Brace yourself: HCFA might be wrong in optimistic predictions for PPS rule

Faulty assumptions also used for ASC outpatient proposal, some say

Many same-day surgery experts initially were relieved to see the Health Care Financing Administration’s (HCFA) estimation that the final regulation for the hospital outpatient prospective payment system (PPS) would lead to a 4.6% increase in outpatient payments, instead of a 5.7% reduction. All the hoopla over the projected impact had been exaggerated, some suggested. But now it appears the hoopla might be more accurate than HCFA.

Many experts now say that HCFA made a number of assumptions; the estimates probably are off; and it’s unclear what impact the rule will have on hospital payments. In addition, some fear that "faulty assumptions" were present in the ambulatory surgery center (ASC) proposed PPS regulation and could cause problems with that final rule, scheduled for publication in November 2000 and implementation in April 2001.

In regard to the final hospital rule, "I never thought it was good news," says Eric Zimmerman, JD, associate with McDermott, Will, and Emery in Washington, DC.

HCFA made several assumptions, for example, that the outpatient claims collected by the agency to develop the PPS were correctly coded, he says.

"I think everyone agrees that hospitals have not correctly coded claims in the past because they haven’t had an incentive to do so," he says. "It’s hard to try to analyze what the impact is going to be, code by code and also in the aggregate, when you don’t have a historical sense."

Consultants who have analyzed HCFA’s assumptions for both the hospital-based rule and the proposed ASC regulation have come to different conclusions than the federal agency, Zimmerman points out. For example, The Lewin Group, a health care consulting company in Falls Church, VA, determined that under the ASC proposed rule, payment would decrease by 10%. In comparison, HCFA estimated that payment would decrease by 2%. "That’s a pretty considerable difference," Zimmerman says, and adds that a 2% reduction is out of the question for high-volume procedures such as ophthalmology.

"I’m nervous that the same faulty assumptions are present here in hospital context too," he says.

In forming the hospital outpatient PPS, HCFA assumed that the new payment system would cause outpatient staff to start coding more completely, or when they had a choice between two codes, to upcode, says Kevin Coleman, senior scientist at The Lewin Group.

"They also assumed hospitals and other outpatient facilities that would be facing reductions in payment would try to offset those losses through volume growth," he says. In addition, HCFA assumed that with multiple procedures, some hospitals would submit separate claims for each procedure to maintain higher payments rather than submit the procedures on a single claim and face payment discounts. These assumptions are reflected in the final rule, Coleman says.

However, HCFA wasn’t specific about how it arrived at these assumptions. For example, no one knows if there will be a volume offset, and no one knows if upcoding will occur and if it will occur rapidly, he adds.

When the Congressional Budget Office (CBO) looked at the differences between Medicare outpatient payments restored by the Balanced Budget Act and the Balanced Budget Refinement Act (BBRA), it estimated that between 2000 and 2004, $5.3 billion would be restored in payments to hospitals. "When we made our estimate, we could only come up with $4 billion," Coleman says.

"I’m not saying we’re right and they’re wrong," he says. "We’re just not sure what HCFA and the CBO have done."

The bottom line: The impact of the BBRA probably is going to be somewhat smaller than HCFA predicted, he says. "It’s difficult to assume how people will respond to a completely new payment system," Coleman adds.

Take HCFA’s prediction "with a grain of salt," suggests Deborah Williams, senior associate director of policy for the American Hospital Association (AHA) in Washington, DC. "No one knows what’s going to happen July 1," she says. "The payments could be more; they could be less; or HCFA could be about right." Keep in mind that HCFA is offering "transitional-corridor" payments until 2004. Medicare will pay hospitals a portion of any losses they would otherwise incur resulting from receiving smaller payment than under prior law.

"That affects the numbers," Williams says. "That’s why the estimate is so high."

At Fairview-Southdale Hospital in Edina, MN, same-day surgery managers have been advised by their financial consultants, Cleveland-based IMRglobal-ORION, that they should expect a mixed response. "They know in some areas we’ll probably be losing money, but they feel that if we follow the rules, there are areas for us to gain money, also," says Sonia Barness, RN, CNOR, same-day surgery nurse manager. (See tips for same-day surgery managers, p. 67.)

For example, same-day surgery programs will be reimbursed for multiple procedures, although the reimbursement will be discounted for the second and subsequent procedures.

In good news from HCFA, the agency is considering increasing outpatient PPS payments for more than 500 medical items, according to an April 21 letter to the Washington, DC-based Health Industry Manufacturer’s Association. In the letter, HCFA said the items would be considered for transitional pass-through payments, which would mean increased reimbursement for up to three years.

HCFA said that a significant number of cathe-ters and items that patients don’t take home with them probably would qualify for the increased payments. At press time, HCFA planned to post a revised list of approved items on its Web site ( (For good news on new intra-ocular lens technology, see story, p. 68.)

Will July 1 implementation date stand?

One question at the forefront of providers’ minds is whether the July 1, 2000, implementation date will be delayed and, if not, what problems can be expected.

Several groups, including the Cincinnati-based Catholic Healthcare Partners, which owns more than two dozen hospitals in four states, are writing congressional representatives to explain problems that will result from a July 1 implementation. However, HCFA officials have said that a delay is unlikely.

In the meantime, the AHA has asked HCFA to form contingency plans to address difficulties that could arise in implementing the system. At press time, HCFA planned to release those contingency plans by May 15. HCFA also is holding teleconferences with state hospital associations and training staff at those associations, software vendors, and fiscal intermediaries. By June 1, HCFA will publicize the PRICER program, which calculates payments for APCs.

[The final outpatient PPS regulation for hospitals was published in the April 7 Federal Register and can be accessed at the publication’s Web site (www. or through published copies in many public libraries. For more information on the final hospital outpatient PPS rule, see Same-Day Surgery, May 2000, p. 49.]

For more information about the hospital outpatient prospective payment system final rule, contact:

Sonia Barness, RN, CNOR, Same-Day Surgery Nurse Manager, Fairview-Southdale Hospital, 6401 France Ave. S., Edina, MN 55435. Telephone: (612) 924-5858. Fax: (612) 924-5390. E-mail:

Kevin Coleman, Senior Scientist, The Lewin Group, 3130 Fairview Park Drive, Suite 800, Falls Church, VA 22042. Telephone: (703) 269-5539. Fax: (703) 269-5501. E-mail: kacoleman

Deborah Williams, Senior Associate Director of Policy, American Hospital Association, 325 Seventh St. N.W., Washington, DC 20004. E-mail:

Eric Zimmerman, JD, Associate, McDermott, Will, and Emery, 600 13th St. N.W., Washington, DC 20005. Telephone: (202) 756-8000. E-mail: