Final rule on APCs called mostly positive

Changes reflect comments HCFA received

Generally speaking, hospitals should be pleased with the changes reflected in the final rule on the outpatient prospective payment system (PPS), says Kevin Quinn, senior health economist with Abt Associates, a health care research and consulting firm in Washington, DC.

As expected, the Balanced Budget Refinement Act (BBRA) of 1999 mitigated much of the negative financial impact of the proposed rules issued Sept. 8, 1998.

Many of the administrative changes made in the final rule, published April 7, 2000, in the Federal Register, reflect the impact of the 10,500 comments the Health Care Financing Administration (HCFA) received from health care organizations, physician groups, beneficiaries, professional organizations, and special interest groups, notes Laura Frazier, RHIT, manager of ambulatory patient classifications (APC) solutions for San Rafael, CA-based QuadraMed Corp.

"I think that hospitals got almost everything they wanted," adds Quinn. "There is more money on the table — an overall increase in the budget. A bunch of specific hospital concerns got addressed in the final rule."

Among the pluses for hospitals, he says, are "a remarkable degree of unbundling, an outlier payment mechanism, pass-through payments for medical devices and some drugs, and no allowance built into the budget calculations for changes in coding. Changes in coding are likely to result only in increases in payments, so some payers, when they are doing something like this, build in an allowance for that. HCFA did not."

Unbundling is "where all the action is" when you design a prospective payment method, he says. "If you look at the diagnosis-related group [DRG] payment system for hospital inpatient services, there is one payment for each stay, and within that stay it doesn’t matter how many tests are done [or] how many X-rays are taken. DRGs are a relatively bundled system."

The physician payment system, in which physicians bill any one of 8,000 different services, is "the epitome of unbundling," Quinn points out. "A few years ago, people talked about APCs as if they were outpatient DRGs. No one would say that now. HCFA has taken much more of a resource-based relative value scale philosophy, which is how physicians get paid, than a DRG philosophy."

Other positive notes for hospitals reflected in the final rule, he says, include the following:

• A transition period through 2004 during which Medicare will pay hospitals a portion of any losses they otherwise would incur as a result of receiving smaller payments than under prior law.

• Additional protection against adverse effects for rural hospitals and cancer hospitals.

• No control on any increases in utilization of services.

• No checking of physician bills against hospital bills to see if, for example, the physician billed a level 1 office visit, and the hospital billed a level 4 office visit.

"The only place HCFA stood really firm," Quinn adds, "was in its treatment of observation services." (See related story, p. 66.)

Not all reaction to the final rule has been positive, however. Overall, the increased payments still put hospitals in a hole compared to where they were before the Balanced Budget Act (BBA), according to the Chicago-based American Hospital Association (AHA).

Before the BBA was passed in 1997, Medicare paid hospitals about 92 cents for every dollar of outpatient services performed, the AHA says. The BBA cut that amount to about 82 cents on the dollar and threatened to lower it. The 1999 BBRA stopped the decrease. With the new PPS regulation, the amount of payment will go to about 86 cents or 87 cents for every dollar of outpatient services. And that amount will decrease as "transitional corridor" payments are phased out, AHA officials point out.

"The big question is how well the corridor system will work," says Eric Zimmerman, JD, an associate with the law firm of McDermott, Will, and Emery in Washington, DC. Zimmerman notes that the payments will be made retroactively when hospitals submit the paperwork. "It will be interesting to see how well carriers will implement that and how soon providers will get their money."

Frazier points out that while many of the provisions of the BBRA reduce the negative financial impact, there are still tremendous operational issues facilities will face that have not been mitigated. Even the stated objective of the PPS was revised to capture HCFA’s intent, she adds.

Added to the objective of simplifying the payment system while ensuring hospitals are compensated adequately is the phrase, "and encourage hospital efficiency in providing outpatient services," Frazier says.