# Medicare Program; Prospective Payment System for Hospital Outpatient Services

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URL: https://www.frixlaw.com/law-library/documents/fr%3A98-23383

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 8, 1998
- **Citation:** 63 FR 47552

## Text

SUMMARY: As required by sections 4521, 4522, and 4523 of the Balanced
Budget Act of 1997, this proposed rule would eliminate the formula-
driven overpayment for certain outpatient hospital services, extend
reductions in payment for costs of hospital outpatient services, and
establish in regulations a prospective payment system for hospital
outpatient services (and for Medicare Part B services furnished to
inpatients who have no Part A coverage). The prospective payment system
would simplify our current payment system and apply to all hospitals,
including those that are excluded from the inpatient prospective
payment system. The Balanced Budget Act provides for implementation of
the prospective payment system effective January 1, 1999, but delays
application of the system to cancer hospitals until January 1, 2000.
The hospital outpatient prospective payment system would also apply to
partial hospitalization services furnished by community mental health
centers.
Although the statutory effective date for the outpatient
prospective payment system is January 1, 1999, implementation of the
new system will have to be delayed because of year 2000 systems
concerns. The demands on intermediary bill processing systems and HCFA
internal systems to become compliant for the year 2000 preclude making
the major systems changes that are required to implement the
prospective payment system. The outpatient prospective payment system
will be implemented for all hospitals and community mental health
centers as soon as possible after January 1, 2000, and a notice of the
anticipated implementation date will be published in the Federal
Register at least 90 days in advance.
This document also proposes new requirements for provider
departments and provider-based entities. These proposed changes, as
revised based on our consideration of public comments, will be
effective 30 days after publication of a final rule.
This proposed rule would also implement section 9343(c) of the
Omnibus Budget Reconciliation Act of 1986, which prohibits Medicare
payment for nonphysician services furnished to a hospital outpatient by
a provider or supplier other than a hospital, unless the services are
furnished under an arrangement with the hospital. This section also
authorizes the Department of Health and Human Services' Office of
Inspector General to impose a civil money penalty, not to exceed
$10,000, against any individual or entity who knowingly and willfully
presents a bill for non-physician or other bundled services not
provided directly or under such an arrangement.
This proposed rule also addresses the requirements for designating
certain entities as provider-based or as a department of a hospital.

DATES: Comments will be considered if we receive them at the
appropriate address, as provided below, no later than 5 p.m. on
November 9, 1998.

ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address: Health Care Financing Administration, Department of
Health and Human Services, Attention: HCFA-1005-P, P.O. Box 26688,
Baltimore, MD 21207-0488.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201, or
Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code HCFA-1005-P. Comments received timely will be available
for public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in Room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
Copies: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
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number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 512-1800 or by faxing to (202) 512-
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libraries throughout the country that receive the Federal Register.
This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web; the Superintendent of Documents home page address
is
http://www.access.gpo.gov/nara/index.html, by using local WAIS client
software, or by telnet to swais.access.gpo.gov, then login as guest (no
password required). Dial-in users should use communications software
and modem to call 202-512-1661; type swais, then login as guest (no
password required).

FOR FURTHER INFORMATION CONTACT:
Janet Wellham, (410) 786-4510 (for general information). Joel Schaer
(OIG), (202) 619-0089 (for information concerning civil money
penalties).
Kitty Ahern, (410) 786-4515 (for information related to the
classification of services into ambulatory payment classification (APC)
groups).
Suzanne Letsch (410) 786-4558 (for information related to volume
control measures and updates).
George Morey (410) 786-4653 (for information related to the
determination of provider-based status).
Janet Samen (410) 786-9161 (for information on the application of APCs
to community mental health centers).

SUPPLEMENTARY INFORMATION: To assist readers in referencing sections
contained in this document, we are providing the following table of
contents.

Table of Contents

I. Background

[[Page 47553]]

II. Elimination of Formula-Driven Overpayment
III. Extension of Cost Reductions
IV. Prohibition Against Unbundling of Hospital Outpatient Services
A. Background
B. Previous Medicare Regulations Affecting Bundling
C. Office of Inspector General (OIG) Civil Money Penalty
Authority
D. Proposed Regulations Published August 5, 1988
1. Bundling of Hospital Outpatient Services
2. Civil Money Penalties for Unbundling Hospital Outpatient
Services
E. Revised Proposed Regulations on Bundling of Hospital Services
V. Hospital Outpatient Prospective Payment System (PPS)
A. Scope of Services Within the Outpatient PPS
1. Services Excluded from the Hospital Outpatient PPS
2. Services Included Within the Scope of the Hospital Outpatient
PPS
a. Services for Patients Who Have Exhausted Their Part A
Benefits
b. Partial Hospitalization Services
c. Services Designated by the Secretary
3. Hospital Outpatient PPS Payment Indicators
B. Description of the Ambulatory Payment Classification (APC)
Groups
1. Setting Payment Rates Based on Groups of Services Rather than
on Individual Services
2. How the Groups Were Constructed
3. Packaging Under the Groups
4. Treatment of Clinic and Emergency Visits
5. Treatment of Partial Hospitalization Services
6. Comments on Specific APCs
7. Discounting of Surgical Procedures
a. Reduced Payment for Multiple Procedures
b. Discounted Payment for Terminated Procedures
8. Inpatient Care
C. Calculation of Group Weights and Rates
1. Group Weights
2. Conversion Factor
a. Calculating Aggregate Calendar Year 1996 Medicare and
Beneficiary Payments for Hospital Outpatient Services (Current Law)
b. Sum of the Relative Weights
D. Calculation of Medicare Payment Amount and Copayment Amount
1. Introduction
2. Determination of Unadjusted Copayment Amount, Program Payment
Percentage, and Copayment Percentage
3. Calculation of Medicare Payment Amount and Beneficiary
Copayment Amount
4. Hospital Election to Offer Reduced Copayment
E. Adjustment for Area Wage Differences
1. Proposed Wage Index
2. Labor-Related Portion of Hospital Outpatient Department PPS
Payment Rates
3. Adjustment of Hospital Outpatient Department PPS Payment and
Copayment Amounts for Geographic Wage Variations
F. Claims Submission and Processing
G. Updates
1. Revisions to Weights and the Wage and Other Adjustments
2. Revisions to APC Groups
3. Annual Update to Conversion Factor
H. Outlier Payments
I. Adjustments for Specific Classes of Hospitals
J. Volume Control Measures
K. Prohibition Against Administrative or Judicial Review
VI. Hospital Outpatient Departments and Provider-Based Entities
A. Background
B. Effects on Medicare
C. Relationship of the ``Provider-Based'' Proposals to
Prospective Payment for Outpatient Hospital Services and Effective
Date of ``Provider-Based'' Proposals
D. Basis for Current Provider-Based Policy
E. Provisions of this Proposed Rule
F. Requirements for Payment
1. Prerequisites for Payment for Outpatient Hospital Services
and Supplies Incident to Physician Services
2. Prerequisites for Payment for Hospital or Critical Access
Hospital Diagnostic Services Furnished to Outpatients
3. Payment for Ambulatory Surgical Services
VII. MedPAC Recommendations
VIII. Collection of Information Requirements
IX. Response to Comments
X. Regulatory Impact Analysis
A. Introduction
B. Estimated Impact on Medicare Program
C. Objectives
D. Limitations of Our Analysis
E. Hospitals Included In and Excluded From the Prospective
Payment System
F. Quantitative Impact Analysis of the Proposed Policy Changes
Under the Prospective Payment System for Operating Costs and Capital
Costs
G. Estimated Impact of the New APC System
XI. Delay in Implementation
Regulations Text
Addenda
Addendum A--List of Proposed Hospital Outpatient Ambulatory Payment
Classes with Status Indicators, Relative Weights, Payment Rates, and
Coinsurance Amounts
Addendum B--Proposed Hospital Outpatient Department (HOPD) Payment
Status by HCPCS and Related Information
Addendum C--Proposed Hospital Outpatient Payment for Procedures by
APC
Addendum D--Summary of Medical APCs
Addendum E--Major Diagnostic Categories
Addendum F--ICD-9 Codes with Major Diagnostic Categories (MDCs) for
Payment of Medical Visits under the Hospital Outpatient PPS
Addendum G--CPT Codes Which Will Be Paid Only As Inpatient
Procedures
Addendum H--Status Indicators
Addendum I--Service Mix Indices by Hospital
Addendum J--Wage Index for Urban Areas
Addendum K--Wage Index for Rural Areas
Addendum L--Wage Index for Hospitals That Are Reclassified

In addition, because there are many terms to which we refer by
acronym in this rule, we are listing these acronyms and their
corresponding terms in alphabetical order below:

APC Ambulatory payment classification
APG Ambulatory patient group
ASC Ambulatory surgical center
BBA Balanced Budget Act of 1997
CAH Critical access hospital
CCI [HCFA's] Correct Coding Initiative
CCR Cost center specific cost-to-charge ratio
CHAMPUS Civilian Health and Medical Program of the Uniformed
Services
CMHC Community mental health center
CMP Civil money penalty
CORF Comprehensive outpatient rehabilitation facility
CPT [Physicians'] Current Procedural Terminology, 4th Edition,
1998, copyrighted by the American Medical Association
DME Durable medical equipment
DMEPOS DME, orthotics, prosthetics, prosthetic devices, prosthetic
implants and supplies
DRG Diagnosis-related group
EACH Essential access community hospital
ESRD End-stage renal disease
FDO Formula-driven overpayment
FQHC Federally qualified health center
HCPCS HCFA Common Procedure Coding System
HHA Home health agency
ICD-9-CM International Classification of Diseases, Ninth Edition,
Clinical Modification
IME Indirect medical education
IOL Intraocular lens
MDC Major diagnostic category
MDH Medicare dependent hospital
MedPAC Medicare Payment Advisory Commission
MSA Metropolitan statistical area
NECMA New England County Metropolitan Area
OBRA Omnibus Budget Reconciliation Act
PPS Prospective payment system
RHC Rural health clinic
RPCH Rural primary care hospital
RRC Rural referral center
SCH Sole community hospital
SGR Sustainable growth rate
SNF Skilled nursing facility
TEFRA Tax Equity and Fiscal Responsibility Act of 1982

I. Background

As the Medicare statute was originally enacted, Medicare payment
for hospital services (inpatient and outpatient) was based on hospital-
specific reasonable costs attributable to serving Medicare
beneficiaries. Later, the law was amended to limit payment to the
lesser of a hospital's reasonable costs or to its customary charges. In
1983, section 601 of the Social Security Amendments of 1983 (Public Law
98-21) completely revised the cost-based payment system for most
hospital inpatient services by enacting section 1886(d) of the Social

[[Page 47554]]

