On July 18, 2011, the Centers for Medicare & Medicaid Services ("CMS") published the outpatient prospective payment system ("OPPS") proposed rule ("Proposed Rule"), updating the payment policies and rates for both hospital outpatient departments ("HOPDs") and ambulatory surgical centers ("ASCs") for calendar year ("CY") 2012. CMS projects that the total CY 2012 OPPS payments for services furnished to Medicare beneficiaries in HOPDs will be approximately $41.9 billion and the total payments under the ASC system will be approximately $3.61 billion. The following summarizes key proposals contained in the Proposed Rule.

Proposed Changes to the OPPS

For CY 2012, CMS is projecting a market basket update of 1.5 percent. This reflects a market basket increase of 2.8 percent for services paid under the Inpatient Prospective Payment System, minus 1.3 percent in adjustments required by the Patient Protection and Affordable Care Act ("PPACA"), including productivity adjustments. CMS is also proposing a 0.6 percent reduction in the payment rates for non-cancer OPPS hospitals to account for the enhanced payment adjustment for cancer hospitals recognizing the budget neutrality requirement under PPACA. Finally, in recognition of the proposed transition to the full use of community mental health center ("CMHC") data for the CMHC partial hospitalization Ambulatory Payment Classification ("APC") payment, CMS proposes a 0.2 percent payment increase for all other hospitals, again for budget neutrality compliance. The net impact of all such proposals amounts to a projected increase in payment rates for non-cancer HOPDs of 1.1 percent.

Cancer Hospitals. Under the Proposed Rule, CMS would increase OPPS payments to cancer hospitals, as a class, by 38.8 percent. However, this number does not reflect the net increase in payments due to most hospitals losing their Transitional Outpatient Payments or "TOPs." CMS estimates that the net increase to payments to cancer hospitals would be approximately nine percent. To ensure that this adjustment is applied in a budget neutral manner, CMS is also proposing a 0.6 percent adjustment to non-cancer hospitals' OPPS payments.

Separately Payable Drugs and Biologicals. The proposed payment rate for the acquisition and pharmacy overhead costs of separately payable drugs and biologicals without pass-through status is the manufacturer's average sales price ("ASP") plus four percent.

Partial Hospitalization Services. The Proposed Rule updates the APC per diem rates for partial hospitalization services furnished in freestanding CMHC partial hospitalization programs ("PHPs") and hospital-based PHPs. Both of the proposed payment systems are two-tiered, and are based on the number of services provided each day (Level I equals three services; Level II, four or more).

Outpatient Supervision Requirements. Physician supervision over outpatient services has been in a state of flux over the last few years. In last year's OPPS rule, CMS indicated that it would consider designating a process whereby individual outpatient services would be evaluated for a determination of whether such services warranted levels of supervision other than "direct" supervision as has been required in the past. Thus, in the Proposed Rule there are not proposed changes to the minimum level of supervision for individual outpatient therapeutic services; instead, there is a proposal to refer requests for supervision consideration to the APC Panel for evaluation and recommendation.

Hospital Outpatient Quality Reporting ("OQR") Program. As adopted in 2011, hospitals must report on 15 quality measures for CY 2012 and 23 quality measures for CY 2013 to be deemed a successful participant in the OQR program. Hospitals failing to meet such quality reporting measures are subject to a two percent reduction to the OPPS market basket update for the relevant year. In the Proposed Rule, CMS is proposing to add nine quality measures to the existing list of reporting measures for the purposes of payment in CY 2014, including measures related to healthcare-associated infections, chart-abstract measures related to diabetes care and cardiac rehabilitation and safe surgical checklist measures. For CY 2015, CMS proposes to add one new measure related to influenza vaccination among healthcare personnel. The proposed process for determining CY 2013 payment is identical to that for CY 2012, but would reduce the number of hospitals randomly selected for validation from 800 to 450. CMS is also proposing to select up to 50 additional hospitals (based on indications of possible data quality concerns) for targeted validation. These hospitals would be required to score at least 75 percent in the validation process to receive the full OPPS update in CY 2013.

Proposed Changes to ASC Payment Rates

CMS annually updates the ASC payment system by the consumer price index for all urban consumers ("CPI-U"). To comply with PPACA, CMS must now reduce that amount by a productivity adjustment. For CY 2012, CMS is projecting a CPI-U of 2.3 percent and a productivity adjustment of 1.4 percent. As such, CMS is proposing to apply a 0.9 percent update to the CY 2012 ASC payment rate.

ASC Quality Measure Reporting. CMS is proposing to implement a quality reporting program for ASCs. Under this proposed program, CMS would add eight quality measures in CY 2012 for CY 2014 payment determinations, including seven outcome and surgical infection control measures and one healthcare-associated infection measure. For the CY 2015 payment determinations, CMS is proposing to add two measures (structural), for a total of ten required reporting measures. CMS is proposing to add one measure (influenza vaccination coverage among healthcare professionals) with reporting beginning in CY 2013 for CY 2016 payment determinations.

Hospital Inpatient Value-Based Purchasing ("VBP") Proposals

As increasingly is the case, CMS includes several hospital inpatient changes in the OPPS rule. Specifically, CMS is proposing several changes to the second federal fiscal year (i.e., FY 2014) of the inpatient VBP as established under PPACA. Pursuant to the Hospital Inpatient Quality Reporting ("IQR") program, the VBP program would redistribute inpatient payments to hospitals to ensure that the payments remain budget neutral, as statutorily required. Payments would be based on quality performance data beginning October 1, 2012 (FY 2013). For FY 2013, the incentive payments would be funded through a one percent reduction to the FY 2013 IPPS payments, as required by PPACA. In FY 2014, the applicable percentage would be 1.25 percent. CMS is also proposing to expand the VBP program by adding one new clinical practice measure (removal of urinary catheters inserted during surgery one or two days post-surgery) to the current list of 12 clinical process and patient experience measures. Under the Proposed Rule, the FY 2014 payments would be based on the following four areas: (i) clinical practices; (ii) patient experiences; (iii) outcomes; and (iv) efficiency. CMS also is proposing to add two new domains (outcomes and efficiency) to better link the VBP program to improved patient outcomes and lower costs. In addition, the Proposed Rule sets forth a scoring methodology, including a scheme for weighting the domains, and outlines a review and correction process to help hospitals confirm the accuracy of the data to be used for calculating the total performance score.

Physician-Owned Hospitals

PPACA narrowed the "whole hospital" and "rural provider" exceptions to the physician self-referral ("Stark") law — the two exceptions that permit physicians to own and invest in hospitals — by limiting the ability of existing physician-owned hospitals to expand their capacity. At the same time, PPACA requires CMS to establish a process for physician-owned hospitals to apply for an exception to this general bar. Under the Proposed Rule, CMS would allow "high Medicaid facilities" and physician-owned hospitals that meet certain criteria (inpatient admission, bed capacity, and bed occupancy) to expand.

Comments to the Proposed Rule must be submitted to CMS by August 31, 2011.