[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]]

_______________________________________________________________________

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


[[Page 47552]]



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.

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