Security Act (the Act). This section provided for a prospective payment
system (PPS) for acute inpatient hospital stays, effective with
hospital cost reporting periods beginning on or after October 1, 1983.
Although payment for most inpatient services became subject to a
PPS, hospital outpatient services continued to be paid based on
hospital-specific costs, which provided little incentive for hospital
efficiency for outpatient services. At the same time, advances in
medical technology and changes in practice patterns were bringing about
a shift in the site of medical care from the inpatient to the
outpatient setting. During the 1980s, the Congress took steps to
control the escalating costs of providing outpatient care. The Congress
amended the statute to implement across-the-board reductions of 5.8
percent and 10 percent to the amounts otherwise payable for hospital
operating costs and capital costs, respectively, and legislated a
number of different payment methods for specific types of hospital
outpatient services. These methods included fee schedules for clinical
diagnostic laboratory tests, orthotics, prosthetics, and durable
medical equipment (DME); composite rate payment for dialysis for
persons with end-stage renal disease (ESRD); and payments based on
blends of hospital costs and the rates paid in other ambulatory
settings such as separately certified ambulatory surgical centers
(ASCs) or physician offices for certain surgery, radiology, and other
diagnostic procedures. Nevertheless, Medicare payment for services
performed in the hospital outpatient setting remains largely cost-
based.
In section 9343(f) of the Omnibus Budget Reconciliation Act of 1986
(OBRA 1986) (Public Law 99-509) and in section 4151(b)(2) of the
Omnibus Budget Reconciliation Act of 1990 (Public Law 101-508), the
Congress required the Secretary to develop a proposal to replace the
current hospital outpatient payment system with a PPS and to submit a
report to the Congress on the proposed system. In OBRA 1986, the
Congress paved the way for development of a PPS, under section 9343(g),
by requiring fiscal intermediaries to require hospitals to report
claims for services under the HCFA Common Procedure Coding System
(HCPCS), and, under section 9343(c), by extending the prohibition
against unbundling of hospital services under section 1862(a)(14) of
the Act to include outpatient services as well as inpatient services.
HCPCS coding enabled us to determine what specific procedures and
services were being billed, while the extension of the prohibition
against unbundling ensured that all nonpractitioner services provided
to hospital outpatients would be billed only by the hospital, not by an
outside supplier, and, therefore, would be reported on hospital bills
and captured in the hospital outpatient data that could be used to
develop an outpatient PPS.
Section 1866(g) of the Act, as added by section 9343(c) of OBRA
1986, and amended by section 4085(i)(17) of the Omnibus Budget
Reconciliation Act of 1987 (OBRA 1987) (Public Law 100-203), also
authorizes the Department of Health and Human Services' Office of
Inspector General to impose a civil money penalty (CMP), not to exceed
$2,000, against any individual or entity who knowingly and willfully
presents a bill in violation of an arrangement (as defined in section
1861(w)(1) of the Act).
A proposed rule to implement section 9343(c) was published in the
Federal Register on August 5, 1988. However, those regulations were
never published as a final rule, so we are including them in this
regulation and will implement them as part of the final regulation
implementing the hospital outpatient PPS.
The Secretary submitted a Report to Congress on March 17, 1995. The
report summarized the research HCFA conducted in searching for a way to
classify outpatient services for purposes of developing an outpatient
PPS. The report cited Ambulatory Patient Groups (APGs), developed by
3M-Health Information Systems under a cooperative grant with HCFA, as
the most promising classification system for grouping outpatient
services and recommended that APG-like groups be used in designing a
hospital outpatient PPS.
The report also presented a number of options that could be used,
once a PPS was in place, for addressing the issue of rapidly growing
beneficiary copayment. As a separate issue, we recommended that the
Congress amend the provisions of the law pertaining to the blended
payment methods for ASC surgery, radiology, and other diagnostic
services to correct an anomaly that resulted in a less than full
recognition of the amount paid by the beneficiary in calculating
program payment (referred to as the formula-driven overpayment).
The Balanced Budget Act of 1997 (BBA) (Public Law 105-33), enacted
on August 5, 1997, contains a number of provisions that affect Medicare
payment for hospital outpatient services. The purpose of this proposed
rule is to implement sections 4521, 4522, and 4523 of the BBA and
section 9343(c) of OBRA 1986. Section 4521 of the BBA eliminates the
formula-driven overpayment effective for services furnished on or after
October 1, 1997. Because of the October 1, 1997 effective date, HCFA
has already taken action to implement this provision. Section 4522
extends the current cost reductions of 5.8 percent and 10 percent
(applicable to hospital outpatient operating costs and hospital capital
costs, respectively) through and including December 31, 1999.
Section 4523 of the BBA amends section 1833 of the Act by adding
subsection (t), which provides for implementation of a PPS for most
hospitals for outpatient services furnished on or after January 1, 1999
and for cancer hospitals that are excluded from inpatient PPS for
services furnished on or after January 1, 2000. We note that while the
statutory effective date for the outpatient PPS is January 1, 1999,
implementation of the new payment system will have to be delayed
because of year 2000 systems concerns. The demands on intermediary bill
processing systems and HCFA internal systems to become compliant for
the year 2000 preclude making the major systems changes that are
required to implement the PPS. See Section XI of this preamble (``Delay
in Implementation'') for a more detailed explanation of the reasons for
delay. The outpatient PPS will be implemented as soon as possible after
January 1, 2000. A notice of the anticipated implementation date will
be published in the Federal Register at least 90 days in advance. The
rates that will go into effect on the implementation date will apply to
all hospitals including cancer hospitals described in section
1886(d)(1)(B)(v) of the Act. The rates will be based on the rates that
would have been in effect January 1, 1999 updated by the rate of
increase in the hospital market basket minus one percentage point.
Section 1833(t)(1)(B) of the Act authorizes the Secretary to
designate the hospital outpatient services that would be paid under the
PPS. Section 1833(t)(1)(B) also requires that the outpatient PPS
include inpatient services covered under Part B for beneficiaries who
are entitled to Part A benefits but who have exhausted their Part A
benefits or otherwise are not in a covered Part A stay. However,
section 1833(t)(1)(B) specifically excludes as covered services under
the outpatient PPS ambulance services and physical and occupational
therapy, and speech-language pathology services, for which separate fee
schedules are required by

[[Page 47555]]

statute. (See section 4531 of the BBA for amendments pertaining to
ambulance services and section 4541 for amendments pertaining to
outpatient rehabilitation services.)
Section 1833(t)(2) of the Act stipulates certain requirements for
the hospital outpatient PPS. The Secretary is required to develop a
classification system for covered outpatient services which may consist
of groups arranged so that the services within each group are
comparable clinically and with respect to the use of resources. In
addition, this section specifies data requirements for establishing
relative payment weights, which are to be based on median hospital
costs determined by data from the most recent available cost reports;
requires that the portion of the Medicare payment and the beneficiary
copayment that are attributable to labor and labor-related costs be
adjusted for geographic wage differences; and authorizes the
establishment of other adjustments, such as outlier adjustments or
adjustments for certain classes of hospitals, that are necessary to
ensure equitable payments. All adjustments are required to be made in a
budget neutral manner. This section concludes with the requirement that
a control on unnecessary increases in the volume of covered services be
established.
Section 1833(t)(3) provides for a new method of calculating
beneficiary copayment. It freezes beneficiary copayment at 20 percent
of the national median charges for covered services (or group of
covered services) furnished during 1996 and updated to 1999 using the
Secretary's estimated charge growth from 1996 to 1999. This section
specifies how beneficiary deductibles are to be treated in calculating
the Medicare payment and beneficiary copayment amounts and requires
that rules be established regarding determination of copayment amounts
for covered services that were not furnished in 1996. Further, it
prescribes the formula for calculating the initial conversion factor
used to determine Medicare payment amounts for 1999 and the method for
updating the conversion factor in subsequent years.
Sections 1833(t)(4) and (t)(5) describe the basis for determining
the Medicare payment amount and the beneficiary copayment amount for
services covered under the outpatient PPS. The latter section requires
the Secretary to establish a procedure whereby hospitals may
voluntarily elect to reduce beneficiary copayment for some or all
covered services to an amount not less than 20 percent of the Medicare
payment amount. Hospitals are further allowed to advertise any such
reductions of copayment amounts. Section 4451 of the BBA added section
1861(v)(1)(T) to the Act, which stipulates that bad debts will not be
recognized on any copayment the hospital elects to reduce.
Section 1833(t)(6) authorizes periodic review and revision of the
payment groups, relative payment weights, wage index, and conversion
factor.
Section 1833(t)(7) describes how payment is to be made for
ambulance services, which are specifically excluded from the outpatient
PPS under section 1833(t)(1)(B).
Section 1833(t)(8) provides that the Secretary may establish a
separate conversion factor for determining services furnished by cancer
hospitals excluded from inpatient PPS under this PPS.
Section 1833(t)(9) prohibits administrative or judicial review of
the PPS classification system, the groups, relative payment weights,
adjustment factors, other adjustments, calculation of base amounts,
periodic adjustments, and the establishment of a separate conversion
factor for those cancer hospitals excluded from inpatient PPS.
Section 4523(d) of the BBA amends section 1833(a)(2)(B) of the Act
to require payment under the PPS for some services described in section
1832(a)(2) that are currently paid on a cost basis and furnished by
providers of services such as comprehensive outpatient rehabilitation
facilities (CORFs), home health agencies (HHAs), hospices, and
community mental health centers (CMHCs). This amendment requires that
partial hospitalization services furnished by CMHCs beginning January
1, 1999 be paid under the PPS. As noted earlier, implementation of the
PPS will be delayed. Implementation will occur as soon as possible
after January 1, 2000.

II. Elimination of Formula-Driven Overpayment

Before enactment of section 4521 of the BBA, under the blended
payment formulas for ASC procedures, radiology, and other diagnostic
services, the ASC or physician fee schedule portion of the blends was
calculated as if the beneficiary paid 20 percent of the ASC rate or
physician fee schedule amount instead of the actual amount paid, which
was 20 percent of the hospital's billed charges. Section 4521 corrects
this anomaly by changing the blended calculations so that all amounts
paid by the beneficiary are subtracted from the total payment in
determining the amount due from the program. Effective for services
furnished on or after October 1, 1997, payment for surgery, radiology,
and other diagnostic services under blended payment methods will be
calculated by subtracting the full amount of copayment due from the
beneficiary (based on 20 percent of the hospital's billed charges).

III. Extension of Cost Reductions

Section 1861(v)(1)(S)(ii) of the Act requires that the amounts
otherwise payable for hospital outpatient operating costs and capital
costs be reduced by 5.8 percent and 10 percent, respectively. These
reductions were scheduled to sunset at the end of fiscal year 1998, but
section 4522 of the BBA extended the reductions through December 31,
1999.

IV. Prohibition Against Unbundling of Hospital Outpatient Services

A. Background

The Social Security Amendments of 1965 (Public Law 89-97), enacted
on July 30, 1965, established title XVIII of the Act, which authorized
the establishment of the Medicare program to pay part of the costs of
health care services furnished to eligible beneficiaries. Part A of the
program (Hospital Insurance) provides basic health insurance protection
against the costs of inpatient or home health care. Part B of the
program (Supplementary Medical Insurance) provides voluntary
supplementary insurance covering most physician services and certain
other items and services not covered under Part A, including hospital
outpatient services.
Before the enactment of Public Law 98-21 on April 7, 1983, which
established the Medicare PPS for inpatient hospital services,
nonphysician services furnished to Medicare beneficiaries who were
hospital patients were generally billed by the hospitals. Under certain
circumstances, however, Part B of the Medicare statute permitted
payments to be made to an outside supplier or another provider for
certain nonphysician services otherwise covered by Medicare Part B that
were furnished to a hospital patient. When payments were made under
these circumstances, some nonphysician services were billed as hospital
services in one hospital and billed by an outside supplier in another.
The practice of billing by suppliers outside the hospital for these
services has been referred to in the legislative history as the
``unbundling'' of hospital services.
Since the enactment of Public Law 98-21 and the publication of
implementing regulations on September 1, 1983 (48 FR 39752), the
Medicare program has required that nonphysician

