WAIS Document Retrieval[Federal Register: September 8, 1998 (Volume 63, Number 173)]
[Proposed Rules]               
[Page 47551-47600]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08se98-34]
 

[[Page 47551]]

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Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



Office of Inspector General



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42 CFR Part 409, et al.



Medicare Program; Prospective Payment System for Hospital Outpatient 
Services; Proposed Rules


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration
Office of Inspector General

42 CFR Parts 409, 410, 411, 412, 413, 419, 489, 498, and 1003

[HCFA-1005-P]
RIN 0938-AI56

 
Medicare Program; Prospective Payment System for Hospital 
Outpatient Services

AGENCY: Health Care Financing Administration (HCFA), HHS, and Office of 
Inspector General (OIG), HHS.

ACTION: Proposed rule.

-----------------------------------------------------------------------

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 
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date 
of the issue requested and enclose a check or money order payable to 
the Superintendent of Documents, or enclose your Visa or Master Card 
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-
2250. The cost for each copy is $8. As an alternative, you can view and 
photocopy the Federal Register document at most libraries designated as 
Federal Depository Libraries and at many other public and academic 
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:
    <bullet> 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).
    <bullet> 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.
    <bullet> 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.)
    <bullet> 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).
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> Antigens (as defined in 1861(s)(2)(G) of the Act);
    <bullet> Splints and casts (1861(s)(5));
    <bullet> 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.
    <bullet> We use ``A'' to indicate services that are paid under some 
other method such as the DMEPOS fee schedule or the physician fee 
schedule.
    <bullet> We use ``E'' to indicate services for which payment is not 
allowed under the hospital outpatient PPS or is not covered by 
Medicare.
    <bullet> We use ``C'' to indicate inpatient services that are not 
payable under the outpatient PPS.
    <bullet> We use ``N'' to indicate services that are incidental, 
with payment packaged into another service or APC group.
    <bullet> We use ``P'' to indicate services that are paid only in 
partial hospitalization programs.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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''.
    <bullet> 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:
    <bullet> If services in a group are not homogeneous, a single 
payment rate for

[[Page 47562]]

all services in the group would not be accurate.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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.
    <bullet> 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

