By Toni Cesta, PhD, RN, FAAN


In this month’s issue, the conversation on healthcare reimbursement turns to the additional prospective payment systems found across the continuum of care. Prospective payment remains a way in which the Centers for Medicare & Medicaid Services (CMS) can determine the rates for care based on predetermined amounts rather than on billing. The processes are similar to the use of the diagnosis-related groups (DRGs) in the acute care setting, with some differences. We will continue with a review of the various reimbursement schemes in outpatient settings.

Inpatient Only List

As the cost of acute care continued to escalate in the 1990s, it made sense for CMS to turn its attention to other levels of care that could be provided at lower cost. This includes ambulatory and outpatient settings, such as emergency departments, ambulatory surgery, clinics, and patient-centered medical homes. Because of the rising cost of inpatient care, these other, lower-cost settings became more viable for certain diagnoses and surgical procedures that could be adequately treated in a lower level of care.

CMS also implemented the Inpatient Only (IPO) list. This list includes procedures that CMS will only reimburse in an acute level of care. These surgeries require more care than can be provided safely in an inpatient setting. Currently, surgical procedures are being removed from the IPO list, with the plan of phasing the IPO out completely by 2024.1 This is a testament to the ability of these outpatient settings to manage more complex patients over time. Hospitals and case management professionals must ensure patients receiving services on the IPO list are admitted to the hospital and not registered as ambulatory sugery patients. When this happens, the hospital is at risk for losing reimbursement for that procedure.

CMS created the Prospective Payment System (PPS) for hospital outpatient services in 1997 as part of the Balanced Budget Act. The final rules were implemented in 2000. CMS had officially started the process of controlling costs in the outpatient settings, not just in acute care.

Ambulatory Payment Classifications

The ambulatory payment classification (APC) system was implemented first. It is defined as an encounter-based patient classification system designed to reimburse for one or more patient encounters. We will review more of this later. Reimbursement based on encounter is a fundamental difference between APCs and DRGs. It identifies like groups of patients in similar fashion to the Inpatient Prospective Payment System (IPPS) and uses predetermined rates. The difference is each outpatient encounter can include multiple APC systems. As with DRGs, the APCs predict the amount and types of resources to be consumed.

The initial APC list consisted of 451 ambulatory payment classification groups. Like DRGs, the groupings and the reimbursement reflect categories similar in resource use and cost. This piece of the APC system mirrors the DRGs.

The APC system uses a process called mapping. Mapping aligns each patient encounter to a particular APC based on CPT codes. Each APC also is assigned a status indicator. The status indicator defines if and how a service will be paid. Not all status indicators are paid under an APC. Therefore, all services provided during an encounter may not be mapped to a single APC.

APC groupings and number of APC systems in each group:

  • Significant procedures: 240;
  • Medical visits: 7;
  • Ancillary: 39;
  • New technology: 15;
  • Transitional pass-through: 132;
  • Extensive pharmaceuticals: 17;
  • Partial hospitalization: 1;
  • Total: 451.

Procedure APCs include surgical and nonsurgical procedures. Nonsurgical procedures include nuclear medicine, MRI, radiation therapy, and psychotherapy.

Other items also may be mapped in. One example is pass-through items, which include drugs, biologicals, and devices that can be claimed for reimbursement in addition to the APC payment if certain CMS criteria are met. Examples of these items are pacemaker devices, cataract lenses, and cardiac catheterization lead wires. Many of these are high-cost items and receive a separate reimbursement.

In some cases, all resources applied to a service are bundled together. Examples include:

  • Anesthesia;
  • Recovery and treatment rooms;
  • Operating room;
  • Drugs and pharmaceuticals (with exceptions);
  • Medical/surgical supplies;
  • Observation services;
  • Implantable devices;
  • Donor tissue;
  • Exceptions to packaged services include: Drugs, pharmaceuticals, biologicals, and/or devices that are eligible for transitional pass-through payments;
  • Other specific services defined by CMS:

- Corneal tissue acquisition;

- Casting, splinting, and strapping;

- Blood and blood products;

- Certain other high-cost drugs.