[[Page 47556]]

services furnished to hospital inpatients be covered and paid for under
Medicare as hospital services. This practice of covering nonphysician
services furnished to hospital inpatients by an outside supplier as
hospital services is referred to as ``bundling.'' Under the PPS for
inpatient hospital services, a single predetermined payment is made for
a case based on the diagnosis-related group (DRG) to which the case is
assigned. Bundling ensures that the DRG payments to all hospitals cover
a comparable ``bundle'' of services related to the hospital stay.
Specifically, Public Law 98-21 added section 1862(a)(14) to the Act
to prohibit payment for services (other than physician services)
furnished to an inpatient of a hospital by an entity other than the
hospital, unless the services are furnished under an arrangement (as
defined in section 1861(w)(1) of the Act). (Section 1861(w)(1) of the
Act specifies that the term ``arrangements'' is limited to arrangements
under which receipt of payment by the hospital or other provider for
Medicare-covered services to an individual discharges the liability of
the individual or any other person to pay for the services.) Public Law
98-21 also added section 1866(a)(1)(H) to the Act to provide that a
hospital is eligible to participate in the Medicare program only if the
hospital agrees to furnish to inpatients either directly or under an
arrangement all Medicare-covered items and services, other than
physician services.
Regardless of whether the hospital furnishes the services directly
or arranges for furnishing the services, the hospital assumes financial
responsibility for the services. The Medicare program makes payment
only to hospitals and not to other providers or suppliers that furnish
inpatient services on behalf of the hospitals.
In Public Law 98-21, the Congress addressed only nonphysician
services furnished to Medicare beneficiaries who are hospital
inpatients. The Congress did not address at that time nonphysician
services furnished to Medicare beneficiaries who are hospital
outpatients, for which payment is made, usually on a cost basis, under
Part B of Medicare. Thus, services to hospital outpatients continued to
be unbundled in some hospitals. Subsequently, in section 9343(c) of
OBRA 1986, the Congress extended the bundling provision to all
nonphysician services furnished to hospital ``patients,'' thus also
including nonphysician services furnished to Medicare beneficiaries who
are hospital outpatients.
Sections 9343(c)(1) and (c)(2) of OBRA 1986 amended sections
1862(a)(14) and 1866(a)(1)(H) of the Act, respectively. As revised,
section 1862(a)(14) of the Act prohibits payment for nonphysician
services furnished to hospital patients (inpatients and outpatients),
unless the services are furnished by the hospital, either directly or
under an arrangement (as defined in section 1861(w)(1) of the Act). As
revised, section 1866(a)(1)(H) of the Act requires each Medicare-
participating hospital to agree to furnish directly all covered
nonphysician services required by its patients (inpatients and
outpatients) or to have the services furnished under an arrangement (as
defined in section 1861(w)(1) of the Act). Section 9338(a)(3) of OBRA
1986 affected implementation of the bundling mandate by amending
section 1861(s)(2)(K) of the Act to permit services of physician
assistants to be covered and billed separately.
Bundling of outpatient hospital services was required in order to
provide a basis for implementing another provision of OBRA 1986, which
required the development of a prospective payment methodology for
outpatient hospital services. Section 9343(f) of OBRA 1986 amended
section 1135 of the Act to require the Secretary to submit to the
Congress by April 1, 1988, an interim report concerning development of
a fully prospective payment system for ambulatory surgery. The
legislation also specified that a final report was due to the Congress
no later than April 1, 1989, with recommendations concerning
implementation of a fully prospective payment mechanism for ambulatory
surgery services by October 1, 1989. We released an interim report in
June of 1988 and the final report in September of 1990. The final
report summarized our research findings relating to hospital outpatient
prospective payment and did not contain specific recommendations
regarding a PPS for ambulatory surgical services. Later, in section
4151(b)(2) of OBRA 1990, the Congress expanded its earlier request and
required HCFA to develop a PPS that included all hospital outpatient
services. That legislation also directed us to submit a report to the
Congress concerning this proposal. We submitted a report to the
Congress on March 17, 1995.
In order for us to be able to develop a PPS for hospital outpatient
services, it was necessary to have available clear and consistent rules
about the range of services that would be included in this payment
system. Previous policies on coverage of hospital outpatient services
permitted services to be unbundled and thus allowed providers to vary
their practices concerning the furnishing of services. The Congress
recognized the inconsistencies of the current payment system and
required bundling as a first step toward payment reform.

B. Previous Medicare Regulations Affecting Bundling

Previous regulations set forth at 42 CFR 405.310(m) concerning
noncoverage of certain services furnished to hospital inpatients
(redesignated as Sec. 411.15(m)) implemented the statutory requirement
for bundling of inpatient hospital services. They excluded from
coverage nonphysician services furnished to hospital inpatients by an
entity other than the hospital, unless the services were furnished
under an arrangement. The exclusion from coverage in effect at that
time did not apply to physician services that met the conditions for
payment for physician services to provider patients in Sec. 405.550(b)
(redesignated as Sec. 415.102(a)), or services of anesthetists employed
by physicians that met the conditions for payment in Sec. 405.553(b)(4)
concerning reasonable charges for anesthesiology services furnished by
the anesthesiologist or by an anesthetist employed by the
anesthesiologist. (The regulation is now deleted as the payment
structure for anesthesiologists has changed.) The exception for
physician services is required by section 1862(a)(14) of the Act.
Services of physician-employed anesthetists were exempted from bundling
as an administrative measure to prevent disruption of long-standing
physician-anesthetist team relationships. However, in a final rule
published on May 26, 1993 (58 FR 30630), the regulations set forth at
Sec. 411.15(m) and Sec. 489.20(d) were revised to reflect the statutory
exclusion of certified registered nurse anesthetist (CRNA) services
(including services of anesthesiologist assistants), physician
assistant services, certified nurse midwife services, and qualified
psychologist services from the inpatient bundling requirement. Section
411.15(m) concerns services to hospital inpatients excluded from
coverage, and Sec. 489.20(d) concerns a provider agreement in the case
of a hospital or critical access hospital (CAH) to furnish directly or
make arrangements for Medicare-covered services to inpatients of a
hospital or a CAH.

C. Office of Inspector General (OIG) Civil Money Penalty Authority

In order to prevent the unbundling of nonphysician hospital
services, section 9343(c)(3) of OBRA 1986 amended section 1866 of the
Act by adding a new paragraph (g). Specifically, this

[[Page 47557]]

authority provided for the imposition of a civil money penalty (CMP),
not to exceed $2,000, 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 Part B of Medicare that violates
the requirement for billing under arrangements specified in section
1866(a)(1)(H) of the Act. Section 1866(g) was further amended by
section 4085(i)(17) of OBRA 1987. Section 4085(i)(17) of OBRA 1987
deleted all references to hospital outpatient services under Part B of
Medicare and authorized imposition of a CMP when arrangements should
have been made but were not. Section 1866(g) of the Act authorizes
imposition of a CMP against any person who knowingly and willfully
presents, or causes to be presented, a bill or request for payment
inconsistent with an arrangement under section 1866(a)(1)(H) or in
violation of the requirement for an arrangement. The result of this
amendment is that the CMP is now applicable for all services furnished
to hospital patients, whether paid for under Medicare Part A or B. The
statute also requires that a CMP be imposed in the same manner as other
CMPs are imposed under section 1128A of the Act. Section 231(c) of the
Health Insurance Portability and Accountability Act of 1996 (Public Law
104-191) revised section 1128A of the Act to increase the CMP maximum
amount for each false claim or prohibited practice from $2,000 to
$10,000. Implementing regulations for this authority are set forth in
42 CFR parts 1003 and 1005.
To implement the provisions of section 9343(c) of OBRA 1986, we
published a proposed rule in the Federal Register on August 5, 1988 (53
FR 29486). Those regulations have not been published in final, but we
are proposing revised implementing regulations as part of this
regulation.

D. Proposed Regulations Published August 5, 1988

1. Bundling of Hospital Outpatient Services
We proposed to implement the requirement for bundling of outpatient
hospital services by amending then existing Medicare regulations
(Sec. 405.310 concerning particular services excluded from coverage,
and part 410 concerning supplementary medical insurance benefits) to
exclude coverage of any services that are furnished in a hospital to an
outpatient of the hospital by an entity other than the hospital during
or as a result of an encounter in the hospital, unless the services are
furnished under an arrangement. In addition, we proposed to require
bundling of those diagnostic procedures or tests (for example, magnetic
resonance imaging procedures) that are furnished outside the hospital
by an entity other than the hospital but are ordered during an
encounter in the hospital with the patient or as a result of such an
encounter.
In the proposed rule, in Sec. 405.310(n)(1) concerning definitions
of services to hospital outpatients excluded from coverage (now
redesignated as Sec. 411.15(m)), we defined a hospital outpatient as an
individual who is not an inpatient of the hospital but who is
registered as an outpatient.
We proposed to define, in Sec. 410.2 (``Definitions''), the term
``encounter'' as a direct personal contact between a patient and a
physician, or other person who is authorized by State licensure law
and, where applicable, by hospital staff bylaws, to order or furnish
services for the patient for the purpose of diagnosis or treatment of
the patient. The use of the ``encounter'' as a basis for identifying
the services to be bundled is not specifically required by OBRA 1986
but is needed in order to implement the bundling requirement in a
uniform and equitable manner, as explained further in section III. of
the preamble of the August 5, 1988 proposed rule (53 FR 29489).
As in the case of services to hospital inpatients, physician
services that meet the conditions for payment for services of
physicians to provider patients in Sec. 415.102(a) would not be bundled
under our proposal. (The exception for physician services is required
by section 1862(a)(14) of the Act.) We also proposed, as an
administrative measure, to exempt from outpatient bundling the services
of physician-employed anesthetists that meet the conditions for payment
for services furnished by an anesthesiologist or by an anesthetist
employed by the anesthesiologist in Sec. 405.553(b)(4). These services
were exempted from bundling to prevent disruption of long-standing
physician-anesthetist team relationships. We also proposed to exempt
physician assistant services as defined in section 1861(s)(2)(K)(i) of
the Act from inpatient and outpatient bundling. We proposed this change
to help accomplish the objective of section 1861(s)(2)(K)(i) of the
Act, as amended by section 9338(a)(3) of OBRA 1986, which permits
physician assistant services to be covered and to be billed separately.
As noted earlier, we have made the changes in the types of services
excluded from bundling of inpatient services in the May 1993 final rule
(58 FR 30630).
We also proposed to revise the regulations set forth at
Sec. 489.20, which describe the basic commitments included in the
provider agreement. They would require a hospital that furnishes
services to a beneficiary who is not currently an inpatient of a
hospital but who is registered by the hospital as an outpatient to
agree either to furnish directly or to make arrangements (in accordance
with section 1861(w)(1) of the Act) for all items and services for
which bundling is required under the proposed revision described above,
and for which the beneficiary is entitled to have payment made under
Medicare.
We proposed in the August 5, 1988 proposed rule that if a Medicare
outpatient is referred to another provider or supplier for further
diagnostic testing or other diagnostic services as a result of an
encounter that occurs in the hospital, the hospital would be
responsible for arranging with the other entity for the furnishing of
services. (We have now changed our view on bundling of these services
as discussed in the following section IV.E.) Also, the hospital would
be responsible for furnishing or arranging for the furnishing of
prostheses and prosthetic devices (other than dental) that replace all
or part of an internal body organ (for example, intraocular lenses
(IOLs)) and are implanted or fitted during an encounter. For example,
in the absence of a bundling provision, the physician who implants an
IOL during surgery performed on an outpatient of a hospital also could
be the supplier of the IOL and could bill Medicare under Part B for it.
As proposed in our August 1988 rule, this practice would be prohibited,
and the hospital would have to furnish the IOL, either directly or
under an arrangement (that is, would have to pay for the lens). The
same policies would apply to other items and services, such as
artificial limbs, knees, and hips; orthotics; equipment and supplies
covered under the prosthetic device benefit; and services incident to
physician services. Thus, hospitals would be required to assume
financial liability for prostheses and prosthetic devices (which are
regarded as ``services'' for Medicare coverage purposes) and for other
services furnished by an outside entity to their outpatients, and the
practice of unbundling these services would be prohibited.
Sometimes a hospital may furnish an item or service for which a
patient will have a continuing need. For example, a hospital may
furnish a DME item such as a wheelchair. When this situation occurs,
the proposed rule required that

[[Page 47558]]

the hospital would be responsible for bundling the items and services
it furnishes on-site. In adopting the view that these types of items
are subject to bundling, we did not discount the patient's continuing
need for them after leaving the hospital. However, the bundling
provisions in sections 1862(a)(14) and 1866(a)(1)(H) of the Act
prohibit unbundling of services to an individual who is a patient of a
hospital and do not provide any specific exception to these provisions
for DME. Therefore, we did not believe it would be appropriate to
exclude DME from bundling when it was furnished to a hospital patient.
(We have now changed our previous position on bundling of DME as
discussed in section IV.E.)
2. Civil Money Penalties for Unbundling Hospital Outpatient Services
In order to implement section 1866(g) of the Act, in our August 5,
1988 proposed rule, we proposed that the OIG would impose a CMP 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 Part B of Medicare that violates the billing arrangement
under section 1866(a)(1)(H) of the Act or the requirement for an
arrangement. The amount of the CMP was to be limited to $2,000 for each
improper bill or request, even if the bill or request included more
than one item or service. However, in accordance with the Health
Insurance Portability and Accountability Act of 1996, which increased
the minimum penalty amount to $10,000, the increased amount will now be
reflected in the regulations.

