DRG Coding Advisor

Analysts begin making the case for APCs

How will they compare to DRGs?

Now that ambulatory payment classifications (APCs) have been in place for the outpatient prospective payment system, some analysts are comparing them favorably to the diagnosis-related groups (DRG) system for inpatient services. Others, however, aren’t so sure about the way to go.

The real question is whether payers will follow the lead of the Health Care Financing Administration (HCFA) and use a system similar to APCs, says Dean Farley, PhD, vice president of health care policy and analysis for HSS, Hamden, CT. "Certainly we are seeing some of that now. A number of payers are looking at APCs and similar types of payment vehicles," Farley notes.

Payers who are accustomed to the benefits of the DRG system may be disappointed if they put into place an outpatient prospective payment system similar to HCFA’s. "The DRG system was pretty sophisticated, probably more than APCs at this point," he says. "I am interested in how private payers will respond once several of them get the payment system in place and realize that many of the benefits of inpatient payment systems don’t carry over. I don’t know whether they will continue to adopt that system or look at other strategies."

The DRG system created incentives for the hospitals by bundling services together in packages, but HCFA has not made an effort to revisit this issue with APCs, Farley says.

"DRGs gave a single payment for an entire hospital stay. They gave hospitals a great deal of latitude in terms of how they chose to treat that patient. That’s where you get incentives to improve efficiencies," he says. "With APCs, the hospital is basically paid for each individual service — not bundled together in treatment categories."

To bundle or not to bundle?

Because outpatient hospital care is often only part of an entire episode of care, the technical and data issues of APCs are more daunting for HCFA, Farley says. "I think HCFA will want to move in the direction [of bundling] even though MedPAC [the Medicare Payment Advisory Commission] has argued that HCFA shouldn’t go with the straight fee-schedule type of arrangement for hospital outpatient services."

One analyst, however, says bundling services would not properly and adequately reimburse a hospital. "When you go to a bundled, single APC per encounter, then the reimbursement level has to reflect the average for all those types of cases that could be included in that bundle," says Lamar Blount, CPA, FHFMA, president of Healthcare Management Advisors in Alpharetta, GA.

The risk would be that providers would try to gain by doing fewer of the things that could have been included in that single encounter, he continues. The provider, for example, could have the patient return at some other time for care that could have taken place in the first visit. The current system is also beneficial and convenient for patients, Blount says. "They can take less time from work to be able to come in and have more than one thing done in an outpatient encounter."

In addition, there is too much diversity between hospitals and from patient to patient to make a single APC system for the entire outpatient encounter work well, Blount says. "[The current system] results in a more appropriate reimbursement that recognizes the differences between patients and between facilities in terms of the extent of services that could occur within a single patient encounter."

For example, some patients may see three or four different clinics within an organization, he says. "If that was not generating a single, distinct APC for each of those types of services, then that type of organization would likely be severely financially hurt by going to an all-inclusive bundle situation in which each patient encounter has one APC."

The frustration with APCs is that many providers were not prepared to cope with the system. HCFA acknowledged that it wasn’t prepared to cope at that point either, Farley says. Providers’ ability to cope with the system will not improve if the outpatient prospective payment system continues to churn at the rate it is churning now, he adds. "By law, we are seeing weights and categories changing every three months. That’s a very fast pace for the providers to have to keep up with, just from a management perspective."

Providers are also seeing changes in reimbursement policy that are being made on the fly, Farley says. "These changes are being made through program memoranda, not through regulations. In some cases, they are not being made explicit." In addition, providers often find surprises in HCFA’s Outpatient Code Editor. "The changes are not being well-articulated. The providers are trying to hit a moving target, and they don’t necessarily even know what that target is," he says. (See "Coders will be in increasing demand," in this issue.)

In a worst-case scenario, the outpatient prospective payment system will lose support if the pace of the changes and the lack of communication about them continue. "It will also be difficult for HCFA to figure out how to rationalize the system," Farley predicts. "They won’t have a stable system that they can analyze and understand."

If the situation does change, however, providers might find a system they could embrace. "The providers could recognize the importance of the payment that they are creating and invest in their outpatient coding as they haven’t in the past."

A whole new system

Based on the history of DRGs, Blount says there is a reasonably good chance that the government will only tinker with APCs for at least 10 years. However, he does see the chance that the federal government could go to an all-capitated system. "Just as it pays HMOs on a capitated basis, it could do the same with the rest of the providers," Blount notes. He says such a change in reimbursement could reasonably occur sometime in the future, but he doesn’t see that happening any time soon.

Farley says he expects a continued movement toward code-based reimbursement. The Balanced Budget Act (BBA) of 1997 put Medicare on the path to prospective payment — fee-schedule, code-based reimbursement, he says. This reimbursement is driven by diagnostic procedure codes on the bill for virtually all Medicare services. "Once the BBA is fully phased in, those payment systems will cover 99% of the Medicare dollar. I think it is inevitable that Medicare will continue to move in that direction, although not as quickly as originally envisioned."