1. INTRODUCTION

   On April 7, 2000, the Health Care Financing Administration ("HCFA") issued a final rule implementing the hospital outpatient prospective payment system ("HOPPS"). 65 Fed. Reg. 18,434. This rule is the most significant reimbursement change facing hospitals -- and manufacturers and suppliers of products used in the hospital setting -- in almost twenty years. The rule generally is effective July 1, 2000, with certain exceptions.

   Briefly, under the final rule, all covered outpatient services are divided into 451 "ambulatory payment classification" ("APC") groups, which represent services that are clinically similar and require comparable resources. All services within a particular APC generally are paid at the same prospectively-fixed rate. The national payment rate will be wage-adjusted to reflect regional differences. Additional special payment is available for certain chemotherapy drugs, new medical devices and drugs, and certain high-cost cases.

   In addition to implementing the HOPPS, the final rule addresses, among other things, the criteria a facility must meet to be designated "provider-based." In recent years, provider-based facilities have expanded, including an increase in hospitals acquiring physician office practices to use as hospital outpatient departments. The final rule also includes requirements for hospitals to furnish an appropriate level of physician supervision. Because of the significance of these requirements for many clients with satellite facilities, we are addressing these provisions in a separate Client Memorandum that we also are releasing today.(fn1)

   HCFA is accepting comments only on the provisions of the rule that address changes mandated by the "Balanced Budget Refinement Act of 1999" ("BBRA"). Such comments must be received by June 6, 2000.

   Because of the complexity of the almost 400-page HOPPS rule, this Memorandum provides only an overview of the major issues addressed in the rule and highlights areas important to many of our clients. It does not provide a comprehensive treatment of all of the many questions raised by the regulation. We would be pleased, however, to provide additional details and analysis regarding any aspects of the rule that are of particular interest.

2. HOPPS PROVISIONS

1. Background

   The Balanced Budget Act of 1997 ("BBA") requires the Secretary of Health and Human Services ("Secretary") to establish a prospective payment system ("PPS") for hospital outpatient services. Under this system, payments will be uniform and fixed for all patients undergoing certain procedures in certain hospitals. The BBA also intended to reduce patient copayments for hospital outpatient services. The Secretary issued a proposed rule to implement the HOPPS on September 7, 1998 (63 Fed. Reg. 47,551), with payments based on ambulatory payment classification ("APC") groups. On June 30, 1999, the Secretary published a correction notice (64 Fed. Reg. 35,258) addressing a number of technical errors in the initial proposed rule.

   The BBRA made several structural changes intended to improve the design of the HOPPS. Among other things, the BBRA established outlier payments for high-cost patients and transitional pass-through payments for certain medical devices, drugs, biologicals, and radiopharmaceuticals.(fn2) 

2. Facilities And Services Included In The HOPPS System
   1. Facilities

The HOPPS covers all hospitals participating in the Medicare program, except (1) those services furnished by certain Maryland hospitals that are paid under a cost containment waiver, and (2) critical access hospitals.

Hospitals or distinct parts of hospitals that are excluded from the inpatient PPS are included in the outpatient PPS, to the extent that the hospital or distinct part furnishes outpatient services. Likewise, partial hospitalization services furnished by community mental health centers ("CMHCs") are covered by the rule.

   2.  Services

The final rule is applicable to services listed below that are furnished on or after July 1, 2000 by hospital outpatient departments to Medicare beneficiaries who are registered on hospital records as outpatients.

The PPS rate includes operating and capital-related costs that are directly related and integral to performing a procedure or furnishing a service on an outpatient basis, including, but not limited to:

(1) Use of an operating suite, procedure room, or treatment room;

(2) Use of recovery room;

(3) Use of an observation bed;

(4) Anesthesia, certain drugs, biologicals, and other pharmaceuticals; medical and surgical supplies and equipment; surgical dressings; and devices used for external reduction of fractures and dislocations;

(5) Supplies and equipment for administering and monitoring anesthesia or sedation;

(6) Intraocular lenses ("IOLs");

(7) Incidental services such as venipuncture;

(8) Capital-related costs;

(9) Implantable items used in connection with diagnostic X-ray tests, diagnostic laboratory tests, and other diagnostic tests;

(10) Durable medical equipment ("DME") that is implantable;

(11) Implantable prosthetic devices (other than dental) which replace all or part of an internal body organ (including colostomy bags and supplies directly related to colostomy care), including replacement of these devices; and

(12) Costs incurred to procure donor tissue other than corneal tissue.