E. Revised Proposed Regulations on Bundling of Hospital Services

This proposed rule incorporates most of the provisions of the
August 5, 1988 proposed rule. The following describes how the
regulations published in this proposed rule to implement the rebundling
of outpatient hospital services differ from the regulations we proposed
and published on August 5, 1988:
We are not including any of the changes in the regulations
relating to payment for physician laboratory services (Secs. 405.555(a)
through (c), and 405.556(c) of the August 5, 1988 proposed rule),
because these regulations were deleted as a result of publication of
regulations to implement the Medicare physician fee schedule published
on November 25, 1991 (56 FR 59502).
We are revising Sec. 409.10(b), which describes services
that are not included in the definition of ``hospital inpatient or
inpatient CAH services'' to include all of the services that are now
exceptions from the bundling rule under section 1862(a)(14) of the Act.
Section 4511 of the BBA revised sections 1862(a)(14) and 1866(a)(1)(H)
of the Act to exclude services of nurse practitioners and clinical
nurse specialists described in section 1861(s)(2)(K) of the Act from
the bundling requirement.
As previously indicated, proposed Sec. 410.2 had been
revised in the earlier proposed rule to include a definition of an
``encounter.'' The definition of an encounter is expanded to include
encounters in a CAH. That section is further amended to include a
definition of an ``outpatient'' as a person who has not been admitted
as an inpatient but who is registered on the hospital or CAH records as
an outpatient and receives services (rather than supplies alone)
directly from the hospital or CAH. The revision to include CAHs in
these definitions is made to comply with sections 1862(a)(14) and
1866(a)(1)(H) of the Act, which require that CAHs be treated as
hospitals for purposes of the bundling provisions. (The BBA eliminated
rural primary care hospitals (RPCHs) and created CAHs. The Congress
intended, under section 4201(c) of the BBA, that CAHs be subject to the
same Medicare requirements to which RPCHs were subject.)
The revision to Sec. 410.27 is the same as in the earlier
proposed rule except that the revision is now designated as paragraph
(e) instead of paragraph (c).
We are removing paragraph (a)(4) of Sec. 410.28
(``Hospital or CAH diagnostic services furnished to outpatients:
Conditions'') to reflect a change made by section 4085(i)(11) of OBRA
1987 regarding provisions of diagnostic services furnished to
outpatients.
Proposed Sec. 410.30 (redesignated as Sec. 416.39 in this
proposed rule) is being significantly revised. In Sec. 410.30(a) and
(b) (now Sec. 410.39 (a) and (b) of regulations published on August 5,
1988, we proposed to require the hospital to furnish directly or under
arrangements all services furnished to its outpatients during an
encounter as well as any diagnostic services furnished outside the
hospital that were ordered during or as a result of an encounter in the
hospital. In this rule, we are not extending the bundling requirements
to include diagnostic services ordered during an encounter in the
hospital that are furnished outside the hospital. Thus, the hospital
will not be required to furnish such diagnostic services directly or
under arrangements. We are proposing a more limited approach to
bundling because the PPS we are proposing involves less ``packaging''
than we anticipated when we published the August 1988 proposed
regulations. At that time, we believed that a PPS payment for a
surgical procedure was likely to include preoperative tests and that
payment for a clinic visit was likely to include the ancillary services
(for example, laboratory tests and x-rays) that were needed to make a
diagnosis. Therefore, by requiring bundling of off-site diagnostic
tests that were ordered during an outpatient encounter at the hospital,
we believed we could ensure that: (1) We had sufficient data to set
payment rates that included the ancillary tests, and (2) once the
system was implemented, the bundling rules would prevent any
duplication of program payments. That is, a service packaged into a PPS
payment to the hospital could not also be billed to the program as an
ancillary test by an outside entity.
As noted above, the PPS we are proposing now does not include
extensive packaging; therefore, the payment for related diagnostic
tests is not included in the payments under the ambulatory payment
classification (APC) groups for surgical procedures, clinic visits,
emergency room visits, etc. Any diagnostic tests that are furnished
will result in a separate payment. The program will pay the entity that
actually furnishes the service--the hospital, if the service is
provided directly or under arrangements made by the hospital; or
another Medicare recognized entity, if the patient leaves the hospital
and obtains the service elsewhere. Because diagnostic tests are not
being packaged into another hospital service, we no longer need to
require that a hospital furnish directly or under arrangements the
services ordered during, or as a result of, an encounter, but furnished
outside the hospital. If the PPS is changed in future years to require
a more packaged approach to payment, the bundling regulations will be
revised. Proposed Sec. 410.30 (now Sec. 410.39) is also revised to
require that the bundling rules apply to CAHs, and the list of services
that are excepted from the bundling requirements, in Sec. 410.30(b)
(now Sec. 410.39(b)) (previously designated in the August 5, 1988,
proposed rule as Sec. 410.30(c)), is expanded to include all of the
services that are currently excepted under section 1862(a)(14) of the
Act.
We are revising Sec. 411.15(m) (previously designated as
Sec. 405.310(m)) significantly. We are eliminating proposed
Sec. 405.310(n). That section, which had described the hospital

[[Page 47559]]

outpatient services that were excluded from coverage if not furnished
directly or under arrangements, has been revised so that we will not
require that hospitals bundle diagnostic services ordered during or as
a result of an encounter in the hospital if furnished outside the
hospital. The requirements of that section have been incorporated into
Sec. 411.15(m)(1). We are revising Sec. 411.15(m)(2), which describes
the services that are exceptions to the bundling rule, to include all
of the services that are now exceptions under section 1862(a)(14) of
the Act. We are further revising Sec. 411.15(m)(3), ``Scope of
exclusion,'' to delete the reference to DME as a service that must be
bundled. DME is defined under section 1861(n) of the Act as equipment
used in the patient's home or in another institution used as his home
other than a hospital or skilled nursing facility (SNF). By definition,
DME is not something that is provided for use in the hospital setting.
Therefore, we do not believe that the DME benefit provides for any item
or service that is expected to be used by the patient while in the
hospital as an inpatient or outpatient. Section 1862(a)(14) of the Act
requires the hospital to provide directly or under arrangements
services furnished to the patients of a hospital or CAH. We did not
provide an exception for DME in our earlier proposed rule, because the
bundling requirements under sections 1862(a)(14) and 1866(a)(1)(H) of
the Act did not provide an exception for DME. However, we now believe
that a statutory exception is not required because the bundling
requirements apply to the services a hospital furnishes to its
patients, and DME is not a hospital service. The covered Part B benefit
for DME as described under section 1861(n) of the Act is intended for
equipment used in the home, so a hospital that furnishes DME to its
patients is not providing a hospital service to its patients, but is
acting in the capacity of a supplier of DME, not a provider of hospital
services. For these reasons, we will not require bundling of DME for
hospital patients.
Section 412.50 was not amended in the earlier proposed
rule, but we are revising it in this rule to specify that hospital
inpatient services do not include the services that are exceptions to
the bundling requirements under section 1862(a)(14) of the Act.
We are revising proposed Sec. 489.20(d) to incorporate as
exceptions to the bundling requirements all of the services that are
now exceptions under section 1866(a)(1)(H) of the Act.
In addition to minor wording changes in introductory
paragraph (b), proposed Sec. 1003.102 remains the same as in the August
5, 1988 proposed rule, with the exception that the revision is now
designated as paragraph (b)(14) rather than as paragraph (b)(4), as
originally indicated in the August 5, 1988 proposed rule. Paragraphs
(b)(11) through (b)(13) of Sec. 1003.102 are being reserved. We are
also amending Sec. 1003.103(a) to indicate, in accordance with section
231(c) of the Health Insurance Portability and Accountability Act, that
the maximum CMP for each improper bill or request has been increased to
$10,000.
We are also amending Sec. 1003.105 (Exclusion from
participation in Medicare and State health care programs) by revising
paragraph (a)(1)(i) to reflect that this basis for imposition of a CMP
is also a basis for an exclusion from participation in Medicare and the
State health care programs.

V. Hospital Outpatient Prospective Payment System (PPS)

In this proposed rule, we delineate the services that are covered
under the hospital outpatient prospective payment system (PPS) that we
are required to establish under section 1833(t) of the Act. We also
propose Medicare payment rates when those services are ordered or
furnished for diagnosis or treatment of a Medicare beneficiary who is
registered on hospital records as an outpatient, and who receives
services directly from the hospital.
In this section, we explain the framework for the hospital
outpatient PPS. This framework rests on Medicare's definition of an
outpatient, which we discuss in section IV.E, above, and on Medicare's
definition of what constitutes a hospital outpatient department or
clinic. In section VI., below, we address requirements to define and
distinguish among the various sites where services that are covered
under the hospital outpatient PPS could be furnished. For example, a
service furnished at an outpatient department or clinic located within
a hospital can also be furnished at a ``provider-based'' entity, at a
site away from a hospital that functions as though it were a department
within the hospital, at an ASC, and at a physician office. Under the
statute as it is currently written, in order to determine whether
Medicare makes payment for a service under the hospital outpatient PPS
that is the subject of this proposed rule or under another provision of
Medicare Part B, such as the ASC benefit or the physician fee schedule,
it is essential to clarify exactly where and under what conditions the
service was furnished.
This PPS will apply to covered hospital outpatient services
furnished by any hospital participating in the Medicare program, except
for those hospitals discussed below. Partial hospitalization services
in community mental health centers (CMHCs) will also be paid under this
PPS.
The cancer hospitals that are excluded from inpatient PPS will be
paid under hospital outpatient PPS. Although the BBA provides for a
separate conversion factor if necessary, we intend to pay cancer
hospitals using the same conversion factor and rates as all other
hospitals. Certain hospitals in Maryland furnish services that are
exempt from this system because they qualify under section 1814(b)(3)
of the Act for payment under the State's payment system. Such excluded
services are limited to the services paid under the State's payment
system as described in section 1814(b)(3) of the Act. Any other
outpatient services furnished by the hospital will be paid under the
outpatient PPS. Critical access hospitals are excluded from the
outpatient PPS because they are paid under a reasonable cost based
system, as required under section 1834(g) of the Act. All other
participating hospitals will be paid under hospital outpatient PPS.
Distinct parts of hospitals that are excluded under inpatient PPS
will be included in the outpatient PPS, to the extent that outpatient
services are furnished by the hospital. For example, a hospital with an
excluded inpatient psychiatric unit will have payment made under this
PPS for outpatient psychiatric services including to inpatients who are
not in a covered Part A stay.

A. Scope of Services Within the Outpatient PPS

Section 1833(t)(1)(B)(i) of the Act gives the Secretary the
authority to designate which services are to be covered under the
hospital outpatient PPS. In this section, we indicate the types of
services for which we are proposing to make payment under the hospital
outpatient PPS and the types of services we are proposing to exclude
from the scope of the hospital outpatient PPS.
Section 1833(t)(2)(A) of the Act requires the Secretary to develop
a classification system for the services that she designates are
covered under the hospital outpatient PPS. Section 1833(t)(2)(B) of the
Act allows the Secretary to classify covered outpatient services by
groups so that the services within each are comparable clinically and
with respect to the use of resources.

