Proposed OPPS changes for 2008 may threaten observation units

Pay-for-observation services would disappear under 'wholesale' packaging

For years now, the annual changes proposed in the outpatient prospective payment system (OPPS) rules by the Centers for Medicare & Medicaid Services (CMS) have been changes of degree, not kind. Payments have shifted a few dollars here and a few percentage points there, criticisms have been raised and addressed, providers have adjusted, and the process was repeated the following year.

This year, however, CMS appears to be making a major philosophical shift. In its 2008 proposed rule, it has expressed the intention "to view a service, in some cases, as not just the diagnostic or treatment modality identified by one individual HCPCS code but as the totality of care provided in a hospital outpatient encounter that would be reported with two or more HCPCS codes for component services." In other words, under the proposal several services for which hospitals are receiving separate payments would no longer be treated in that manner. This change could pose a significant threat to the creation of new observation units and the continued existence of those already in operation, say emergency medicine observers.

Under the proposal, payment for these services would be bundled into the associated ambulatory payment classification (APC) under the following categories:

  • observation services;
  • guidance services;
  • image processing services;
  • intraoperative services;
  • imaging supervision and interpretation services;
  • diagnostic radiopharmaceuticals;
  • contrast media.

How big a threat?

"Observation medicine has been a tremendous capacity builder, because when these patients are taken upstairs, you typically double and triple the length of stay," notes Michael J. Williams, MPH, HSA, president of The Abaris Group, a Walnut Creek, CA-based health care consulting firm specializing in emergency services. "For emergency care, this one wholesale packaged approach will deter some hospitals from staying in the [observation unit] business and some others who are not in it from getting in."

The American College of Emergency Physicians (ACEP) has been urging CMS for years to expand observation care and the number diagnoses and conditions that would be allowed for separate payment, says Barbara Marone, federal affairs director at ACEP in Washington, DC. "This proposal is basically bundling all observation now," she says. 'We don't think it's a good thing."

It "flies in the face" of their own APC technical advisory committee and the recommendations of the Institute of Medicine (IOM) in its report last year, Marone says. "And given ED crowding, we could end up sending people home prematurely or admitting them as inpatients when we could have had them in observation," she says.

Michael A. Ross, MD, FACEP, director of observation medicine in the Department of Emergency Medicine at Emory University School of Medicine in Atlanta, and a newly appointed member of CMS' APC advisory panel, admits to being "shocked" by the proposal, but is not ready to predict dire consequences for observation services. "It's not clear this would be a disincentive for having a separate unit," he asserts. "I could come up with a strong argument on either side."

On the one hand, says Ross, if the hospital is not paid separately for the observation services, "it still makes sense to follow best practices, such as a dedicated ED observation unit." On the other hand, he concedes, "the lack of separate payment for the use of an observation bed could gives the impression that it is an unfunded service, and shouldn't be supported."

One of the key variables affecting the economic impact of the proposed new rule, adds Marone, is case mix. "When you estimate the payment for a high-level emergency visit on the facility side vs. what was paid on the observation side, you lose at least $100," she says. "But since this proposal is budget-neutral; what comes out goes into other areas, so there will be winners and losers on the hospital side."

A call to action

Williams says the potential threat posed by the proposal is serious enough that ED managers should take action. "Remember, these changes are just proposed, and CMS has done some major reversals in the past," he says. "It's time to testify, if need be, and those who have observation units should be aghast and respond to a call for action."

There is "lots of science" that demonstrate the cost-effectiveness of observation units, as well as the quality and bed capacity improvements that occur as a result of having such units, Williams says. "ED managers should be educated about what having an observation unit does and does not mean," he advises. "If you have a program that supports itself, do not let administration overreact [to the proposal] and shut it down."

You should know what your payer mix is and be aware of other important facts such as charges and lengths of stay for rule-out myocardial infarction, for example, before and after having an observation unit, Williams says. "If you can break these numbers out and defend them, you'll have a better chance," he says.

"I strongly encourage people to respond based on how they feel about this," adds Ross. "The IOM report authors, for example, felt strongly that observation should not be restricted by condition and that there should be fair and separate payment of observation services."

Another area of growing importance in the OPPS involves quality measures. Hospitals must submit data on 10 such measures in order to receive the full OPPS payment update for services furnished in 2009, and of more immediate concern is the fact that these measures will become effective with outpatient services provided as of Jan. 1, 2008. Those measures include five that are directly related to the ED:

  • ED transfer [acute myocardial infarction (AMI)] — aspirin at arrival;
  • ED transfer (AMI) — median time to fibrinolysis;
  • ED transfer (AMI) — fibrinolytic therapy received within 30 minutes of arrival;
  • ED transfer (AMI) — median time to electrocardiogram;
  • ED transfer (AMI) — median time to transfer for primary percutaneous coronary interventions.

"This would definitely affect the ED, and they are currently being called for at the National Quality Forum as well," notes Marone. "ED managers have to know what these quality measures are, and I would assume they also need to educate their staff." It's important, she adds, for ED managers to revisit their processes and make sure they meet these quality measures.

Williams says, "We now have more definition to quality indicators, and ED managers definitely need to be familiar with the quality measures." It's important that the ED is being included in these measures, he says, "But it will make it that much more important in the future to have an EMR [electronic medical record] to figure out the reporting, because you will not be able to do this by hand."

CMS also is seeking comment on 30 additional quality measures that are under consideration for reporting in future years. They include ECG performed for patients with syncope — percentage of patients ages 18 to 60 years with an ED discharge of syncope who had an ECG performed.


For more information on the proposed rule, contact:

  • Barbara Marone, Federal Affairs Director, American College of Emergency Physicians, 2121 K St. N.W., Suite 325, Washington, DC 20037-1801. Phone: (202) 728-0610.
  • Michael A. Ross, MD, FACEP, Director of Observation Medicine, Department of Emergency Medicine, Emory University School of Medicine, Atlanta.
  • Michael J. Williams, MPH, HAS, President, The Abaris Group, 700 Ygnacio Valley Road, Suite 270, Walnut Creek, CA 94596. Phone: (925) 933-0911. Fax: (925) 946-0911. E-mail:

A copy of the proposed 2008 OPPS rule can be found at: Comments on the proposed rule will be accepted until Sept. 14, 2007. You may submit comments electronically at Click on "submit electronic comments on CMS regulations with an open comment period."