,107 (APC 527, lithotripsy).

What Does All of This Mean?

The changes discussed above will shape the outpatient surgical service landscape for years to come. For the first time hospitals and ASCs will know in advance exactly how much a hospital is paid for an outpatient surgical procedure. Under the existing payment system, hospitals are paid for outpatient services well after the fact and on an aggregated basis based on overall costs. The typical hospital has only a vague understanding of how much it is paid for an outpatient service, and perhaps even less of a sense of how much it costs to provide that procedure. This disclosure may heighten competition between the two service sites.

Moreover, while hospitals may continue to receive higher reimbursement than ASCs for outpatient surgical procedures, the use of APCs to classify both ASC and hospital outpatient procedures may be a first step toward linking the two reimbursement methods.

ASCs might confront steep reimbursement decreases under the new payment system. HCFA predicts that overall Medicare spending on ASC services would decline by 2 percent under the new payment system. However, industry analysts are suspicious of these predictions. A simple look at the proposed cuts for just a few high-volume ASC procedures suggests that HCFA¹s estimate is probably off the mark: HCFA proposes to cut reimbursement for CPT code 66984 (remove cataract, insert lens) by 7 percent, CPT code 43239 (upper GI endoscopy, biopsy) by 23 percent, CPT code 52000 (cystoscopy) by 32 percent, and 66821 (after cataract laser surgery) by 35 percent. Together, these four procedures account for more than 50 percent of the Medicare ASC volume.

According to The Lewin Group, a Washington-based health care consulting firm, implementing the proposed payment rates would reduce overall ASC reimbursements by approximately 10 percent, not the 2 percent that HCFA predicts. Moreover, the impact on single- specialty facilities specializing in ophthalmology, digestive/GI, and urology procedures would be far greater, some experiencing reductions of as much as 25 percent.

Not all reimbursements will be cut, however - payment for orthopedic and laparoscopic procedures, for example, will go way up. For example, CPT code 29844 (wrist arthroscopy/surgery) will increase by 67 percent, CPT code 23430 (repair biceps tendon) will increase by 87 percent, and CPT code 56316 (laparoscopic hernia repair) will increase by 132 percent. Moreover, HCFA proposed to add 422 CPT codes to the ASC list, including numerous orthopedic arthroscopy procedures, such as wrist arthroscopy (CPT code 29848), hip arthroscopy (CPT codes 29860, 29861, 29862, and 29863), and ankle arthroscopy (CPT codes 29891, 29892, and 29893).

Studies evaluating the impact on hospitals have been harder to come by, largely because hospitals have always had a difficult time tracking their costs and reimbursements for outpatient services, and because payments vary considerably from facility to facility. Nonetheless, hospitals too will feel a pinch.

Hospitals are likely to experience payment pressure through beneficiary copayment reductions. Presently, Medicare beneficiary copayments are based on 20 percent of the hospital's billed charges. Soon, however, copayment will be based on Medicare payments rather than hospital charges. In other words, Medicare would pay 80 percent of the APC payment rate and the beneficiary would be responsible for the remaining 20 percent. However, it may be many years before this 80/20 cost-sharing arrangement is achieved. Because of a quirk in the statute, the 80/20 cost-sharing ratio will be transitioned in gradually over a few years. In the interim, Medicare beneficiaries will be on the hook for significantly more than 20 percent, often as much as 40 percent, of the total hospital payment.

In light of this potential burden on Medicare beneficiaries, the proposed rule will allow hospitals to reduce copayment amounts to as low as 20 percent of the APC rate. Hospitals that voluntarily reduce beneficiary copayments may advertise these reduced rates, and hospitals in competitive markets may feel obliged to do this to compete with other hospitals and ASCs. Congress to the Rescue Fearful of steep reimbursement cuts, the hospital and ASC industry took their case to Congress and got some relief. On November 19, 1999, Congress enacted legislation that includes provisions affecting these new payment systems. The most significant changes will be made to the hospital outpatient system.

Additionally, for a period limited to three years, the Act requires HCFA to make an additional payment to hospitals for orphan drugs; cancer therapy drugs and biological agents; radiopharmaceutical drugs and biologicals; and new drugs, devices and biologicals (i.e., those not paid for on an outpatient basis before 1997).

The Act also requires HCFA to phase in the new payment rates for ASCs over a period of three years. However, it's possible that HCFA may delay implementing the new payment system for ASCs until more current data is available. The data that HCFA used to develop the ASC payment rates is between seven and nine years old, and the Agency was unable to collect adequate data for more than 60 percent of the procedure codes. HCFA is currently conducting an ASC survey that promises to yield much more comprehensive and accurate data, and organizations such as the American Association of Ambulatory Surgery Centers, the Federated Ambulatory Surgery Association, the American Gastroenterological Association, and the Outpatient Ophthalmic Surgery Society are lobbying hard to make sure the new data is taken into account.

When Will All of This Happen?

While it is still a good bet that these payment systems will be implemented before we celebrate another millennium, implementation may be farther off than you think. The BBA required HCFA to implement the hospital outpatient PPS by January 1, 1999. HCFA is under no statutory obligation to implement the ASC changes. In its September 1998 notice, however, HCFA announced that it would not implement either new payment system until sometime in 2000, because of fears about year 2000 computer problems. In recent months, HCFA officials have publicly said that the Agency intends to implement these payment systems in mid-2000, perhaps as early as July. However, those predictions were made before Congress stepped into the ring. The Medicare legislation enacted in November requires HCFA to make numerous changes, not just to these new payment systems, but also to payment systems for skilled nursing facilities, home health agencies, dialysis providers, and others. HCFA will undoubtedly need additional time to make the changes and may be forced to divert resources to make other required changes. As such, it may be 2001 before hospitals or ASCs are paid under these new systems. Of course, the reimbursement changes described above pertain only to the Medicare program. However, remember that private payors often adopt Medicare payment changes, including Medicare payment rates. As such, the reimbursement changes for many surgical procedures likely will be replicated beyond the Medicare program.

HCFA also is considering changes to the rules which govern whether a surgical unit may be considered "provider-based," which could jeopardize the provider-based status of hundreds of freestanding units. In light of these changes, hospitals may be increasingly inclined to entirely spin off freestanding surgical facilities or sell portions of existing facilities in hospital-physician joint ventures. This may give many physicians and entrepreneurs the opportunity to build or develop their own ASCs.

Providers, physicians, and administrators wishing to learn more about these changes should contact legal counsel.

For a comprehensive list of additions and deletions to the ASC procedure list and other related information, see Outpatient Surgery Magazine's web site at http://www.outpatientsurgery.net.

The Comprehensive List