[[Page 47560]]

We refer to the hospital outpatient PPS classification system that we
have developed as the Ambulatory Payment Classification (APC) system.
The APC system consists of 346 groups of services that are covered
under the hospital outpatient PPS.
In section V.B., below, we explain how we assigned services and
procedures to APC groups and in sections V.C. and V.D., below, we
explain how we used the APC groups to determine hospital outpatient PPS
payment rates.
1. Services Excluded From the Hospital Outpatient PPS
Section 1833(t)(1)(B)(iii) of the Act excludes the following from
payment under the hospital outpatient PPS: ambulance services, physical
and occupational therapy, and speech-language pathology services. These
services will be paid under fee schedules in all settings.
Section 1833(t)(1)(B)(i) of the Act gives the Secretary the
authority to designate which hospital outpatient services are covered
under the outpatient PPS. In considering which services to include
under the outpatient PPS, we wanted to ensure that all hospital
outpatient services are paid under a prospectively determined amount.
Some hospital outpatient services (for example, clinical diagnostic
laboratory services, orthotics and prosthetics, ESRD dialysis services)
are currently paid based on fee schedules or other prospective rates.
Payments under these fee schedules apply not only to hospital
outpatient services, but the same or very similar payment rates apply
across a number of sites of ambulatory care. Such similar payments
across various settings creates a level playing field where HCFA pays
virtually the same payment for the same service, without regard to
where the service is furnished. So that we do not disrupt an existing
level playing field, we propose to exclude from our PPS, hospital
outpatient services that are currently paid prospectively determined
rates that are the same rates paid in other settings.
We are proposing to exclude from the hospital outpatient PPS the
following:
a. Certain services already paid for under fee schedules or other
payment systems including, but not limited to, services for patients
with ESRD that are paid for under the ESRD composite rate; laboratory
services paid under the clinical diagnostic laboratory fee schedule;
and DME, orthotics, prosthetics, prosthetic devices, prosthetic
implants and supplies (DMEPOS) paid for under the DMEPOS fee schedule
when the hospital is acting as a supplier of these items. An item such
as crutches or a walker that is given to the patient to take home, but
that may also be used while the patient is at the hospital, would be
billed to the DME regional carrier rather than being paid for under the
hospital outpatient PPS.
b. Hospital outpatient services furnished to inpatients of an SNF
regardless of whether the person is in a Part A covered stay and
furnished pursuant to the resident assessment or comprehensive care
plan and that are covered under the SNF PPS, furnished ``under
arrangements'' and billable only by the SNF.
c. Services and procedures that require inpatient care.
MedPAC Recommendation: In its March 1998 report to the Congress,
the Medicare Payment Advisory Commission (MedPAC) recommends that costs
associated with allied health professions training, such as nursing
schools and paramedical education, be excluded from the calculation of
the relative weights and the conversion factor used to set outpatient
PPS payment rates. MedPAC further recommends that Medicare make
separate payment for these costs, consistent with the manner in which
Medicare pays for allied health professions training costs under the
inpatient PPS.
Response: We agree with MedPAC's recommendation. We did not include
costs associated with allied health professions training in the
calculation of outpatient PPS relative weights and conversion factors.
We propose to pay hospitals that have allied health professions
training programs on a cost-pass-through basis similar to the way we
treat these costs under the hospital inpatient PPS.
2. Services Included Within the Scope of the Hospital Outpatient PPS

a. Services for Patients Who Have Exhausted Their Part A Benefits

Section 1833(t)(1)(B)(ii) of the Act provides for Medicare payment
under the hospital outpatient PPS for certain services furnished to
inpatients who have exhausted Part A benefits or otherwise are not in a
covered Part A stay. Examples of services covered under this provision
include diagnostic x-rays and certain other diagnostic services and
radiation therapy covered under section 1832 of the Act.

b. Partial Hospitalization Services

Section 1833(a)(2)(B) of the Act provides that partial
hospitalization services furnished in CMHCs be paid for under the
hospital outpatient PPS. Partial hospitalization is a distinct and
organized intensive psychiatric outpatient day treatment program,
designed to provide patients with profound and disabling mental health
conditions an individualized, coordinated, comprehensive, and
multidisciplinary treatment program.

c. Services Designated by the Secretary

Under the authority established by the statute at section
1833(t)(1)(B)(i), we further are proposing to include within the scope
of services for which payment is made under the hospital outpatient PPS
the following:
Services that are included within the outpatient PPS
system are all hospital outpatient services that have not been
identified for exclusion as described in section V.A.1., above. Among
the types of services that we have classified into APC groups for
payment under the hospital outpatient PPS are the following: surgical
procedures; radiology, including radiation therapy; clinic visits;
emergency department visits; diagnostic services and other diagnostic
tests; partial hospitalization for the mentally ill; surgical
pathology; cancer chemotherapy.
Services furnished to SNF inpatients that are not packaged
into SNF consolidated billing precisely because they are services that
are commonly furnished by hospital outpatient departments and that SNFs
would not be able to provide, such as CT scans, magnetic resonance
imaging, or ambulatory surgery requiring the use of an operating room.
Supplies such as surgical dressings that can be used
during surgery or other treatments in the hospital outpatient setting
that are also on the DMEPOS fee schedule. Payment for such supplies,
when they are used in the hospital, is packaged into the APC payment
rate for the procedure or service with which the items are associated.
Certain preventive services furnished to healthy persons,
such as colorectal cancer screening.
Section 4523(d)(3) of the BBA provides that we will make Part B
payment for certain medical and other health services, when furnished
by a provider of services or by others under arrangement with a
provider of services, under the outpatient PPS, if we would otherwise
pay those providers on a reasonable cost basis for those services.
Specifically, we are proposing that we would pay for the following
medical and other health services under the

[[Page 47561]]

outpatient PPS when furnished by a provider of services:
Antigens (as defined in 1861(s)(2)(G) of the Act);
Splints and casts (1861(s)(5));
Pneumococcal vaccine, influenza vaccine, hepatitis B
vaccine (1861(s)(10)).
We make Part B payment for the above services under the outpatient
PPS when those services are provided by a CORF, HHA, or hospice
program. However, this provision does not apply to services, furnished
by a CORF, that fall within the definition of CORF services at section
1861(cc)(1) of the Act. It also does not apply to services furnished by
a hospice within the scope of the hospice benefit. Nor does it apply to
services furnished by HHAs to individuals under an HHA plan of
treatment within the scope of the home health benefit.
3. Hospital Outpatient PPS Payment Indicators
Column B in Addendum B indicates the payment status of each HCPCS
code. Addendum B displays all HCPCS codes, including those incidental
services that are packaged into APC payment rates. Addendum G
identifies inpatient services not payable under outpatient PPS.
We use ``A'' to indicate services that are paid under some
other method such as the DMEPOS fee schedule or the physician fee
schedule.
We use ``E'' to indicate services for which payment is not
allowed under the hospital outpatient PPS or is not covered by
Medicare.
We use ``C'' to indicate inpatient services that are not
payable under the outpatient PPS.
We use ``N'' to indicate services that are incidental,
with payment packaged into another service or APC group.
We use ``P'' to indicate services that are paid only in
partial hospitalization programs.
We use ``S'' to indicate significant procedures for which
payment is allowed under the hospital outpatient PPS but to which the
multiple procedure reduction does not apply.
We use ``T'' to indicate surgical services for which
payment is allowed under the hospital outpatient PPS. Services with a
payment indicator ``T'' are the only services to which the multiple
procedure payment reduction applies.
We use ``V'' to indicate medical visits for which payment
is allowed under the hospital outpatient PPS. Providers must use ICD-9-
CM (International Classification of Diseases, Ninth Edition, Clinical
Modification) codes to determine the level of payment for services with
a payment indicator ``V''.
We use ``X'' to indicate ancillary services for which
payment is allowed under the hospital outpatient PPS.
The table below lists all of the outpatient PPS indicators and what
they designate.

Status Indicators
[How Medicare Pays for Various Services When They Are Billed for Hospital Outpatients]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Indicator Service Status
--------------------------------------------------------------------------------------------------------------------------------------------------------
A..................................... Pulmonary Rehabilitation; Non-paid.
Clinical Trial.
C..................................... Inpatient Procedures............ Bill as Inpatient.
A..................................... Durable Medical Equipment, DMEPOS Fee Schedule.
Prosthetics and Orthotics.
E..................................... Non-covered Items and Services.. Non-paid.
A..................................... Physical, Occupational and Rehab Fee Schedule.
Speech Therapy.
A..................................... Ambulance....................... Ambulance Fee Schedule.
A..................................... EPO for ESRD patients........... National Rate.
A..................................... Clinical Diagnostic Laboratory Lab Fee Schedule.
Services.
A..................................... Physician Services for ESRD Bill to carrier.
patients.
A..................................... Screening Mammography........... Lower of Charge or National Rate.
N..................................... Incidental Services, packaged Packaged; no additional payment allowed.
into APC Rate.
P..................................... Partial Hospitalization Services Paid per diem.
S..................................... Significant Procedure, not Paid under hospital outpatient PPS (APC rate).
reduced when multiple.
T..................................... Significant Procedure, multiple Paid under hospital outpatient PPS (APC rate).
procedure reduction applies.
V..................................... Visit to Clinic or Emergency Paid under hospital outpatient PPS (APC rate).
Department.
X..................................... Ancillary Service............... Paid under hospital outpatient PPS (APC rate).
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Description of the Ambulatory Payment Classification (APC) Groups

In response to OBRA 1986 and OBRA 1990 requirements to develop a
hospital outpatient PPS, we examined systems that were in place or
under development, and we entered into a cooperative agreement with 3M-
Health Information Systems to develop a classification system for
outpatient services. The results of our review of existing systems are
outlined in a Report to Congress dated March 17, 1995. The report
identified the Ambulatory Patient Groups (APGs), which were developed
by 3M-Health Information Systems, as the most promising classification
system, and we recommended that APG-like groups be used as the basis
for the hospital outpatient PPS. Soon after the report was submitted to
the Congress, 3M-Health Information Systems released an updated version
(known as Version 2.0) of the APGs. Since the release of Version 2.0,
HCFA has revised the APGs based on more recent Medicare data. These
revisions constitute what we are calling the Ambulatory Payment
Classification (APC) system or groups that are proposed in this rule.
Services within the APC system are identified by HCPCS codes and
descriptions.
1. Setting Payment Rates Based on Groups of Services Rather Than on
Individual Services
MedPAC Recommendation: In its March 1998 report to the Congress
entitled ``Report to the Congress: Medicare Payment Policy,'' MedPAC
recommends that payment rates under the hospital outpatient PPS be
based upon relative weights for each individual service rather than
upon groups of similar services to help ensure consistent payments
across ambulatory settings. MedPAC gives several reasons to support
this recommendation:
If services in a group are not homogeneous, a single
payment rate for

