Hospitals Assess Impact of New Medicare Payment System
By Rick Louie
Principal, Market Insights
Health care providers are facing a complex new Medicare payment mechanism for outpatient care expected to decrease reimbursement for the same services when compared with the pre-existing payment system. As a result, providers in all states are preparing to carefully examine coding practices to ensure that they receive adequate reimbursement to cover their costs. Hospitals seeking to assess the impact of the proposed outpatient payment system need a way to quantify the projected changes in reimbursements. The analysis should use automatic grouping software to assign the new codes, and summarize related profitability, unprofitable outpatient procedures and cost saving opportunities.
Ambulatory Patient Groups (APG) is a visit-based outpatient classification system designed to explain the amount and type of resources used during the outpatient encounter. While there is a strong possibility that the APG name may be changing, the basic concept and classification system is almost certain to remain. The APG reimbursement covers only the facility cost for rendering outpatient services, not the professional or physician component. Under the new system, Medicare would reimburse hospitals and other outpatient facility owners a fixed rate determined in advance for facility expenses, such as outpatient surgery center use.
The basic payment calculation for APGs is the same as with DRGs: Reimbursement = Payment Rate X Payment Weight/Relative Value. APG reimbursement covers the facility cost for a wide range of outpatient services including those rendered in the ER, Same Day Surgery Unit, hospital clinics, and ancillary service departments, but does not cover phone contacts, home visits, or nursing home services. Although the classification's structure places emphasis on resource utilization, not on principal diagnoses as with DRGs, services within a given version 1.0 APG do have similar clinical diagnoses.
Because APGs group together outpatient services and procedures for reimbursement of facility expenses, they generally result in lower payments than if payers reimbursed providers based on facility charges for every individual service or procedure. As a result, APGs, like DRGs, will force providers to carefully examine coding practices to ensure that they receive adequate reimbursement to cover their costs.
The Health Care Financing Administration (HCFA) commissioned the development of APG Version 1.0 in 1989. HCFA recently released a proposed Version 2.0 with sample weights but has yet to finish testing the system or to assign final reimbursement levels for the 290 APGs. Nevertheless, several states' Medicaid systems and private insurance companies have already implemented APGs, while other payers are in the implementation stage.
Many health providers are in the process of undertaking detailed analysis to show the impact of the outpatient prospective payment system on a peer group of hospitals. The goal of the analysis is to quantify the projected changes in reimbursement and related profitability under APGs. Moreover, hospitals should see why reimbursement differs among hospitals for the same APG by comparing APG case mix, utilization differences, and coding errors. Hospitals use the analyses to identify unprofitable outpatient procedures and set cost saving opportunities; and to highlight areas in which a hospital has a competitive advantage. The information also supports APG-related negotiations with health care purchasers.
This shows a comparison of actual APG reimbursements to expected levels.
The assessment process begins when a particular organization's reimbursement data is automatically grouped in the APG format. Initial APG partitioning or grouping is based upon the presence or absence of a significant procedure. Once the APG groupings are completed, a weight is applied to each APG record. The highest weight APG receives a 100% reimbursement, second-highest weight APG receives 60% and the remaining APGs receive 40% (this discounting structure may vary by payor in actual practice). A base rate is then assigned to calculate reimbursements for each record, and the totals are automatically calculated for all relevant records. The reports then summarize significant findings related to the overall hospital APG reimbursement impact, and provides an overview of reimbursement drivers.
With this type of analysis, management sees the projected financial impact of the new APG coding system, along with an analysis of the patient population and case mix, and the reasons behind any changes in Medicare outpatient reimbursements levels. Proposed solutions strive to improve the accuracy of coding, thus maximizing allowed reimbursements.
As an example, a 200-bed rural hospital seeks to predict the impact on its bottom-line if the prospective payment system was applied to outpatient services. The first task would be to extract hospital and surrounding competitor's outpatient claims-level data from HCFA's 100% standard analytical outpatient file. The analysis then codes the hospital-specific CPT-4 charges into APGs. The reimbursement formula is applied, adjusted for wage differences, to forecast APG reimbursement. Summarized findings highlight the hospital APG market share and outpatient service lines where overall reimbursement is expected to decline.
This sample assessment analysis used the APG/Calculator PC program from IRP Systems, Inc. Woburn, Massachusetts. The IRP software is the only PC-based APG grouping product available, and offers easy-to-use automatic coding functions as a critical part of the assessment. The APG/Calculator analyzes hospital outpatient cases and assigns the correct APG groupings to the case. The software correctly maps current ICD-9-CM and CPT-4 codes to APG compatible codes, computing up to 13 APGs to a patient visit, displaying titles and weights. IRP also has an APG/Grouper product that can analyze large volumes of data automatically on PCs or UNIX/Mainframe systems.
The results of the analysis show how a switch to APGs can affect a typical hospital's revenues. For example, the analysis showed a total Medicare outpatient reimbursement decrease of 32.8% under an APG prospective payment system. However, the findings showed some areas that benefit under APG reimbursement. The sample hospital receives an increase in Medicare reimbursement for outpatient visits with a principal diagnosis of Senile Nuclear Sclerosis. An overview of reimbursement results show that compared to a peer group of hospitals, the sample hospital receives 22% less reimbursement for the same APG. The lower than expected reimbursement levels may be partially explained by a higher than expected error rate, case mix index, and fewer significant procedures and therapies for primary diagnosis than the comparator group average.
The analysis should also show managers the top APGs with greatest reimbursement optimization potential and provide insight as to how that potential can be achieved, such as lowering the number of error codes. For example, this hospital could be paid $2,081,840 in additional reimbursements for APG 76 (cardiac catheterization) if actual reimbursement matched the comparator group average level, or the expected level. For this particular APG, there are 14% more error codes per visit than average. Also, this primary APG has 32% fewer procedures per visit than the comparator group average.
Having information on APG reimbursement and error code rate is also useful. The analysis should provide the relationship between the error code rate œ the average number of error codes per outpatient claim -- and reimbursement. In general, hospitals with a reimbursement index less than 1.00 tend to have a higher than average error code rate. In this example, overall APG reimbursement index is .78 with actual reimbursement 22% lower than expected.
A chart, generated by the APG/Calculator PC program from IRP Systems, showing the change in Medicare outpatient reimbursement from implementing an APG prospective payment system.
Seeing the exact impact of the new payment system on reimbursement levels lets the sample hospital maximize outpatient reimbursements by management of case mix and utilization differences. The information also lets management take steps to minimize coding errors. This is powerful information for the hospital, letting them better contain costs and increase accuracy while readying for the new regulations.
For hospitals anticipating the APG coding, such analysis and "what if" scenarios are critical. Organizations impacted by this reimbursement change should not wait to begin planning for the policy, payment, coding, and cost control implications of APGs.