The rule also provides that payment is made under the HOPPS for antigens, splints and casts, and pneumococcal vaccine, influenza vaccine, and hepatitis B vaccine furnished by:

(1) A comprehensive outpatient rehabilitation facility ("CORF") when they are provided outside the patient’s plan of care;

(2) A home health agency ("HHA") to patients who are not under an HHA plan or treatment; or

(3) A hospice program furnishing services to patients outside of the hospice benefit.

b)  Excluded Costs

The following costs are excluded from the HOPPS APC payments, although in some cases, they can be paid separately:

(1) Medical education costs for approved nursing and allied health education programs;

(2) Corneal tissue acquisition costs incurred by hospitals that are paid for on a reasonable cost basis;

(3) Physician services;

(4) Nurse practitioner and clinical nurse specialist services, physician assistant services, certified nurse-midwife services, services of qualified psychologists, services of an anesthetist, and clinical social worker services;

(5) Outpatient therapy services,

(6) Ambulance services;

(7) Orthotic and prosthetic devices, except those discussed above;

(8) Non-implantable DME supplied by the hospital for the patient to take home; (fn3) 

(9) Clinical laboratory services;

(10) Services for patients with end-stage renal disease ("ESRD") that are paid under the ESRD composite rate and drugs and supplies furnished during dialysis but not included in the composite rate;

(11) Services and procedures that the Secretary designates as requiring inpatient care; (fn4)

(12) Certain outpatient services furnished to skilled nursing facility ("SNF") residents as part of the patient’s resident assessment or comprehensive care plan (and thus included under the SNF PPS) that are furnished by the hospital "under arrangements" but billable only by the SNF, regardless of whether or not the patient is in a Part A SNF stay;

(13) Services not covered by Medicare by statute; and

(14) Services that are not reasonable or necessary for the diagnosis or treatment of an illness or disease.

C.  APCs

Under the HOPPS, HCFA divides all outpatient services covered by the new payment schedule into 451 groups, called "ambulatory payment classifications" ("APCs"). Services within each APC are clinically similar and require comparable resources. (fn5) In response to criticism that the proposed rule included dissimilar procedures within a single APC and new BBRA APC requirements, HCFA in the final rule increased the number of APC groups and included fewer codes within each group. In many cases, HCFA has moved HCPCS codes from its proposed APC group to a different APC group in the final rule.

Under the final rule, HCFA considers items and services within a group as not comparable if the highest median cost for an item or service within the group is more than two times greater than the lowest median cost for an item or service within the group (HCFA may make exceptions to this criteria in unusual cases, such as low volume items and services, but not in the case of a drug or biological designated as an orphan drug).

D.  Calculation Of Payments Under The HOPPS

Generally, the methodology HCFA uses to calculate payments under the HOPPS includes APCs, transitional corridor payments, transitional pass-through payments, and outliers, as summarized below.

1. Basic Payments

The APC payment rate (and applicable beneficiary copayment) for each group applies to every HCPCS code classified within the APC group. While payment is dependent on the APC, hospitals still will submit bills using HCPCS codes.

Using data from calendar year ("CY") 1996 and data from the most recent available hospital cost reports, HCFA determines the median costs for the services and procedures within each APC group. HCFA then assigns to each APC group an appropriate weighing factor to reflect the relative median costs for the services within the APC group compared to the median costs for the services in all APC groups ("relative weight").

HCFA also uses a "conversion factor" that essentially calculates the total level of Medicare outpatient payments and beneficiary coinsurance payments in CY 1999 and, for calendar years 2000 through 2002, reduces it by the hospital inpatient market basket ("MBI") percentage increase reduced by one percentage point. For CY 2003 and beyond, the reduction is the full MBI percentage.