[[Page 47562]]

all services in the group would not be accurate.
Hospitals whose case mix includes a greater than average
volume of higher-cost procedures in a group with a payment rate based
on median costs for all procedures in the group could face losses and
would have a financial incentive to provide only the lower-cost
procedures within a group and to avoid the higher-cost procedures.
Grouping services creates considerable administrative
burdens and problems related to data consistency, provider education,
the need for extensive technical assistance, and modification of claims
processing systems.
If costs for services in a group change at different
rates, the price for the group may become distorted over time,
necessitating periodic rebasing of group weights.
Using groups to set rates for services under the hospital
outpatient PPS moves away from standardizing payment systems across
ambulatory settings.
Response: We have carefully reviewed MedPAC's concerns about using
groups of services rather than individual services as the basis for
setting weights under the hospital outpatient PPS, and we believe that
we have addressed most of these concerns in our approach to ratesetting
using APC groups.
Section 1833(t)(2)(A) of the Act requires the Secretary to develop
a classification system for covered outpatient services. Section
1833(t)(2)(B) provides that this classification system may be composed
of groups, so that services within each group are comparable clinically
and with respect to the use of resources. The statute refers to ``each
such service (or group of services),'' implying that we may choose or
not choose to group services. We have chosen to set rates for groups of
similar services rather than setting rates for individual services for
several reasons:
The composition of the APC groups is based on two
premises: the procedures within each group must be similar clinically,
and the procedures must be similar in terms of resource costs. As we
explain below, we used 3M's APGs as a starting point, but we have
subsequently made changes to most of the 3M groups, taking into account
1996 outpatient claims data; data collected in a 1994 survey of ASC
costs and charges; data collected in 1995 and 1996 to establish
resource-based practice expense relative values under the Medicare
physician fee schedule; comments on surgical groupings following an ASC
town meeting held at HCFA in July 1996 at which participants reviewed
3M's Version 2.0 surgical APGs for consistency in terms of clinical
characteristics and resource costs; and the medical judgment of HCFA's
medical advisors. Further, we invite comments on the composition of all
the APC groups that are presented in this proposed rule and whether
readers believe that further refinements are needed. We request that
commenters support their recommendations for changes in the APC groups
with data regarding resource costs (time, supplies, equipment, labor
requirements) as well as clinical arguments.
We have also solicited comments on the same surgical APC groups
that are proposed in this rule as part of a proposed rule entitled
``Update of Ratesetting Methodology, Payment Rates, Payment Policies,
and the List of Covered Surgical Procedures for Ambulatory Surgical
Centers Effective October 1, 1998'' (HCFA-1885-P), published in the
Federal Register June 12, 1998 (63 FR 32290). We intend to coordinate
our review of all comments submitted timely during the comment period
for the hospital outpatient PPS proposed rule and the ASC proposed
rule. Any subsequent changes to the APC groups will be used by both
payment systems when we set their respective final rates. We have a
high level of confidence in the homogeneity of the APC groups that will
emerge from this exhaustive review process.
We have found that, in this context, setting weights at a
single code level suggests a level of precision that is often not
warranted due either to low procedure volume or questionable cost data.
Of the 10,500 codes in the HCPCS, over 5,000 describe
services that are covered under the hospital outpatient PPS. However,
an examination of outpatient claims data for 1997 reveals that as few
as 100 HCPCS codes account for more than a third of all coded services
billed during that year. MedPAC states in its report to the Congress
that its analysis of physician claims for 1996 revealed that more than
90 percent of hospital outpatient volume was accounted for by 300 high
volume services. Because so many codes were billed infrequently or not
at all, we found ratesetting to be facilitated by grouping together the
data that were available for codes that are similar clinically. We
disagree with MedPAC's suggestion that we establish payment groups
composed only of low-volume procedures. If we were to establish such
groups, we would either have to except these groups from the principle
of clinical consistency that applies to other APC groups or greatly
increase the number of APC groups within the outpatient PPS. And, this
approach does not solve the problem of how to establish weights for
procedures, whether they are taken individually or in groups, for which
we have inadequate cost data. Placing low Medicare volume procedures in
APC groups with which they are similar clinically and in terms of
resource consumption does not affect the weight established for the
group to any appreciable extent because the weight derives from the
higher volume procedures within the group.
Grouping closely related services, and paying the median
cost of the group, discourages the upcoding that occurs when individual
services that are similar have disparate median costs.
Using APC groups to set outpatient weights is consistent
with the ratesetting method we are proposing for ASCs. In a proposed
rule entitled ``Update of Ratesetting Methodology, Payment Rates,
Payment Policies, and the List of Covered Surgical Procedures for
Ambulatory Surgical Centers Effective October 1, 1998'' (HCFA-1885-P),
published in the Federal Register June 12, 1998 (63 FR 32290), we
propose payment rates for surgical procedures performed in Medicare-
approved ASCs using APC surgical groups proposed in this rule.
Payment rates for new or redefined services can be more
reliably established by assigning codes for these services to an
existing group of several codes that share characteristics with the new
code rather than trying to match it to an equivalent single procedure
for which we may or may not have reliable cost data.
Our experience basing ASC payment rates on groups of codes
has proved to be no more burdensome administratively than has our
experience with setting weights on a single code basis under the
Medicare physician fee schedule. Under the outpatient PPS, with weights
set by APC groups, hospitals will continue to use the same HCPCS coding
and the same claims forms that they use currently. Any burdens on HCFA
or on hospitals necessitating additional technical assistance or
systems changes are more a function of implementing an entirely new
payment system than of our setting weights on the basis of groups of
services instead of on the basis of single procedures or services.
We invite comments on our setting rates on the basis of groups of
services rather than on individual codes.

[[Page 47563]]

2. How the Groups Were Constructed
3M created APGs by combining procedure codes and diagnosis codes
into groups that were clinically related (such as all codes for repair
of fractured legs) and analyzing claims data to determine if the codes
that were clinically similar also used resources in similar ways (for
example, surgical repair would likely be more resource intensive than
closed manipulation and casting). The resources that were examined were
based on a 3-month sample of all Medicare claims for outpatient
services. The sample of nearly 15 million claims was selected from
claims paid in 1992 with the charges on each claim matched to
departmental cost-to-charge ratios from the hospital that provided the
services. The costs that were calculated using billed charges and
department cost-to-charge ratios included direct costs, as well as the
overhead for performing the services. The APGs were clustered into
significant procedures (both surgical and nonsurgical), medical visits
(in both clinics and emergency departments), and ancillary services.
Other groups captured incidental services (those that would not be paid
separately) and procedures for which no payment is made, such as
services specifically excluded from Medicare payment by statute.
Our Report to Congress recommended the use of APG-like groups for a
hospital outpatient prospective payment system. When the time came to
update payment groups for ASCs, which already were paid under a PPS, we
decided to propose the use of APG-like groups. The ASC industry was
accustomed to eight payment groups, with rates ranging from about $300
to about $900 in roughly $75 increments, without clinical coherence.
While interested in our proposal, the ASCs were concerned about
perceived misclassifications, with groups containing codes they
believed represented divergent resources. To accommodate these
concerns, we regrouped many surgical codes, creating more levels within
some ranges of groups and otherwise changing 3M's system. We also found
it necessary to change the medical APGs. The medical visit groups,
which under the APGs were grouped based on the patient's diagnosis,
were clearly distinct when laboratory services and plain film x-rays
were packaged in, but were much less distinct when those ancillary
services related to the visit were not packaged, as will be the case
initially under our system. We therefore investigated other approaches
to categorizing medical visits that would result in clearly defined
payment groups without extensive packaging. We discuss these approaches
in section V.B.4., below.
This process of revising 3M's APGs resulted in the development of
the set of 346 mutually-exclusive and exhaustive service categories
called ambulatory payment classification groups or APCs. The weights of
the groups proposed in this rule are based on new data, as required by
the BBA. We matched the database of 98 million hospital outpatient
claims paid in 1996 to the most recent available cost reports for each
hospital, and constructed the groups using these cost data. We defined
each outpatient service under the PPS by a HCPCS code and classified it
either into one of the APC groups for which an outpatient PPS payment
rate is established or into a non-payment category of services that are
excluded from the outpatient PPS. A weight is associated with each APC
group. See section V.C. of this rule for details on how we calculated
the weights. Procedures and services assigned a non-payment
classification include services that can be provided only on an
inpatient basis; codes or services that are not covered by Medicare;
and procedures and services paid under fee schedules or other payment
method.
3. Packaging Under the Groups
Packaged services are those that are recognized as contributing to
the cost of the services in an APC, but that we do not pay for
separately. Under the APC system, packaged services include the
operating room, recovery room, anesthesia, medical/surgical supplies,
pharmaceuticals, observation, blood, intraocular lenses, casts and
splints, donor tissue, and various incidental services such as
venipuncture. We ``packaged'' the services (and their costs) within the
APC group of procedures with which they were delivered in the base
year. Below is a list of the hospital revenue centers from which we
derived costs that were packaged within the APC groups. For example, a
given surgical procedure would have a cost for the use of the operating
and recovery rooms in every case. However, supply costs might vary,
with some patients requiring special drains and dressings and others
needing minimal dressings. The average packaged cost for supplies might
represent, for example, $200 for the former group 40 percent of the
time, and $150 for the rest. Thus, the APC would include $170 for
supplies. Similarly, only a few cases would have included observation
in the base year, but each case in the group would include a small
amount for the times we associated observation with the cases in the
group.
We have packaged the cost of pharmaceuticals and biologicals within
APC groups. We did this because we believe drugs are usually provided
in connection with some other treatment or procedure. We have captured
aggregate cost data on all drugs that were billed with HCPCS codes and
those billed with revenue center codes, whether or not a HCPCS was
entered. Thus, historical patterns of drug use are captured within the
APC groups with which the drugs were billed during the base year. The
only separate drug groups we have created are for chemotherapeutic
agents, because those were separately identified in 3M's APG system.
Because we intended to use an APG-like system, we required detailed
coding of chemotherapeutic agents in order to be able to capture the
costs of the specific drugs. We did not require HCPCS coding of other
drugs, so we cannot specifically identify costs of non-chemotherapy
drugs. We understand, however, that some rarely-used drugs are both
expensive and used in only a few hospitals. In those instances, APC
payment rates may not adequately represent costs for hospitals that
treat patients who require infusions of very costly drugs or
biologicals. Because we do not have bills that were coded to identify
these high-cost drugs individually, we cannot evaluate the impact of
paying separately for high-cost drugs. We could require HCPCS coding of
all drugs or certain categories of drugs in order to gather the data,
but we know hospitals could find such a requirement burdensome. We
solicit comments on this issue.
Currently, drugs that can be self-administered are not covered
under Part B of Medicare (with certain specific exemptions for blood-
clotting factors, immunosuppresives, erythropoietin for dialysis
patients, and certain oral chemotherapeutic agents and antiemetics).
This presents problems in the outpatient hospital setting because even
a pain killer given to a groggy patient postoperatively would not be
covered. The only way such drugs can be paid for is for the hospital to
bill the beneficiary. In many cases, the hospital does not, both
because keeping track of such small charges for billing purposes is
burdensome and because beneficiaries would not understand why they are
being asked to pay for, for example, pain medication that was clearly
related to the procedure they had undergone.
We propose to allow hospitals to provide drugs to patients without
requiring that the hospital bill the

[[Page 47564]]

patient, and without Medicare's paying the hospital. Normally,
hospitals are not allowed to waive such billing, since not charging a
patient could be seen as an inducement to the patient to use other
services at the hospital, for which the hospital would be paid.
However, if the benefit is not advertised, we believe that provision of
the self-administered drugs at no charge to the beneficiary need not
constitute an inducement in violation of the anti-kickback rules. The
hospital may not advertise this to the public or in any other way
induce patients to use the hospital's service in return for forgoing
payment.
Recommendation: MedPAC recommends that the unit of payment under
the outpatient PPS be the individual service or procedure that is
furnished and that payment for services and supplies integral to the
individual service or procedure be bundled within that single unit of
payment.
Response: We agree both with MedPAC's recommendation regarding what
should constitute the unit of payment under the outpatient PPS, and
with MedPAC's recommendation regarding the ``bundling'' of payment,
which we call ``packaging,'' for supplies and services that are
integral to the individual service or procedure that constitutes the
unit of payment. All services and procedures for which payment is to be
made under the outpatient PPS are identified by HCPCS codes and
descriptions. This approach of identifying individual services by HCPCS
as the unit for payment parallels the unit for payment under both the
Medicare physician fee schedule and the ASC facility services benefit.
In addition, as we explain above, the payment amount for each HCPCS
code is a packaged payment that takes into account the costs associated
with services and supplies that are integral to the primary HCPCS-coded
service or procedure and that are furnished at the same time and in the
same place as the primary service or procedure. Because we modeled the
outpatient PPS package of services for surgical procedures on the
package of services that is the basis for payments for facility
services furnished by Medicare approved ASCs, the definition of
packaging will become standardized across both settings upon
implementation of the outpatient PPS.
MedPAC cites as a disadvantage of using individual services or
procedures as the unit for payment the limited options that are
available to control the volume of unnecessary ancillary services. We
discuss in section V.J. how we intend to address volume control under
the outpatient PPS. While a broader definition of packaging that
includes related ancillaries such as diagnostic x-rays and other
diagnostic tests that are furnished in other settings or at a different
time than the primary service or procedures may have potential benefits
not realized by the more limited packaging that we are using, we are
concerned that applying different definitions of packaging to payments
for the same primary service furnished in different settings would
defeat the goal of establishing a unified payment structure across
sites. One component of achieving this goal is to employ a consistent
definition of packaging across all sites of ambulatory services. We
solicit comments on the packaging options and the implications for
ratesetting and volume control of using the same or different
definitions of packaging across different settings.
The following table identifies by revenue code the services and
items that are packaged into the various categories of APC groups
(surgery, radiology, other diagnostic, medical visits, and all other
APC groups).