It would be difficult to itemize these encounters due to the large number of resources used.

The total reimbursement of an encounter is the sum of the individual payments for each service. An outpatient visit might include APC- as well as non-APC-related payments. The total determines the final reimbursement.

Comparing APCs and DRGs:

  • APCs follow the same methodology as DRGs;
  • Similar groupings of patient types are prospectively identified with corresponding reimbursement amounts;
  • Unlike DRGs, a single outpatient encounter can result in the payment of one or more APCs.

The Scope of the OPPS

The Outpatient Prospective Payment System (OPPS) applies to acute care hospitals. It includes hospitals exempt from the IPPS, and partial hospitalization services provided by community mental health centers. Cancer centers that are exempted from the IPPS are held permanently harmless for payment reductions. This means the center must use the same infrastructure for mapping and billing under the OPPS, but reimbursement will be supplemented if it is negatively affected.

Included Services:

  • Emergency department (ED) visits;
  • Clinic visits;
  • Surgical procedures;
  • Radiology;
  • Chemotherapy;
  • Most ancillary services;
  • Partial hospitalization program services.

Excluded Services:

  • Ambulance services;
  • Rehabilitation therapy services;
  • Laboratory services paid under a fee schedule;
  • End-stage renal disease (routine dialysis services) and Epoetin;
  • Services provided by critical access hospitals;
  • Durable medical equipment;
  • Orthotic/prosthetic devices;
  • Screening mammography.

Clinics, EDs, and Critical Care Services

Critical care, ED visits, and clinic visits are assigned to one of seven APC groups based on 31 Evaluation and Management (E&M) CPT-4 codes. Hospital-based clinics use three APCs: low, medium, and high. Assignment is similarly based on the CPT-4 code identified. EDs also use the low, medium, and high categories, identified based on the CPT-4 code. Critical care uses one CPT.

Observation Services

Under the new system, observation is no longer reimbursed separately. It is part of the APC payment, either ED or ambulatory surgery. Exceptions are congestive heart failure, asthma, and chest pain. Patients admitted to observation with one of these diagnoses are mapped to their own APC.

Each hospital is required to develop its own mapping system and determine which items will be mapped to either high, medium, or low APC groupings. The hospital is required to link this information to a computer system and to billing.

Home Care Prospective Payment System

Prospective payment for home care visits was implemented in October 2000. The home care PPS structure is based on a nursing assessment tool completed when the patient is admitted for these services. Reimbursement is based on an episode of care and/or 60 days of care. The dollar amount is fixed regardless of the number of visits.

The home care PPS is the only PPS that relies on a nursing assessment to drive reimbursement. The Outcome and Assessment Information Set (OASIS) data must be accurate as it is related directly to reimbursement. Home health resource groups (HHRGs) are similar to DRGs and APCs.


The home care nurse completes the OASIS tool. Scoring is based on three categories:

  • Clinical category with four items;
  • Functional category with five items;
  • Service utilization category with four items.

The final score results in the assignment of one of 80 HHRGs. Like the DRGs, each HHRG includes a predetermined dollar amount.

Reimbursement for a HHRG relates to the level of home care provided. Each HHRG holds a fixed national rate similar to the DRGs. The only item not included is durable medical equipment. The base rate is adjusted or added for exceptional items. All disciplines are included as well as non-routine medical supplies. It also includes the cost of managing the OASIS, as this requires additional resources and time to complete. CMS regularly adjusts these rates.

Final Payment

CMS pays for all line items and services provided at the end of the 60-day period. Example (numbers and dollar amounts are for demonstration purposes only):

  • Standard Prospective Payment Rate: $2,037.04;
  • Case Mix Payment Rate for C0F050: ×0.5265%;
  • Case Mix Adjusted PPS Payment Amount: $1,072.50.