The payment rate for services and procedures is the product of the conversion factor and the relative weight. The following are examples of payment rates for several APCs:

Although national payment rates are established for each group, payments will be wage-adjusted to reflect geographic differences.

HCFA will adjust the conversion factor as needed to ensure that updates and adjustments are budget neutral. The first annual review must be conducted in 2001 for payments made in 2002. HCFA also will review the APC groups, wages, and other adjustments at least annually. As part of this review, HCFA will consult with an expert panel composed of provider representatives.

Note, however, that in addition to the payments under the APCs, hospitals may be eligible for payments under the transitional pass-through and outlier provisions discussed below, along with fee schedule payments for clinical laboratory services and certain other items and services.

     2.  "Transitional Corridor" Payments

The final rule implements a BBRA provision that mandates additional payments to hospitals during the first three years of the HOPPS if the hospitals’ payments are less than their pre-PPS payments in 1996, based on a specified formula. The additional payments are a specified percentage of the difference between old and new payment levels. For instance, for calendar years 2000 and 2001, payment to hospitals whose HOPPS payment is less than 100 percent but at least 90 percent of the pre-BBA payment is increased by 80 percent of the difference. On the other hand, payments to hospitals whose PPS payment is less than 70 percent of the pre-BBA payment will be increased by 21 percent of the pre-BBA payment.

Moreover, the final rule temporarily holds certain small rural hospitals harmless from payment reductions under the PPS (i.e., they will be paid a predetermined pre-BBA amount for services covered under the HOPPS if payment under the HOPPS would be less than the pre-BBA amount). This provision expires January 1, 2004. The rule also institutes a "hold harmless" provision for cancer hospitals, but this protection is permanent.

In the preamble to the final rule, HCFA points out that it will conduct extensive analyses during the first years of implementation of the PPS to determine whether it should propose adjustments for certain types for hospitals, including children’s hospitals, when the transitional corridor provision expires.

     3.  Transitional Pass-Through Payments

Under the BBRA, Congress mandated a "pass-through" or carve-out for  the following drugs and devices:

• Current orphan drugs;
• Current drugs, biological agents, and brachytherapy devices used for treatment of cancer;
• Current radiopharmaceutical drugs and biological products;
• New medical devices, drugs, and biological agents, in instances where the item was not being paid for as a hospital outpatient services as of December 31, 1996, and where the cost of the item is "not insignificant" in relation to the hospital outpatient PPS payment amount.(fn6)

Transitional pass-through payment will be available for not less than 2 years and not more than three years.

The pass-through payments will be paid with drugs and biologicals at the amount 95 percent of average wholesale price ("AWP") exceeds the portion of the APC amount associated with the drug or biological. Medical devices will be paid by the amount by which the hospital’s charges for the device, adjusted to cost, exceed the portion of the APC associated with the device. Stated otherwise, HCFA will somehow determine the portion of the APC that represents the value of the drug, biological or device. This value will be subtracted from the AWP minus five percent (for drugs and biologicals), the hospital costs, or the APC payment rate to determine the pass-through. The total amount of pass-throughs, however, cannot exceed a percentage of total HOPPS payments. Therefore, pass-through payments may be reduced to ensure that this payment cap is not exceeded.

HCFA has placed a number of specific chemotherapy drugs, radiopharmaceuticals, and other products eligible for pass-through payments, in discrete APCs.

4.  New Technology APCs/Additional Payments For Certain New Medical Devices And Drugs

In the final rule, HCFA created a new category of APCs -- new technology APCs -- which allow HCFA to temporarily classify new technology items and services while it gathers additional data and gains pricing experience.

In contrast to the other APCs, the new technology APCs are not based on the clinical aspects of the services they contain. Instead, these APCs are differentiated by the "costs" of the items or services. The payment rate is based on the midpoint of ranges of possible costs. Thus, for a new technology APC reflecting costs from $100 to $300 dollars, the payment would be set at $200. The new technology APCs are numbered 0970 - 0984 and cover costs from less than $50 to $6,000.

New items and services assigned to these APCs will be retained in the APC for at least two years, but not more than three years. The items or services will then be moved to a clinically related APC group with comparable resource costs. If no APC exists with these characteristics, HCFA will create a new classification for the service. HCFA will implement this process via a quarterly update to the HOPPS (i.e., the next update is October 1, 2000).