Packaged Services by Revenue Center
------------------------------------------------------------------------
SURGERY
------------------------------------------------------------------------
250.................................... PHARMACY.
251.................................... GENERIC.
252.................................... NONGENERIC.
257.................................... NONPRESCRIPTION DRUGS.
258.................................... IV SOLUTIONS.
259.................................... OTHER.
270.................................... M&S SUPPLIES.
271.................................... NONSTERILE SUPPLIES.
272.................................... STERILE SUPPLIES.
360.................................... OPERATING ROOM.
361.................................... MINOR SURGERY.
369.................................... OTHER.
370.................................... ANESTHESIA.
379.................................... OTHER.
380.................................... ``BLOOD, GENERAL CLASS''.
381.................................... PACKED RED CELLS.
382.................................... WHOLE BLOOD.
383.................................... PLASMA.
384.................................... PLATELETS.
385.................................... LEUCOCYTES.
386.................................... OTHER COMPONENTS.
387.................................... OTHER DERIVATIVES.
389.................................... OTHER BLOOD.
390.................................... BLOOD STORAGE AND PROCESSING.
391.................................... BLOOD ADMINISTRATION.
399.................................... OTHER BLOOD PROC/STORAGE.
490.................................... ``AMBULATORY SURGERY, GENERAL
CLASS''.
491.................................... OTHER AMBULATORY SURGICAL CARE.
630.................................... DRUGS REQUIRING ID.
631.................................... SINGLE SOURCE DRUG.
632.................................... MULTIPLE SOURCE DRUG.
636.................................... DRUGS REQUIRING DETAILED
CODING.
700.................................... CAST ROOM.
709.................................... OTHER.
710.................................... RECOVERY ROOM.
719.................................... OTHER.
720.................................... LABOR ROOM.
721.................................... LABOR.
722.................................... DELIVERY.
723.................................... CIRCUMCISION.
724.................................... BIRTHING CENTER.
729.................................... OTHER.
750.................................... GASTROINTESTINAL.
759.................................... OTHER.
760.................................... OBSERVATION ROOM.
761.................................... TREATMENT ROOM.
762.................................... OBSERVATION ROOM.
769.................................... OTHER TREATMENT ROOM.
890.................................... OTHER DONOR BANK.
891.................................... BONE.
892.................................... ORGAN.
893.................................... SKIN.
899.................................... OTHER.
920.................................... ``OTHER DIAGNOSTIC SERVICES,
GENERAL CLASS''.
929.................................... OTHER DIAGNOSTIC SERVICES.
940.................................... ``OTHER THERAPEUTIC SERVICES,
GENERAL CLASS''.
949.................................... OTHER THERAPEUTIC SERVICES.
------------------------------------------------------------------------
MEDICAL VISIT
------------------------------------------------------------------------
250.................................... PHARMACY.
251.................................... GENERIC.
252.................................... NONGENERIC.
257.................................... NONPRESCRIPTION DRUGS.
258.................................... IV SOLUTIONS.
259.................................... OTHER.
270.................................... M&S SUPPLIES.
271.................................... NONSTERILE SUPPLIES.
272.................................... STERILE SUPPLIES.
279.................................... OTHER.
380.................................... ``BLOOD, GENERAL CLASS''.
381.................................... PACKED RED CELLS.
382.................................... WHOLE BLOOD.
383.................................... PLASMA.
384.................................... PLATELETS.
385.................................... LEUCOCYTES.
386.................................... OTHER COMPONENTS.
387.................................... OTHER DERIVATIVES.
389.................................... OTHER BLOOD.
390.................................... BLOOD STORAGE AND PROCESSING.
391.................................... BLOOD ADMINISTRATION.
399.................................... OTHER BLOOD PROC/STORAGE.
630.................................... DRUGS REQUIRING ID.
631.................................... SINGLE SOURCE DRUG.
632.................................... MULTIPLE SOURCE DRUG.
636.................................... DRUGS REQUIRING DETAILED
CODING.
762.................................... OBSERVATION ROOM.
------------------------------------------------------------------------
DIAGNOSTIC
------------------------------------------------------------------------
250.................................... PHARMACY.
251.................................... GENERIC.
252.................................... NONGENERIC.
254.................................... INCIDENT TO OTHER DIAGNOSTIC.
257.................................... NONPRESCRIPTION DRUGS.
258.................................... IV SOLUTIONS.
259.................................... OTHER.
270.................................... M&S SUPPLIES.
271.................................... NONSTERILE SUPPLIES.
272.................................... STERILE SUPPLIES.
360.................................... OPERATING ROOM.
361.................................... MINOR SURGERY.
369.................................... OTHER.
370.................................... ANESTHESIA.
372.................................... INCIDENT TO OTHER DIAGNOSTIC.
379.................................... OTHER.
380.................................... ``BLOOD, GENERAL CLASS''.
381.................................... PACKED RED CELLS.
382.................................... WHOLE BLOOD.
383.................................... PLASMA.
384.................................... PLATELETS.
385.................................... LEUCOCYTES.
386.................................... OTHER COMPONENTS.
387.................................... OTHER DERIVATIVES.
389.................................... OTHER BLOOD.
390.................................... BLOOD STORAGE AND PROCESSING.
391.................................... BLOOD ADMINISTRATION.
399.................................... OTHER BLOOD PROC/STORAGE.

[[Page 47565]]

450.................................... ER.
459.................................... OTHER.
622.................................... INCIDENT TO OTHER DIAGNOSTIC.
630.................................... DRUGS REQUIRING ID.
631.................................... SINGLE SOURCE DRUG.
632.................................... MULTIPLE SOURCE DRUG.
636.................................... DRUGS REQUIRING DETAILED
CODING.
710.................................... RECOVERY ROOM.
719.................................... OTHER.
762.................................... OBSERVATION ROOM.
------------------------------------------------------------------------
RADIOLOGY
------------------------------------------------------------------------
250.................................... PHARMACY.
251.................................... GENERIC.
252.................................... NONGENERIC.
255.................................... INCIDENT TO RADIOLOGY.
257.................................... NON-PRESCRIPTION DRUGS.
258.................................... IV SOLUTIONS.
259.................................... OTHER.
270.................................... M&S SUPPLIES.
271.................................... NONSTERILE SUPPLIES.
272.................................... STERILE SUPPLIES.
360.................................... OPERATING ROOM.
361.................................... MINOR SURGERY.
369.................................... OTHER.
370.................................... ANESTHESIA.
371.................................... ANESTHESIA INCIDENT TO
RADIOLOGY.
379.................................... OTHER.
380.................................... ``BLOOD, GENERAL CLASS''.
381.................................... PACKED RED CELLS.
382.................................... WHOLE BLOOD.
383.................................... PLASMA.
384.................................... PLATELETS.
385.................................... LEUCOCYTES.
386.................................... OTHER COMPONENTS.
387.................................... OTHER DERIVATIVES.
389.................................... OTHER BLOOD.
390.................................... BLOOD STORAGE AND PROCESSING.
391.................................... BLOOD ADMINISTRATION.
399.................................... OTHER BLOOD PROC/STORAGE.
621.................................... SUPPLIES INCIDENT TO RADIOLOGY.
630.................................... DRUGS REQUIRING ID.
631.................................... SINGLE SOURCE DRUG.
632.................................... MULTIPLE SOURCE DRUG.
636.................................... DRUGS REQUIRING DETAILED
CODING.
710.................................... RECOVERY ROOM.
719.................................... OTHER.
762.................................... OBSERVATION ROOM.
------------------------------------------------------------------------
ALL OTHER APC GROUPS
------------------------------------------------------------------------
250.................................... PHARMACY.
251.................................... GENERIC.
252.................................... NONGENERIC.
257.................................... NONPRESCRIPTION DRUGS.
258.................................... IV SOLUTIONS.
259.................................... OTHER.
270.................................... M&S SUPPLIES.
271.................................... NONSTERILE SUPPLIES.
272.................................... STERILE SUPPLIES.
279.................................... OTHER.
380.................................... ``BLOOD, GENERAL CLASS''.
381.................................... PACKED RED CELLS.
382.................................... WHOLE BLOOD.
383.................................... PLASMA.
384.................................... PLATELETS.
385.................................... LEUCOCYTES.
386.................................... OTHER COMPONENTS.
387.................................... OTHER DERIVATIVES.
389.................................... OTHER BLOOD.
390.................................... BLOOD STORAGE AND PROCESSING.
391.................................... BLOOD ADMINISTRATION.
399.................................... OTHER BLOOD PROC/STORAGE.
630.................................... DRUGS REQUIRING ID.
631.................................... SINGLE SOURCE DRUG.
632.................................... MULTIPLE SOURCE DRUG.
636.................................... DRUGS REQUIRING DETAILED
CODING.
762.................................... OBSERVATION ROOM.
------------------------------------------------------------------------

4. Treatment of Clinic and Emergency Visits
The major issue we face in determining payment for clinic and
emergency room visits is whether to include diagnosis as well as
Physicians' Current Procedural Terminology (CPT) codes in setting
payment rates. We solicit comments on the approaches that we discuss
below and on other possible alternatives.
Determining payment for clinic and emergency room visits requires a
variety of considerations and trade-offs. These include:
The impact of packaging on setting payment rates (for
example, the more packaging, the greater the difference among APC
payments; however, we are not proposing a fully packaged system
initially, which reduces payment differences and may necessitate
additional policies to increase differences across payment groups);
How to code visits in a manner that recognizes variations
in service intensity and levels of resource consumption (for example,
how to pay more for visits that cost more);
How to keep the system administratively manageable (for
payment purposes, we assign 31 CPT codes that describe different levels
of evaluation and management services to 7 APC groups);
How to define critical care in terms of facility as
opposed to physician inputs (for example, what is an appropriate
facility payment for critical care when critical care CPT codes are
currently determined to reflect physician inputs);
Data problems associated with identifying costs from
claims that list multiple services (for example, the data analysis we
have conducted so far reflects only data from claims for single visits;
we are analyzing data from multiple visit claims to glean additional
information relevant to these policies);
How to move toward greater uniformity of payments across
ambulatory settings so as to remove payment as an incentive for
determining site of service (for example, the trade-off that could
result if, by enhancing differentiation of payments for services within
the hospital outpatient setting, we were to increase payment
differences across settings for services that are provided in both
hospital outpatient departments and physician offices).
Given the range of issues surrounding payments for clinic and
emergency room visits, we are continuing to weigh different options. We
are concerned that using diagnosis coding to set rates for hospital
outpatient clinic visits could increase disparities in payment
methodology between outpatient departments and physician offices, for
which a new system of resource based practice costs is just now being
proposed. (These concerns do not extend as much to emergent and
critical care, which are not routinely furnished in physician office
settings.) Diagnostic coding has not been used in the past to adjust
payments in the physician office setting and there is no general
evidence that practice expense (or work) in physician office settings
varies by the patient's diagnosis. Moreover, because patients in the
hospital outpatient department can be shifted easily to alternative
outpatient settings, adjustment of facility costs to take diagnosis
into account in one setting but not others may create incentives to
shift patients among ambulatory settings in unknown ways.