Wage Index Adjustments

  • Case Mix Adjusted PPS Payment Amount: $1,072.50;
  • Labor Percentage of PPS Payment Rate: ×0.77668%;
  • Labor Portion: $832.99.

The labor portion is then multiplied by the Wage Index Factor:

  • Labor Portion: $832.99;
  • Wage Index Factor: ×1.1 (example);
  • Adjusted Labor Portion: $916.29.

Nonlabor Portion

  • Case Mix Adjusted Amount: $1,072.50;
  • Nonlabor Percentage: ×0.2233%;
  • Adjusted Nonlabor Portion: $239.49;
  • Labor Portion: $916.29;
  • Nonlabor Portion: ×239.49;
  • Total Case Mix and Wage Adjusted PPS Rate: $1,155.78.

There are times when the patient does not complete the 60-day home care episode. When one of two situations occurs, CMS will provide some payment.

The first is if a patient elects to leave one home care agency and transfer to another. The second occurs if the patient leaves the home care agency, but returns within 60 days. These payments are called partial episode payments (PEP). The PEP can be applied only if the transfer or discharge and return was not due to a change in the patient’s condition. The amount paid is prorated to the actual number of times the patient was seen by home care. For example, if the patient was seen for 30 of the 60 days, the PEP would be calculated as 30/60 multiplied by the full original payment amount. In this case, the home care agency would receive half the original payment.

Significant Change in Condition Payment

If a clinically significant change occurs in the patient’s status and a new OASIS is initiated, as well as a new HHRG and new physician orders, a special rate would be applied. The change must be unexpected and cause an interruption in the 60-day episode of care. As with the partial episode payment, the home care agency would receive a prorated amount. This includes a partial payment based on the original HHRG, and an additional payment. This second payment is called the “significant change in condition” payment, or SCIC.

Low-Utilization Payment

A patient can receive home care for shorter periods, called low-utilization. In these cases, a low-utilization payment adjustment is made. The home health agency is paid based on the national standard rate for each discipline. These amounts are adjusted based on wage area index but not on case mix.

Outlier Payments

When the cost of care for a patient differs greatly from the usual amount of medically necessary home care, CMS will consider an outlier payment. Two elements are considered before such payments are made:

  • The cost of services should exceed the payment;
  • The outlier payment should be less than the total amount of the cost above the outlier threshold.

The amount of the outlier payment is limited to 5% of the total prospective payment. The fixed-dollar loss amount is now 1.13 times the standard episode amount.

Important Points to Consider

The home care PPS has driven home care to think about appropriate use of resources rather than arbitrarily spending on a patient. When home care shifted to PPS, agencies began considering the coordination of the financial and clinical aspects of a patient’s care. Determining the correct number of visits based on clinical need became the driver of care.

It also is critical to timely and accurately complete the OASIS, as it determines the reimbursement to the home care agency. Home care agencies use these data to benchmark best practices and determine profits and losses. This information helps the agency understand where it might need new product lines, or where others might be eliminated. The HHRG data also helps in analyzing where costs may be too high in managing specific types of patients.

Home health agencies use many tools from the acute care setting to manage costs and visits. One such tool is the clinical practice guidelines for specific case types that provides a structure for interventions for each visit as well as expected resource use. Implementation of clinical practice guidelines helps prospectively ensure the correct resources are applied in a timely manner. Because of the variation among patients and for some high-risk groups, one can assume these high-risk groups are more likely to use excess resources if not managed proactively.

High-risk assessment criteria identify these patients. Many home care agencies use RN case managers to manage these high-risk patients. In some instances, the OASIS can provide much of the data necessary to identify patients at greater risk for poor outcomes or greater resource use.


Each level of care across the continuum uses similar payment schemes that reflect CMS’s goals of managing costs and requiring healthcare providers to use case management skills to optimize their reimbursement.


  1. Centers for Medicare & Medicaid Services. Fact sheet: CY 2021 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System final rule (CMS-1736-FC). Dec. 2, 2020.