APC panel: Don't finalize plan for observation packaging

Evaluation to include composite ED/clinic, observation APC

The Centers for Medicare & Medicaid Services (CMS) Advisory Panel on ambulatory payment classification (APC) groups has recommended that CMS not finalize the proposal to implement observation packaging for 2008, as CMS had originally proposed.

Instead, in its list of recommendations issued in September, it asked that additional data on trends and utilization be provided at its next meeting, tentatively scheduled for the second week of March 2008. The panel specifically asked for more information on:

  • whether claims reflect misuse or overutilization of observation services (a concern many observers say led CMS to propose the changes);
  • distinct frequency and utilization data for the three conditions for which observation services are now separately payable;
  • association of observation services with ED and clinic visits;
  • the frequency of claims for observation services compared with the inpatient error rate;
  • frequency distribution showing length of stay data for observation services.

In addition, in a recommendation one observer called "novel," the panel said that if observation services must be packaged, CMS should create a composite ED/clinic and observation APC (or group of composite APCs) that is only paid when both services are provided. (For information on how to access the panel's recommendations, see the resources at the end of this article.)

Three choices possible

The original CMS proposal on outpatient payments was open for public comment until Sept. 15 and now is under review. The final rule probably will be announced this month, says Michael A. Ross, MD, FACEP, medical director observation services in the Department of Emergency Medicine, Emory University School of Medicine in Atlanta and a member of the CMS Advisory Panel on APCs.

There are three possible outcomes, he explains. "One, it can go through as proposed, in which case it would create a big incentive for hospitals not to have observation unit services. The second outcome would be to do nothing now, look at the claims data, and get a better idea of the impact of observation use and policy changes. This is what the panel proposed."

The third possibility, Ross says, would be to create the separate composite APC package incorporating emergency care with observation when they both occur. "That's how physician CPT codes work," he says. "Both are paid on observation, not emergency."

The wisest course "would be to take that idea and spend six months looking at the feasibility," Ross says. This composite package "would be great for observation units — since there would be a clear, distinct payment, and you would always be paid when observation occurred." The only potential problem would arise if the payment rates were too low, he says. Otherwise, Ross says, this would be "a great solution."

Advocates encouraged

Two experts, who testified before the panel and against the original CMS proposal, are encouraged by its recommendations and hopeful the worst has been avoided.

"The panel is recommending that they not implement the proposal," says Frank Peacock, MD, FACEP, vice chairman of the Emergency Department at The Cleveland (OH) Clinic. "CMS does not necessarily have to follow their advice, but for the purposes of doing everything we could do and getting a favorable response, we did it," he says.

The recommendation that CMS wait until more data has been gathered was "pretty strong," in Peacock's opinion. "They're an advisory board; they are not going to say 'NO' in big letters," he says. 'It's pretty clear they did not support the packaging rule."

Sandra Sieck, RN, MBA, LNC, who heads Sieck Healthcare Consulting, a Mobile, AL-based firm focusing on health care reform and business analysis, says, "If I had to forecast what the CMS response would be, I'd say they will continue to monitor and carve out a separate payment for observation with an extension of the number of diagnoses." They might also add some conditions, she says. "Syncope and dehydration have been proposed."

Peacock agrees with Ross that the composite ED/observation package makes sense. "The point of the composite is that now you have people charging for observation when it is not related to an ED event, and that was not the intent," he says. "They want to link them and only pay if an ED visit is associated with [the observation], and its fine to tie them together."

Stakes are huge

As Peacock and Sieck testified, there is much at stake in terms of outcomes and dollars. "[Finalizing the proposed rule] could potentially harm patients," Peacock says. "As we noted in our presentation, Aaron Kugelmass presented an abstract at the American Heart Association meeting that reported on an HCA study of 5,000 patients before and after an observation unit was installed. After it was installed, mortality went down 37%."1

Sieck testified that if the 271,000 observation claims made in 2006 were to be pushed back to the ED through packaging, "they will offload those patients [and thus the claims] to the inpatient side, which would increase the national deficit by $11.8 billion."

Citing various journal studies, she also argued that unpackaged observation provides:

  • a tenfold decrease in the error rate for "missed myocardial infarction;"
  • a reduction in health care costs by one-half to one-third;
  • a reduction in patient length of stay;
  • an improvement in patient satisfaction;
  • adherence to Quality Improvement Organization (QIO) regulatory policies for one-day stays and inappropriate admits;
  • a reduction in ED overcrowding.

For each individual facility, however, the impact would vary depending on their patient mix and clinical practice. "It not only depends on whether the hospital has a specific chest pain observation unit, but on how they use it for Medicare patients," explains Ron Stunz, MD, medical director of Healthcare Business Resources, in Bala Cynwyd, PA, which provides ED management services to hospitals. "For example, one of our local major teaching hospitals has an observation unit, but in general Medicare patients do not wind up in it." If a chest pain patient is that old, "it's a 'slam dunk' that they get admitted to the regular acute care hospital," he says. "Since these codes apply only to Medicare on the facility side, it may not have that large an impact."

However, an internal study by The Cleveland Clinic showed that packaging would cost it more than $170,000 a year, Peacock says.

Stunz concedes that some hospitals, and thus their observation units, could take a big hit if packaging becomes a reality. "If I lose $500 a case by keeping my doors open and the lights on, what am I doing [keeping the unit open]?" he poses.

He also says Sieck's prediction that inpatient claims will go up considerably makes sense. "As a former ED physician, I know that if I did not have the ability to observe my patient, and the support structure to get a bunch of tests done in a hurry via an observation unit, my tendency was just to say they have to be admitted," he says. "Where this will have impact is not so much on Medicare, but on hospitals being forced to close units and other [insurance] carriers carrying the burden of younger patients who come in with atypical chest pain."

For those patients, he explains, observation units currently provide the option of avoiding an admission day. "That option would go away [under the packaging proposal], and on the reimbursement side, that comes back to other carriers," he says.

That's why the composite ED/observation APC makes so much sense, says Ross. "It would incentivize [observation]," he says. "You'd be paid when the care occurred, and it would resolve the whole utilization issue."


1. Kugelmass AD, Anderson AL, Brown PP, et al. Does having a chest pain center impact the treatment and survival of acute myocardial infarction patients? American Heart Association. Abstracts from Scientific Sessions 2004, No. 1932.


For more information on packaging observation services, contact:

  • Frank Peacock, MD, FACEP, Vice Chairman, Emergency Department, The Cleveland (OH) Clinic. E-mail: peacocw@ccf.org.
  • Michael A. Ross, MD, FACEP, Director of Observation Medicine, Department of Emergency Medicine, Emory University School of Medicine, 531 Asbury Circle — Annex, Suite N340, Atlanta, GA 30322. Phone: (404) 778-2643. Fax: (404) 778-2630. E-mail: michael.ross@emoryhealthcare.org.
  • Ron Stunz, MD, Medical Director, Healthcare Business Resources, One Bala Cynwyd Plaza, No. 545, Bala Cynwyd, PA 19004. Phone: (610) 668-9560.
  • Sandra Sieck, RN, MBA, LNC, President and Owner, Sieck HealthCare Consulting, 9431 Jeff Hamilton Road, Mobile, AL 36695. Phone: (251) 633-4043. Fax: (251) 607-9145. Web: www.sieckhealthcare.com.

A copy of the APC Panel's final recommendations can be accessed at: www.ashp.org/s_ashp/docs/files/advocacy/Final_Recommendations_09-2007.pdf.