The Centers for Medicare & Medicaid Services (CMS) recently announced that, starting January 1, 2015, it is planning to change the way hospitals and other providers are reimbursed by Medicare for many outpatient hospital services—moving away from the traditional fee-for-service model to an expanded bundled payment system. The Proposed CY2015 Hospital Outpatient Prospective Payment Rule issued by CMS on July 3, 2014 (the CY2015 OPPS Proposed Rule), would impose a new, expanded bundled payment system for hospital outpatient procedures similar to the existing bundled payment system used by Medicare to pay for inpatient hospital services (the Inpatient Prospective Payment System (IPPS)). CMS has stated that the CY2015 OPPS Proposed Rule “would continue the progress made so far in moving the OPPS from what currently resembles a hybrid of a prospective payment system and a fee schedule, to a more comprehensive prospective payment system.” For hospitals and physicians, these changes may introduce billing challenges and reduced reimbursement for outpatient procedures.

Currently, Medicare reimburses providers for outpatient hospital services on a fee-for-service basis under Medicare Part B. That is, the hospital and each treating provider are separately paid a pre-set amount for each outpatient service they provide to a Medicare beneficiary, even if the services are for a single illness or course of treatment. The amount paid by CMS for each service is pre-determined by the ambulatory payment classification (APC) assigned to the service, and when multiple services are provided, the APCs are aggregated together to determine the total payment due to the servicing hospital or physician (i.e., APC1 + APC2 + APC3 = Total APC Due Treating Physician A). Moreover, under the existing OPPS system, CMS separately pays providers for services that are ancillary— i.e., integral, supportive, dependent, or adjunctive - to the primary service. These ancillary services are usually minor diagnostic tests, but can also include costly therapeutic services.

CMS has recognized that, under the existing billing system outlined above, hospitals and other treating providers are incentivized to maximize the number of outpatient services and associated ancillary services provided to any single patient in the course of treating an ailment, since the aggregate APC, and therefore often the total payment received from Medicare, varies directly with the number of outpatient services provided. (Note: This statement is qualified by “often” because certain services, as a matter of course, are provided by hospitals at a loss under Part B reimbursement rates).

According to CMS, the CY2015 OPPS Proposed Rule is designed to eliminate this perverse incentive. If the CY2015 OPPS Proposed Rule goes into effect, CMS would begin using “Comprehensive APCs” in place of existing APCs to reimburse providers for 28 identified outpatient services (each identified by a new OPPS status indicator of “J1”). Specifically, the Comprehensive APC would assign a single payment rate (i.e., a bundled payment) for a service that would also compensate the provider for all related or adjunctive hospital services provided to the patient to support the delivery of the primary service (e.g., CMS would provide a single payment for the primary service defined as “insertion of a pacemaker” that would also serve as the payment for all ancillary services provided).

The concern for hospitals and physicians lies in the breadth of services captured by the Comprehensive APCs. In the CY2015 OPPS Proposed Rule, CMS explained that the Comprehensive APC payment, with few exceptions, would capture and compensate for the entire hospital stay of a designated primary service. It states CMS, “with few exceptions, would consider all other services reported on a hospital Medicare Part B claim in combination with the primary service to be related to the delivery of the primary service,” regardless of any differences in the dates of service. CMS provides the following as examples of ancillary procedures captured in the bundled payment rate: diagnostic procedures and laboratory tests that assist in the delivery of the primary procedure, visits and evaluations performed in association with the procedure, uncoded services and supplies used during the service, outpatient department services similar to therapy and delivered either by therapists or non-therapists as part of the comprehensive service, durable medical equipment, prosthetic and orthotic items and supplies when provided as part of the outpatient service, and any other components reported by the HCPCS codes that are provided during the comprehensive service (including drugs, biologicals, radiopharmaceuticals), except services excluded by CMS. Services that are specifically excluded by CMS from bundles include: (i) self-administered drugs that are not considered supplies; (ii) services excluded from the OPPS by Section 1833(t)(1)(B) of the Social Security Act; (iii) preventative services defined in 42 C.F.R. § 410.2; and (iv) brachytherapy services and pass-through drugs, biologicals and devices that are separately payable by statute.

CMS initially proposed Comprehensive APCs for various outpatient services in the CY2014 OPPS Proposed Rule; but, when passing the associated Final Rule, elected to delay implementing the Comprehensive ASCs until it obtained sufficient feedback from hospitals and physicians. The CY2014 OPPS Final Rule defined 29 Comprehensive APCs which would have imposed a flat, prospective payment rate for 167 prototypically high-cost, “device-dependent,” outpatient services (defined by CMS as procedures populated by HCPCS codes that usually, but do not always require that a device be implanted or used to perform the procedure where the cost of the device is relatively high compared to the other costs that contribute to the costs of the service). The CY2015 OPPS Proposed Rule consolidates and restructures the services captured by the CY2014 Comprehensive APCs. Overall, it proposes a total of 28 Comprehensive APCs. It includes the services captured in the CY2014 OPPS Final Rule, but expands the breadth of services captured under the Comprehensive APCs to also include (i) some typically lower-cost, “device-dependent” services and (ii) two procedures that are largely device-dependent or are single-session services with multiple components (e.g., single-session cranial stereotactic radiosurgery (C-APC 0067) and intraocular telescope implantation (C-APC 0351)).

A few of the modifications proposed by the CY2015 OPPS Proposed Rule benefit providers and may offset some of the revenue that will be lost in bundling payments. First, the Rule introduces a proposed “complexity adjustment,” or add-on code to increase the amount paid for a primary service captured under a Comprehensive APC when complexities in treatment exist. This is the first time in OPPS history where something like a severity adjustment is being used in outpatient reimbursement. Second, the CY2015 OPPS Proposed Rule proposes to increase the payment rates provided under the OPPS Payment Schedule by a factor of 2.1 percent. But, the Rule also retains the mandatory 2% reduction in payments for hospitals that fail to meet the hospital outpatient quality reporting requirements in a particular year. Finally, the Rule proposes to modify the physician certification requirement of the Two Midnight Rule to make it a condition of payment and only mandate additional documentation of a physician’s certification for inpatient admissions in long-stay cases and outlier cases.

Overall, the CY2015 OPPS Proposed Rule suggests that CMS is committed to transitioning outpatient hospital services to a more comprehensive bundled payment system in the near future. For hospitals and providers, this Rule, when combined with the Two Midnight Rule, may foretell the decline of the outpatient department as the ever-reliable profit center.