Proposed APC regulation final nail in coffin’ for hospital outpatient surgery

Proposed hospital/ASC reimbursement changes delayed until mid-2000

The proposed prospective payment system (PPS) for hospital outpatient services, published in the Sept. 8 Federal Register, spells death for hospital-based outpatient surgery services, some industry experts say. Hospital outpatient surgery managers already must contend with insurance companies, physician practice management companies, and corporate surgery center chains that are driving their business into surgery centers. And now, the proposed reimbursement system for hospital outpatient services, called ambulatory payment classifications (APCs), will lower their payments even further, experts predict.

For hospitals, the issue is margin, says Stephen W. Earnhart, MS, president and CEO of Earnhart and Associates in Dallas. "You may get more money than surgery centers, but your reimbursement will come way down," he warns.

Managers of hospital outpatient surgery departments have difficulty identifying, controlling, and decreasing costs, he maintains. "You have high labor costs, poor supply cost management, and fixed overhead too high for reimbursement on these procedures. APCs are the final nail in the coffin for outpatient surgery being performed in hospitals today."

Surgery center experts are analyzing the hospital regulation, but, ironically, some express preliminary concerns that the differences in payment between hospitals and surgery centers may be too great.

"I think there are instances in which the higher payment to the hospital would not appear to reflect the actual differential in costs associated with performing the procedure in a hospital vs. the ASC," says Michael Romansky, JD, partner in the health law practice at McDermott, Will, and Emery in Washington, DC.

ASC changes officially delayed

In other news, the Health Care Financing Administration (HCFA) announced Oct. 1 that it will suspend publication of the final ASC reimbursement rule until after year 2000 computer problems are resolved. Previously, HCFA had announced a delay of the hospital outpatient reimbursement changes until those problems are resolved.

This announcement means the proposed rule for ASCs will be adopted concurrent with the publication of the new prospective payment system for hospital outpatient services, Romansky says. "As such, current facility rates based on the eight procedure groupings will remain in effect until mid-2000 at earliest," he explains.

He hails the delay of the ASC reimbursement changes as a "phenomenal victory for the ASC community."

"HCFA had developed a proposed rule which had many methodological flaws, resulting in very significant and unwarranted cutbacks in virtually all high-volume procedures performed in ASCs," he says. (For more on reaction to the proposed ASC reimbursement system, see Same-Day Surgery, August 1998, p. 101.)

The comment period for the proposed ASC reimbursement system has been extended again to Nov. 9 so it is concurrent with the deadline for submission of comments on hospital outpatient rule. (For information on how to access the Federal Register notice and how submit comments, see box, p. 138.)

Concerns about the proposed hospital notice extend beyond specific reimbursements for surgical procedures. In fact, the notice is predicted to have a significant harmful effect on the hospital industry as a whole.

The proposed regulation provides for a new method of calculating beneficiary copayments so beneficiaries eventually pay 20% of total payments rather than 20% of charges. HCFA representatives have stated they believe behavior will change and volume will increase under the new payment system to offset losses in revenue, says Linda Magno, interim vice president for policy at the American Hospital Association in Washing ton, DC. "But hospitals don’t generate volume," she says. "It’s the division that orders services."

HCFA revealed it will lose $570 million in reduced beneficiary coinsurance, and it’s passing on that loss to hospitals. The system was supposed to be budget neutral, Magno stresses. "As a result, the system, rather than being budget neutral, which we believe Congress intended it to be, takes 3.8% of outpatient revenue out of the system. It essentially takes it out of our pockets, because it reduces the total payments to hospitals."

HCFA caps volume expenditures

The negative impact doesn’t end there: HCFA also is placing a cap on volume expenditure. HCFA is required to develop a method for controlling unnecessary increases in the volume of covered outpatient services and can adjust the conversion factor to do so. HCFA’s proposed regulation states, "The volume of services is a significant concern, particularly during the first few years of the outpatient PPS, because of the possible incentives under PPS to increase utilization."

"Our concern is that the business of projecting future volume in the outpatient business is messy, not precise," Magno says. "We’re not sure HCFA can accurately distinguish appropriate increases in volume from inappropriate increases in volume and [distinguish] generating additional services from providing unnecessary services."

The outpatient area, in particular, is unpredictable in terms of what future levels of outpatient services should be, she says. "On any given day, a new therapy or new drug allows patients currently treated in inpatient settings to be treated in outpatient settings. You may create tremendous growth in outpatient areas. It’s appropriate and desirable. You shouldn’t penalize hospitals for changing delivery to respond to those new therapies and new drugs, because you can’t predict them."

Projections are projections, she emphasizes. "They’re only as good as what you know at any given time. If we do the right thing by our patients, we get penalized in future because the outpatient volume is higher than HCFA predicted it would be."

And now, the good news

Is there any good news? At this point, Magno isn’t sure. Others see a couple of silver linings to the cloud:

• HCFA withdrew its proposal requiring hospitals to bill for all diagnostic tests ordered for outpatients, including those furnished outside the hospital.

• HCFA revised its 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.

"MedPAC has stated that, at least at the outset, the unit of payment should be narrowly defined," explains James Mathews, PhD, policy analyst at the Medicare Payment Advisory Com mission (MedPAC) in Washington, DC, which advises Congress on Medicare payment issues. "If there are any add-ons, any diagnostic services provided in connection with the surgical procedure or medical visit, we’d like to have those paid separately under PPS but with a distinct line-item payment. HCFA seems to have concurred."

Keep in mind that services such as EKGs, which will be paid separately from surgical APCs, still must meet medical necessity criteria, warns Lois Yoder, ART, CCS, president of The enVision Group, a resource management and consulting firm for hospital-based services in Naples, FL. Yoder has worked with APGs since states began implementing them for Medicaid.

"And that means if there isn’t a clinically relevant diagnosis to justify the EKG, it still may not get paid," she warns. (For more information on documentation issues and other areas that need preparation, see story, p. 140.)