For an item or service to be eligible for treatment under this process, it must meet the following criteria:

• The item or service is one that could not have been billed to the Medicare program in 1996 or, if it was available in 1996, the costs of the item or services could not have been adequately represented in 1996 data.
• The item or service does not qualify for an additional payment under the statutorily mandated pass-through provisions.
• The item or service has a HCPCS code.
• The item or service falls within the scope of Medicare benefits and is reasonable and necessary.

HCFA issued a separate notice on April 7, 2000 addressing the process for interested parties to use if they wish to submit additional items for consideration under the new technology APC groups. 65 Fed. Reg. 18,341.

5.  Discounting Of Surgical Procedures

Under the HOPPS, HCFA generally will discount payment amounts for surgical procedures when more than one procedure is performed during a single operative session or when a surgical procedure is terminated prior to its completion. This discount is designed to reflect the savings associated with having to prepare the patient only once and the incremental costs associated with anesthesia, operating and recovery room use, and other services required for the second and subsequent procedures. Parallel discounts will apply to beneficiary coinsurance amounts.

a)  Multiple Surgical Procedures And Status Indicators

HCFA assigns a payment status indicator to every HCPCS/CPT code to identify how -- or whether -- the service or procedure is paid under the HOPPS. The status indicator for a particular procedure therefore has significant reimbursement implications for hospitals.

HCFA divides surgical procedures into two categories:

• "S" -- Significant procedures for which payment is allowed under the HOPPS but to which the multiple procedure reduction does not apply (i.e., APC 77, Level I Pulmonary Treatment; APC 284, Magnetic Resonance Imaging; and APC 116, Chemotherapy Administration by Other Technique Except Infusion); and
• "T" -- Surgical services for which payment is allowed under the HOPPS, but to which the multiple procedure payment reduction does apply (i.e., APC 41, Arthroscopy; APC 91, Level I Vascular Ligation; APC 246, Cataract Procedures with IOL Insert).

When more than one surgical procedure with the payment status indicator "T" is performed during a single operative session, HCFA will pay the full Medicare payment and the beneficiary will pay the coinsurance for the procedure having the highest payment rate. For all other procedures performed during the same operative session, 50 percent of the usual HOPPS payment amount and beneficiary coinsurance amount will be paid.

b.  Terminated Procedures

If a surgical procedure is terminated prior to completion due to extenuating circumstances or circumstances that threaten the well-being of the patient, the Medicare program payment amount and the beneficiary copayment amount are based on:

• The full amounts if the procedure is discontinued after the induction of anesthesia or after the procedure is started; or
• One-half of the full program and beneficiary coinsurance amounts if the procedure is discontinued after the patient is prepared for surgery and taken to the room where the procedure is to be performed, but before anesthesia is induced.

6.  Outlier Provisions

The BBRA requires the Secretary to provide an additional "outlier" payment to hospitals for certain high cost cases for which costs for each covered service exceed a fixed multiple of the APC amount. Total outlier payments must be made in a budget-neutral manner. Also, aggregate outlier payments are limited to 2.5 percent of total outpatient payments for the first three years of the new system, and up to 3 percent of total payments in subsequent years.

Under the final rule, an outlier payment will be made when the calculated bill costs exceed the PPS payments on a claim, as adjusted by pass-through payments, by more than 2.5 times.

The rule institutes a BBRA provision authorizing the Secretary until 2002 to identify outliers on a bill basis rather than on a specific service basis, and to use an overall hospital cost-to-charge ratio ("CCR") to calculate costs on the bill rather than using department-specific CCRs for each hospital. As a result, hospitals will need to continue billing as they have, on the basis of charges, in order for HCFA to calculate applicable outlier payments.

7.  Outpatient Operating Costs, Capital Related Costs

The final rule implements a provision of the BBA, as modified by the BBRA, mandating that Medicare hospital outpatient operating and capital costs be reduced by 5.8 percent and 10 percent, respectively, until the date of implementation of the HOPPS.

