Both sides see trouble ahead with proposed outpatient regs

Is playing field level under Medicare APC system?

The Baltimore-based Health Care Financing Administration (HCFA) has postponed implementation of new Medicare regulations for outpatient facilities, which gives the outpatient industry time to make a case for higher reimbursement. However, a bigger question is whether this delay (caused by HCFA’s year 2000 computer concerns) would make any difference in a reimbursement system that some experts say could devastate rural and specialty facilities. Do the proposed rules level the playing field between hospital-based and freestanding facilities, or do they give a competitive edge to one side?

Outpatient Reimbursement Management asked people associated with the hospital-based outpatient industry and ambulatory surgery centers (ASCs) to analyze these issues and explain the proposed regulations for each and how the ambulatory payment classifications (APCs) might affect outpatient facilities.

"I believe we can expect substantial changes from the proposed rule to the final rule," says Chris Mancill, technical analyst for the Healthcare Financial Management Association in Washington, DC. The association represents financial managers in hospitals and other health care organizations.

Mancill says the delays in finalizing the rules and implementing a prospective payment system for both hospital-based and freestanding facilities will give the outpatient industry time to respond to the proposed APC rates.

"The proposed rule has payment amounts that hospitals are going to have to have work done on," he says. "Some of the APC amounts will have to be bumped up or increased."

Others doubt HCFA will change APC reimbursement rates in any substantial way because the government’s main purpose is to save Medicare billions of dollars.

"Congress passed the outpatient prospective payment system for the purpose of saving money," says Linda Magno, interim vice president for policy at the American Hospital Association in Washington, DC.

Outpatient PPS expected to save billions

HCFA predicts that hospital outpatient PPS will save Medicare more than $6.6 billion through 2003. (For more information, see ORM, October 1998, p. 73.)

"That’s a real reduction relative to what hospitals were going to be paid," Magno says.

Because HCFA has repeatedly extended the comment period, ASC officials have had since June to comment on their proposed regulations. Some say they’ve needed the extra time in order to make a case for higher rates.

"It gives us the opportunity to now do some good cost analysis and comparison of the APC proposal for ASCs and hospitals," says Carol Beeler, regional vice president in surgery division of HealthSouth in West Chester, OH. HealthSouth is a health care company that covers 50 states with its surgical center and diagnostic divisions, inpatient rehabilitation, outpatient rehabilitation, and medical centers. Beeler also is the president of the Federated Ambulatory Surgery Association in Alexandria, VA.

1994 cost studies were flawed

Even HCFA has admitted to some flaws in its 1994 cost studies on which the APCs are based, Beeler says.

"HCFA is working with us now to develop a good study for 1999," she adds. "What we’re looking for is a fair reimbursement system because we have to cover our costs."

Plus, hospitals are being hit from another direction as well; the proposed rules reduce the coinsurance amount Medicare beneficiaries pay to hospital outpatient facilities, Mancill says.

HCFA’s new reimbursement methodology fixes the coinsurance payment at 20% of the 1996 national median charge for each APC group with adjustments for inflation for 1999, Mancill explains.

Since beneficiaries presently pay 20% of the outpatient facility’s billed charges regardless of Medicare allowance, this can amount to a substantial reduction, he adds. "This doesn’t reduce the Medicare charges at all, but it does help beneficiaries."

ASC officials say they are pleased that HCFA decided to postpone implementation of both regulations since the hospital-based outpatient ones were going to be postponed until after the year 2000 computer problem is fixed. Last summer, the ASC industry feared they would have to move to PPS before their hospital competitors, placing them at a competitive disadvantage.

Additionally, the ASC industry’s concerns that hospital-based facilities are reimbursed at higher rates were alleviated when the hospital outpatient regulations were published Sept. 8 in the Federal Register.

Playing field is level, but nobody wins

"What we’re seeing is [that] the proposed hospital rates would effectively level the playing field between the freestandings and hospitals, so the hospital outpatient departments would take a tremendous hit from their current reimbursements," says Kevin McHugh, chief executive officer of Washington Orthopedic Center in Centralia, WA. The single-specialty surgery center has more than 1,000 cases per year.

On the down side, rural surgery centers and others are not being reimbursed enough to cover their costs under the new APCs.

"We’ve leveled the playing field, but rates have come down so low they don’t effectively work for anybody now," he says.

Already, Medicare patients are being shifted from ASCs to hospital-based outpatient surgery centers where the reimbursement is higher. What will happen to these patients, McHugh asks, when the hospital-based centers lose their financial advantage in the Medicare rates?

"We could effectively have a big class of patients that nobody wants; I think that’s what HCFA is starting to come to grips with."

Magno says Medicare patients won’t be dumped because non-profit hospitals will take care of them even if it means losing a lot of money.

"Hospitals have been losing money on outpatient services for a number of years; we provide the services anyway," she says.

There’s another problem that has been growing in recent years. Both ASCs and hospitals survived with low Medicare reimbursement because of cost shifting. If Medicare’s payment for a procedure is lower than what it costs to provide the service, then someone else — typically commercial payers — make up the difference by paying more than it costs, Beeler explains. Managed care organizations (MCOs) are putting an end to this trend.

"I think HCFA does not understand the environment . . . today in which managed care uses Medicare’s reimbursement rates as the foundation for their reimbursement rates," Beeler says. "In the past, HCFA assumed Medicare was the lowest cost provider and not the basis for every managed care payer to go by."

The days of cost shifting are long gone; with HCFA again cutting reimbursement rates, health care quality may suffer, Beeler says.

"We want a fair value reimbursement, and the value is cost plus quality," she adds.


For a summary of the Medicare hospital outpatient prospective payment system proposed rule, contact:

Healthcare Financial Management Association’s Knowledge Network Fax-It line at (800) 839-4362. Request item 400057. Members may order it by following the prompt and entering their membership number. Cost for non-members, $30, payable by credit card.

For more information about the Health Care Financing Administration’s regulations for ambulatory surgery centers and hospital-based outpatient facilities, contact:

Carol Beeler, Regional Vice President in Surgery Division, HealthSouth, 5254 Woodcliff Court, West Chester, OH 45069. Telephone: (513) 874-5373. Fax: (513) 874-6282. E-mail:

Federated Ambulatory Surgery Center, 700 N. Fairfax St., Suite 306, Alexandria, VA 22314. Telephone: (703) 836-8808. Fax: (703) 549-0976.

Chris Mancill, Technical Analyst, Healthcare Financial Management Association, 1301 Connecticut Ave. NW, Suite 300, Washington, DC 20036. Telephone: (800) 252-4362, ext. 606. Fax: (202) 223-9771. E-mail: cmancill@hfma. org. World Wide Web: http: //

Linda Magno, Interim Vice President for Policy, American Hospital Association, 325 Seventh St. NW, Suite 700, Washington, DC 20004. Telephone: (202) 626-2329. Fax: (202) 626-4319. E-mail:

Kevin McHugh, Chief Executive Officer, Washington Orthopedic Center, 1900 Cooks Hill Road, Centralia, WA 98531. Telephone: (360) 736-2889. Fax: (360) 736-3136. E-mail: