Brace yourself: HCFA releases maligned Medicare outpatient PPS

Rural and cancer hospitals may suffer the hardest hit

Provider organizations are concerned that the proposed Medicare prospective payment system (PPS) for outpatient services may result in some providers fighting for financial viability.

The system, published in the Sept. 8 Federal Register, proposes payment reductions, a volume expenditure cap for the year 2000, and costs passed along from reduced beneficiary coinsurance.1 The good news is that organizations have time to work with the Health Care Financing Administration (HCFA) in Baltimore on the proposal because potential year 2000 problems will push the implementation of the outpatient PPS back until at least April 2000.

The American Hospital Association’s (AHA) Washington, DC, office has several concerns about the proposal, says Linda Magno, interim vice president for policy. The volume expenditure cap, for example, will reduce the hospital update to offset higher-than-expected increases in volume.

"The business of projecting future outpatient volume is messy, not precise," says Magno. "[Projections] are only as good as what you know at any given time."

The future level of outpatient services is unpredictable, especially since the impact of future scientific advances isn’t known, she adds. "On any given day, a new therapy or a new drug allows patients currently treated in an inpatient setting to be treated in an outpatient setting. You may create tremendous growth in an outpatient area. It’s appropriate and desirable."

"We do the right thing by our patients," Magno adds, "and we get penalized in the future because outpatient volume is higher than HCFA predicted it would be."

Another concern is HCFA’s decision to pass on to hospitals a $570 million reduction that will result from reduced beneficiary coinsurance. "Instead of capping beneficiary coinsurance at the national average, [HCFA] went to a national median, which is lower than the average," Magno says. "As a result, the system, rather than being budget-neutral, which we believe Congress intended the system to be, takes 3.8% of outpatient revenue out of the system."

HCFA seems to believe that provider behavior will change under the new payment system to offset losses in revenue, she says. For example, the agency may think that hospitals may make efforts to increase volume. "Hospitals don’t generate volume," she says. "We’re not clear what behavior change they expect."

The hit on rural and cancer hospitals

The 3.8% revenue is what HCFA estimates that the reduction in payments to hospitals overall will be relative to current law. However, the actual reduction varies by hospital type, location, types of services, and special mission, such as teaching or serving a disproportionate number of poor, Magno notes.

Redistributions also may occur as a result of current payment methods. The new system redistributes the current total Medicare payments, based in part on cost-based payments and in part on blended-payment amounts, across all services. Hospitals, in the aggregate, will receive proportionately less for services that are currently paid based on costs and more for services that had been paid under blended payment methods.

"Our concern about redistribution is that we don’t know why it’s occurring," Magno says. "We don’t know if it is a flaw in the way cases are classified, a flaw in the classification of [ambulatory payment classification] APC, [a flaw in the way] it is coded, or a flaw in not adjusting for legitimate differences in hospital costs or for certain types of hospitals. So we need to get below the surface and find out why there are redistributions."

In addition, if a group of hospitals is losing 9% of outpatient revenues, some in that group will lose 15% or 20% and some will lose no revenues under the new system, she says. "Some have to change the mix of services they offer."

The hit may be too much for some hospitals. If the outpatient system is funded at less than cost, and then beneficiary coinsurance and expenditure caps are taken out, the system is now that much more below cost and the remainder is redistributed, Magno says.

This may result in access problems for some hospitals and communities, she adds. For example, a hospital in a rural area may find itself no longer viable because it’s heavily dependent on outpatient revenue and would take a big hit in moving to prospective pay. "It may eliminate one source to Medicare care in that community," warns Magno.

HCFA acknowledges that rural and cancer hospitals seem to take the brunt of the new payment system. Low-volume hospitals — 75% of which are rural — appear to lose 17% of their payments and cancer hospitals lose 29.2%. The low-volume hospitals also receive a greater percentage of their Medicare income from outpatient services compared to their average-volume counterparts. HCFA is further analyzing the payments to both groups and may phase in the payment system or adjust the payments otherwise. Major teaching hospitals are also expected to take a big hit, at 9.4%.

HCFA is sending mixed messages to rural hospitals, says Darin Johnson, director of government affairs for the National Rural Health Association in Washington, DC. "We are hearing contradictory communications and commitments from HCFA in that they want to expand Medicare+Choice and create more availability of services for Medicare beneficiaries. Yet they are putting rural hospitals in a difficult situation by asking them to do more with a lot less money."

The cut in payments will further keep rural hospitals from being able to sign risk contracts and negotiate contracts with managed care organizations, which also ask those hospitals to do more with less. "There’s just no place else to find the dollars," Johnson says.

"I think we are putting rural Medicare beneficiaries in a vulnerable position," he adds. "The reality of all these changes is going to be that these beneficiaries are not going to have access to health care services."

Next year should be a crossroads for rural health care delivery if HCFA does not consider how it can make an investment in these providers, he says. As the association previously testified to a commission on the future of Medicare, "maybe in the short term, HCFA and the federal government and state governments need to put some extra dollars into rural health care infrastructure to make sure that it’s going to be there and be able to provide the services of Medicare and Medicaid in five or 10 years."

Recommendations heeded

AHA is pleased, however, that HCFA did respond to some of its recommendations. At AHA’s request, HCFA withdrew a proposal requiring hospitals to bill for all diagnostic tests ordered for outpatients, including those furnished outside the hospital, AHA states. HCFA also revised a proposal requiring hospitals to bundle diagnostic tests with surgery or medical visits.

The rule only requires hospitals to bundle related costs, such as those that result from the use of an operating room, recovery room, drugs, and blood. And also at AHA’s request, HCFA left flexibility in the process by which it determines which off-site clinics are part of a hospital and which are not. This is significant because, according to the proposal, clinics deemed part of a hospital are eligible for higher Medicare payments.


1. 63 Federal Register 47552 (Sept. 8, 1998).