E.  Claims Submission And Processing

In the preamble to the rule, HCFA notes that all current correct coding initiative ("CCI") edits, with the exception of laboratory and anesthesiology edits, have been incorporated in the outpatient code editor that fiscal intermediaries ("FIs") use to process payment of hospital outpatient claims. CCI edits detect when codes representing component services are reported with the code for the more comprehensive services.

F.  Limitation On Outpatient Hospital Copayment

Beneficiaries now pay 20 percent of charges billed by the hospital, rather than 20 percent of the Medicare payment amount (as generally is the case with other Medicare services). These "higher" payments have been of particular concern to senior citizens and Congress.

Under the final rule, coinsurance amounts will be frozen temporarily, while the payment rate for the APC is increased by adjustments based on the market basket. As the APC rate increases and the coinsurance amount remains frozen, the coinsurance payment for an APC eventually will become 20 percent of the total Medicare payment. Once coinsurance becomes 20 percent of the total payment, both the Medicare payment and the coinsurance amount will be updated annually. In calculating copayment amounts, special payments to hospitals for outlier cases and for certain medical devices, drugs, and biologicals, and transitional corridor payments are not considered.

The actual copayment amounts for an APC will be limited to the Medicare hospital inpatient deductible for that year ($776 in 2000). Any reductions in copayments that occur in applying this limitation will be paid to hospitals as additional program payments.

Hospitals (but not CMHCs) also have the option of reducing the copayment for any or all APC groups if certain conditions are met.

G.  HOPPS Regulatory Impact Analysis

According to HCFA, the HOPPS -- when factoring in transitional corridor payments -- will increase overall Medicare outpatient payments to hospitals by 4.6 percent annually in calendar years 2000 - 2001, compared to HCFA’s estimate of payment under the current system. The impact on various classes of hospitals varies, however, as does the impact on individual hospitals. For instance, while Medicare HOPPS payments to urban hospitals with 100 - 199 beds are expected to increase by 5.2 percent, payments to urban hospitals with 500 or more beds is expected to rise by only 2.8 percent. The impact of the HOPPS on hospitals exempt from the inpatient hospital PPS also varies; HCFA projects that psychiatric hospitals will see a 27.9 percent increase in outpatient payments, while children’s hospitals will see outpatient payment fall by 2 percent. Of course, these estimates are subject to dispute by the hospital industry.

III.  UNBUNDLING PROHIBITION

Additionally, the final rule implements a provision of the Omnibus Budget Reconciliation Act ("OBRA") of 1986, as amended by OBRA 1987, that authorizes a civil monetary penalty ("CMP") to be imposed against any person who knowingly and willfully presents, or causes to be presented, a bill or request for payment for a hospital outpatient service under Medicare Part B that violates the requirement for billing under arrangements. The amount of the CMP is limited to $2,000 for each bill or request for items and services furnished to hospital patients in violation of the bundling requirements.

The final rule amends the September 1998 proposed rule by, among other things, providing an exception to the hospital bundling requirements for services hospitals furnish to SNF residents. HCFA notes, however, that for exceptionally-intensive hospital outpatient services that lie well beyond the ordinary scope of SNF care plans (i.e., those that are exempt from the consolidated billing requirements), the beneficiary’s status as a SNF resident ends, but only with respect to these services. In such cases, the beneficiary is considered to be a hospital outpatient and the services are subject to hospital unbundling requirements.

IV.  CONCLUSION -- EDUCATION

HCFA recognizes the significant ramifications of the HOPPS rule for hospitals and the need to ensure that both providers and FIs are prepared to implement the new system. To that end, HCFA recently announced that it will be holding a series of HOPPS training sessions in May in Baltimore, Maryland.(fn7) HCFA also is allowing hospitals to submit bills under the HOPPS system in May in order to allow providers to correct any systems problems before HOPPS is operational.

Nevertheless, many in the provider community have raised concerns about the feasibility of actually implementing the system on July 1, 2000. In particular, critics have argued that HCFA has provided insufficient time for hospitals to make the necessary computer and administrative changes. A coalition of hospitals is urging Congress to delay implementation of the HOPPS for at least six months, although it is unclear