Relax! Medicare PPS won’t put you in the poor house

HCFA rejects term ‘APGs’ to avoid confusion

[Editor’s note: On Jan. 1, 1999, the new Medicare outpatient prospective payment system (PPS) goes into effect nationwide. What can hospitals expect in the initial roll-out? For the first year, reimbursement rates are likely to stay as they are, says James Mathews, PhD, a policy analyst with the influential Medicare Payment Advisory Commission (MEDPAC) in Washington, DC. But depending on how Medicare structures the final pricing mechanism, payment rates could change substantially in future years. MEDPAC is the new name for the merger between the Prospective Payment Assessment Commission (ProPAC) and the Physicians Payment Review Commission.]

ORM: What is the current state of Medicare’s planned implementation of ambulatory patient groups (APGs)?

Mathews: For one thing, the Health Care Financing Administration (HCFA) in Baltimore has changed the name of the mechanism for paying hospitals. It is no longer using the term APGs. In its place, the agency has adopted the term ambulatory payment classifications (APCs). (The term ambulatory payment classifications is a tentative name for APGs.)

HCFA hasn’t made clear why it has chosen a new name for the outpatient PPS. But we believe the decision was based on a desire not to endorse the original 3M Health Information System version of APGs, which was originally developed specifically by 3M (based in Murray, UT) for the Medicare program and has since been adopted by some states under Medicaid and some private insurers. HCFA stated that there will be some significant changes to the 3M HIS model of the APGs, but there will be some similarities as well. What those are, HCFA has not yet announced.

ORM: Initially, how will Medicare roll out APCs?

Mathews: To the best of our knowledge, HCFA plans to implement APCs in one fell swoop, according to the Balanced Budget Act. It’s something they’ve been working on at least for eight years now. They’re quite close to being ready for it, so there won’t be a phase in as was proposed back in 1995. At the same time, I don’t anticipate that hospitals will be unprepared for APCs. They’ve been expecting this for quite some time. Therefore, I don’t believe there will be anything like chaos out there.

3M-HIS is out there working with state Medicaid agencies to adopt the system. So there is something of a knowledge curve out there. The extent to which APCs will be difficult to adopt will depend on the bells and whistles that HCFA may or may not finally attach to the system.

ORM: How difficult do you expect the roll out will be?

Mathews: My own personal opinion is that the logistics of implementation for hospitals could be considerable. HCFA’s fiscal intermediaries currently process about 90 million outpatient claims per year. That is quite a bit. HCFA didn’t have the success it had hoped for in consolidating their claims processing operation under the proposed Medicare Transaction System, which was aborted last year by Congress due to expenses. So they are still going to be relying on the current 14 geographically based shared systems and the network of carriers. There could be some difficulty with implementation.

ORM: When finally implemented, how important will the Medicare outpatient PPS be to hospitals?

Mathews: I think it will be the most substantial revision of the payment system for hospital outpatient services that has taken place since the Medicare benefit was created. It will begin a process under which the current hodgepodge that Medicare uses to pay for ambulatory care will be brought under a single system. Most significantly, hospitals will finally know in advance of the Medicare cost report what they will be paid for providing a given service to a Medicare beneficiary.

ORM: Many hospital officials believe the goal of the PPS is primarily to save the Medicare program money. Is that correct?

Mathews: The system that was specified for implementation in the language of the Balanced Budget Act 1997 calls for budget neutrality in the first year. This means that reimbursements aren’t likely to undergo much change initially. Expenditures under the current regulations are projected through 1999, which is the base-line year. After that, there is a mechanism built into law that specifies annual updates on expenditures.

For the first several years, the updates will be based on the hospital market basket rate minus 1%. This does not mean that hospital payment rates will automatically increase by that amount. But it does reflect the increased rate of total Medicare expenditures for outpatient services. The methodology is certain to be a mechanism for restraining the rate of growth Medicare outpatient payments into future years.

ORM: Are providers likely to see a big difference in actual reimbursements?

Mathews: At this point, we can’t say. It will depend on the system HCFA ultimately adopts to price the services under prospective payment. It will also depend on the mix of services that each provider delivers. Certain high-volume procedures will receive higher reimbursements based on the relative weights HCFA will assign to those procedures. We’re still at an early stage of doing our own impact analysis of these factors.

Because so much depends on the final pricing mechanism, I wouldn’t say that providers will eventually see fewer dollars than what they are presently getting. But we can say that the aggregate dollar amounts will be the same in the first year. There is likely to be some redistribution across hospitals, but the size of the pot will initially remain the same.

ORM: Hospitals reacted quite negatively to Medicare’s inpatient PPS using diagnosis related groups [DRGs]. Are similar reactions being reported with regard to APCs?

Mathews: I don’t think so. In our dealings with hospital groups based here in Washington, DC, there’s more of an air of inevitability but not a sense of doom. The sense I get is that hospitals want to be a player in this game. They want to have a seat at the table when it comes to determining how the system will be implemented. I think it’s a positive attitude. The mechanics of dealing with an outpatient PPS are a little more amorphous than DRGs because of the inherent complexity of defining exactly what it is you’re paying for on the outpatient side. But hospitals do understand the basics and what they need to do to be successful within the system.

ORM: What assurances will providers have that the PPS will be a fair system? Will APCs ultimately turn out to be as bad as the current system?

Mathews: I honestly don’t believe that. No one we know is looking to stick it to hospitals by implementing this system. There is a genuine dialogue between HCFA and hospitals regarding APCs. Obviously, there will be winners and losers once the system gets fully implemented. But it won’t be out of any nefarious design on HCFA’s part. Medicare is a complicated system. It’s a system that has emerged as a function of the political process. It’s a product of years of compromise. There will always be someone who is unhappy with end results. But it can also be argued that hospitals have done fairly well under the Medicare system.