Coding Visits

We have considered several approaches to setting prospective
payment rates for hospital clinic and emergency visits. We reviewed the
medical visit groups in 3M's version 2.0 of APGs that are based solely
on ICD-9 diagnosis codes, with 80 APGs providing several groups for
each body system; we analyzed the effect on ratesetting of defining
clinic and emergency visits solely by CPT code; and, we analyzed the
effect of using a matrix that combines patient diagnosis with a CPT
code to describe the nature of the outpatient encounter. We discuss
these various approaches in more detail here and some of the advantages
and disadvantages of each. Again, we solicit comments on these
approaches to setting payment rates for clinic and emergency room
visits as well as comments on alternative approaches that are not
mentioned here.

Approach 1: Using Diagnosis Codes Only

3M's approach of using only ICD-9 diagnosis codes with extensive
packaging results in a wide range of group payment rates. The group
that pays the most is almost 13 times as costly as the lowest-paid
group. However, when we removed minor laboratory tests, x-rays, and
certain other minor procedures that had been packaged into 3M's medical
visit APGs in order to conform with the packaging that we propose in
this proposed rule,

[[Page 47566]]

the difference between the highest and the lowest paid group dropped to
not quite five times. (Fully packaged APGs are sufficiently
differentiated for payment purposes, while partially packaged APGs are
not; therefore, if we were to move to a fully packaged system, we would
re-evaluate approaches using diagnosis.)
We also found that grouping clinic and emergency visits solely on
the basis of diagnoses tends to result in visits that require major
resources for critical cases clustering together with less resource-
intensive follow-up visits after the crisis has passed.

Approach 2: Using CPT Codes Only

The APC groups that we propose in this proposed rule as the basis
for setting rates for surgical services consist solely of CPT codes. We
looked at using only CPT codes to establish payment groups for
outpatient clinic and emergency room visits, but we found that the
variation between the most costly and the least costly encounter was
quite flat, with the former only 4.5 times greater than the latter.
When basing payment on CPT codes alone, the range reflects hospitals'
billing patterns in increasing level of intensity, but cases at the
margin are overwhelmed by the numbers of visits billed so that
individual cases with low or high costs are not discernible. Also,
billing patterns reflect standard bills, not the resources used in any
particular case.

Approach 3: CPT and Diagnosis Hybrid

We looked at another approach that bases payment rates on a hybrid
of CPT codes and patient diagnoses. We first assigned 31 CPT codes that
describe physician encounters with patients in the outpatient setting
to seven APC groups: three for clinic visits, three for emergency
department visits, and one for critical care. We also collapsed
approximately 12,000 ICD-9 codes into 20 major diagnostic categories
(MDCs), arranged generally by body system. Classifying services in this
fashion produces a more manageable number of groups, and results in a
matrix of 121 CPT/diagnosis combinations, in which the most costly
combination is more than 10 times as costly as the least.
Our grouping of evaluation and management CPT codes was based on
several factors. As we note above, we grouped 31 CPT codes that
represent different levels of physician ``evaluation and management''
of patients into seven APC groups. (For a more complete discussion,
refer to the evaluation and management services guidelines in
Physicians' Current Procedural Terminology 1998 edition (CPT '98)
published by the American Medical Association.) CPT codes are more
descriptive of physician effort than of facility use, and our cost data
showed little difference between level 1 and level 2 visits or between
level 4 and level 5 visits. Therefore, we elected to combine some of
the CPT codes into a single group, for example, the two least intensive
outpatient visit codes, 99201 and 99202, are both in APC 911, which is
the lowest level of clinic visits, etc. Grouping CPT codes together in
this fashion reduces administrative burden, and our data analysis shows
only small additional cost differences among the complete set of CPT
medical visit codes. Moreover, we found that grouping CPT codes in this
fashion evens out certain anomalies that arise when an emergency
department furnishes services that would not typically be thought of as
emergency care, such as suture removal, or treatment of a skin disease.
Even though suture removal or treatment of conditions such as impetigo,
conjunctivitis, etc. is performed in emergency departments, these types
of services are more appropriately furnished at a clinic because they
do not require the more elaborate resources of the emergency
department. Assigning codes to APC groups would allow us to set payment
for care of patients with minor problems in the emergency department at
a level equivalent to payment for the same care when it is furnished at
a clinic. We welcome comments on payment for services that do not
require emergency room use.
Using a matrix of evaluation and management codes with patient
diagnosis would offset the disadvantages noted above of grouping solely
by CPT code (too little payment variation) or solely by patient
diagnosis (reduced payment variation and commingling of resource
intensive and non-resource intensive visits). Defining a clinic or
emergency visit APC in terms of both CPT code and diagnosis, even when
grouping codes to provide a manageable number of groups, would better
recognize the facility resources consumed in providing emergency and
critical care visits. Many such visits, of course, cluster around the
same dollar amount, but this is expected because many visits involve
typical care and standard resources. The cases that represent care at
higher or lower levels of intensity appear to represent real
differences in resource consumption. We used the CPT/patient diagnosis
hybrid to model impacts. We do not believe that payment to individual
hospitals would be significantly affected, whether we base payment
rates on groups of CPT codes only or on groups that combine CPT codes
and patient diagnosis.
Using a matrix that combines CPT codes with patient diagnosis to
set payment rates for clinic and emergency department visits would also
improve the coding of diagnoses in the hospital outpatient setting
generally. Such improved diagnosis coding is critical to evaluating
future degrees of packaging in the APC system, and we have already
noted that more packaging tends to increase the measured cost
differences across APC groups.
However, as we discussed earlier, there are also problems with
using a matrix that includes diagnosis codes for hospital outpatient
visits. We are concerned about the effect of using a method to pay for
clinic visits in the hospital outpatient setting that is at variance
with the method we use to pay for the same service in a physician
office. A possible alternative to using diagnosis codes as an indicator
of resource consumption in connection with medical visits in hospital
outpatient departments is to create a uniform fee schedule for
physician visits across all ambulatory settings, paying the site at
which the service is furnished the physician practice expense component
as a ``facility fee.'' However, the latter option would require
legislation and a possible reallocation of the overhead currently
associated with medical visits in the outpatient department to other
outpatient services. Given the complexity of these issues, it may not
be desirable to introduce additional differences, such as diagnosis,
among payments in medical visits at this time. We invite public comment
on all of the issues raised in the discussion in this section. In
addition, after this rule is published, we will be reexamining our
outpatient database and extending our analysis to multiple visit data.
We will incorporate the findings of these additional analyses into our
final decision.

Hypothetical Case Using the Hybrid

The following is a hypothetical case presented to illustrate how
payment would be determined using the CPT code/diagnosis code hybrid. A
new patient, an elderly woman who has recently come to live with her
family in the area, presents to the primary care clinic complaining of
fatigue, shortness of breath, swollen ankles, and loss of vision. The
physician spends 45 minutes eliciting the patient's medical, family,
and social history and performing an extensive physical examination.
Suspecting cataracts as the

[[Page 47567]]

cause of her loss of vision, the physician suggests she make an
appointment in the eye clinic. Suspecting congestive heart failure as
the cause of her other symptoms, but also suspicious of coexisting
diabetes and hypertension, the physician orders laboratory tests and an
electrocardiogram (ECG) to be performed that day, and schedules an
appointment in the cardiovascular clinic for a later date. If payment
to the hospital were to be made on the basis of a CPT code/ICD-9 code
matrix, the hospital's claim for services furnished in connection with
this visit would identify the following information: CPT code 99204,
comprehensive outpatient visit, new patient, and ICD-9 diagnosis code
401.1, benign hypertension. Payment would be determined by mapping CPT
code 99204 to APC group 915, levels 4 and 5 clinic visit, and ICD-9
code 4011 to MDC 36, cardiovascular system diseases. Payment would be
the rate established for the resulting hybrid group identifier, 91536.
Addendum A lists the payment rates for the proposed hospital clinic and
emergency room payment groups. Separate payment would be made under the
clinical diagnostic laboratory fee schedule for the laboratory work;
the ECG would be paid for separately on the basis of the payment rate
established for APC 950.
Several months later, the same patient, who now is known to have
congestive heart failure, returns to the primary care clinic
complaining of a cough and runny nose. The physician, having determined
that the symptoms are due to a virus, recommends using a humidifier and
drinking extra fluids. The hospital would code this visit with CPT code
99212 (problem-focused outpatient visit, established patient) and with
ICD-9 diagnosis code 460 (acute nasopharyngitis, or common cold). This
combination, in turn, would map to APC 911, levels 1 and 2 clinic
visit, plus MDC 31, ear, nose, mouth and throat diseases, and payment
for this patient's second visit to the hospital clinic would be based
on the rate established for hybrid group 91131.

Payment for Screening Services

Every patient who presents to an emergency department and requests
(or has requested on his or her behalf) a screening must be screened in
accordance with section 1867(a) of the Act. If the physician or other
hospital staff who performs the screening determines that no medical
emergency exists, the patient can be referred to one of the hospital's
clinics or to another provider such as a physician office for further
treatment, or the emergency department personnel can decide to treat
the patient in the emergency department. We propose to create a HCPCS
code to be used to bill the screening. Payment for this new code will
be low because no treatment is included in the screening. Payment for
the screening APC is made only when no additional services are
furnished by the emergency department. If non-emergency treatment is
furnished, the appropriate emergency room visit should be billed, and
not the screening. Similarly, if the screening reveals that an
emergency does exist and treatment is instituted immediately, the
screening should not be billed; the screening is subsumed into the
further treatment. If an emergency room physician feels the need to
consult with another physician before deciding whether the patient
needs emergency treatment, the consultation is part of the original
screening, and the hospital should bill for only one screening visit,
if a bill for screening is appropriate, as described above.

Payment for Critical Care

We propose to have hospitals use CPT code 99291 to bill for
outpatient encounters in which critical care services are furnished. We
use the CPT definition of ``critical care,'' which is the evaluation
and management of the unstable critically ill or injured patient who
requires the constant attendance of a physician. Under the outpatient
PPS, we would allow the hospital to use CPT 99291 in place of, but not
in addition to, a code for a medical visit or for an emergency
department service. However, the entire duration of the hospital
outpatient department's critical care services for an individual
patient is represented by CPT 99291, and we would not allow the
facility to use CPT 99292 to bill for critical care services extended
in 30-minute increments, as would the attending physician. (We have
packaged the costs associated with subsequent hours of critical care
billing into the APG group of services with which the critical care
hours were billed in the base year.) If other services, such as
surgery, x-rays, or cardiopulmonary resuscitation, are furnished on the
same day as the critical care services, we would allow the hospital to
bill for them separately.
We expect that the numbering scheme proposed in this rule to
distinguish clinic and emergency room visits would be changed in the
final rule. Although we believe the 5-digit identifier used in this
proposal makes it easier to see the relationship between the CPT code
for the level of the visit and the ICD-9-CM code for the diagnosis, for
claims processing purposes, we would have to replace 5-digit
identifiers with 3-digit ones.
5. Treatment of Partial Hospitalization Services
In accordance with section 1861(ff) of the Act, partial
hospitalization services may be furnished only by a hospital to its
outpatients or by a community mental health center (CMHC). We published
an interim final rule on February 11, 1994 (59 FR 6570) to establish
coverage criteria and payment requirements for partial hospitalization
programs. In that rule, we indicated that physician services and
certain nonphysician practitioner services are not considered to be
partial hospitalization services. Payment for these services is outside
the scope of this proposed rule.
The partial hospitalization program of services is organized and
furnished similarly, whether the program is administered by a hospital
or by a CMHC. Section 1833(a)(2)(B) of the Act requires that payment
for CMHC partial hospitalization services be based on the hospital
outpatient PPS. Thus, the methodology we are proposing would apply to
hospital outpatient and to CMHC partial hospitalization programs. The
current rules governing CMHC payment appear in 42 CFR part 413. This
proposed rule would amend Sec. 413.1 to indicate that payment for
partial hospitalization services furnished by CMHCs is made in
accordance with the hospital outpatient prospective payment system
described in part 419 of this chapter.
Patients eligible for the Medicare partial hospitalization benefit
comprise two groups: patients who have been discharged from a
psychiatric hospital for whom partial hospitalization services are
provid

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-23383. Public record. Not legal advice.