CHAPTER I: OVERVIEW OF OUTPATIENT PROSPECTIVE PAYMENT SYSTEM

OBJECTIVE 

OVERVIEW

BACKGROUND

BBA-97

BBRA-99

AMBULATORY PAYMENT CLASSIFICATION (APC) GROUPS


CHAPTER I: OVERVIEW OF OUTPATIENT PROSPECTIVE PAYMENT SYSTEM

OBJECTIVE

This chapter provides participants with an overview of the 
outpatient prospective payment system. It also introduces terminology and concepts 
that will facilitate understanding of the detailed discussion in later chapters.

OVERVIEW

Effective for claims with dates of service on or after July 
1, 2000, Medicare implements the outpatient prospective payment system (OPPS). 

OPPS applies to hospital outpatient departments, community mental health centers 
(CMHCs) and for some services provided by comprehensive outpatient rehabilitation 
facilities (CORFs), home health agencies (HHAs) and services provided to hospice 
patients for the treatment of a non-terminal illness. The 10 cancer centers 
exempt from inpatient PPS are included in OPPS. 

OPPS does not apply to Indian Health Service or critical 
access hospitals. Hospital outpatient services furnished by Maryland hospitals 
are under a waiver and will not be paid under this system.

Payment under OPPS will result in the discontinuation of 
the blended payment methodology for outpatient radiology, outpatient other diagnostic, 
and outpatient ambulatory surgical center (ASC) services.

BACKGROUND

HCFA is authorized to implement a Medicare prospective payment system for certain types of services.

BBA-97
The Balanced Budget Act (BBA-97) of 1997 required HCFA to 
implement a Medicare prospective payment system for the following types of services:

Hospital outpatient services, including partial hospitalization services
Certain Part B services furnished to inpatients who have no Part A coverage
Partial hospitalization services furnished by community mental health centers (CMHCs)
Vaccines, splints, casts and antigens provided by home 
health agencies (HHAs) that provide medical and other health services
Vaccines provided by comprehensive outpatient rehabilitation facilities (CORFs) 
Vaccines, splints, casts and antigens provided to hospice 
patients for the treatment of a non-terminal illness.

BBA-97 authorized HCFA to develop a classification system 
consisting of groups of services so that services within each group are comparable 
clinically and with respect to the use of resources. HCFA will establish relative 
payment weights for each group based on median hospital costs and estimated 
frequencies of utilization of services in 1999. The BBA-97 further provided 
that HCFA will also establish a wage adjustment factor and may establish other 
adjustments determined to be necessary to ensure equitable payments, such as 
outlier adjustments or adjustments for certain classes of hospitals. 

BBA-97 provided that the outpatient hospital payment rate 
amounts in 1999 would be determined in the following way: 

HCFA will estimate the sum of: (1) the total amount that 
would otherwise be paid by Medicare for outpatient hospital services in 1999; 
and (2) the total amount of copayments that are estimated to be paid under 
the pre-PPS payment system in 1999, as described below. 
A conversion factor is estimated in order to convert 
the weights into fee schedule amounts. This conversion factor is calculated 
in a manner so that the sum of the products of the fee schedule amounts and 
the frequencies equals the aggregate sum of Medicare payments and copayments 
estimated above. [Note: Since the formula-driven overpayment is eliminated 
on October 1, 1997 and the cost and capital reductions on outpatient hospital 
services are being extended, these two provisions are built into the base 
outpatient hospital fee schedule rates in 1999. 
For each group, the outpatient hospital fee schedule 
amount is equal to the conversion factor multiplied by the weight. 

A coinsurance amount (unadjusted coinsurance amount) is 
established for each outpatient hospital payment group based on 20 percent of 
the national median of the charges for services in the group furnished during 
1996, updated to 1999 using HCFA’s estimate of charge growth. A minimum 
coinsurance amount (floor) is established based on 20 percent of the outpatient 
payment rate amount. The unadjusted coinsurance amount for an outpatient hospital 
payment group cannot be less than 20 percent of the payment rate for the payment group. 

A pre-deductible payment percentage will be calculated for 
each group in each year. This will be equal to the ratio of: the outpatient 
hospital payment group’s rate minus the unadjusted copayment amount over 
the payment group’s payment rate.

To determine payment for a particular group in a particular area, the following calculation will occur: 

The payment rate for the outpatient hospital payment 
group will be adjusted by the wage adjustment factor and other factors determined 
to be necessary by the Secretary. 
The Medicare portion of the outpatient hospital payment 
group’s rate will be equal to the adjusted payment rate, reduced by any 
unmet deductible amount, multiplied by the pre-deductible payment percentage. 
The amount of beneficiary copayment will be equal to 
the adjusted outpatient hospital payment rate amount in step1 minus the Medicare 
portion of the payment calculated in step 2. 

In future years, the conversion factor used to determine 
the outpatient hospital payment rates will be updated by the hospital market 
basket, except that for 2000, 2001, and 2002, the update will be equal to the 
hospital market basket reduced by 1 percentage point. 

In each year, the unadjusted copayment amount remains unchanged 
until the coinsurance amount becomes equal to 20 percent of the outpatient hospital 
payment group’s rate. The pre-deductible payment percentage and the Medicare 
payment, however, will continue to be calculated in the same manner, and Medicare 
will assume a larger portion of the total outpatient payment rate each year. 
At the point in time when the coinsurance amount for a group equals 20 percent 
of the payment rate, the copayment amount will be maintained each year at 20 
percent of the group’s payment rate. 

BBA-97 required HCFA to establish a procedure whereby a 
hospital could elect to reduce the coinsurance amount for some or all outpatient 
services to a lower amount (but not less than 20 percent of the group’s payment rate). 

The Secretary may periodically review and revise the groups, 
the relative payment weights, and the wage and other adjustments to take into 
account changes in medical practice, changes in technology, the addition of 
new services, new cost data, and other relevant information and factors. Such 
adjustments must be made in a budget neutral fashion.

The Secretary is required to develop a method for controlling 
unnecessary increases in the volume of services. If the Secretary determines 
under such a methodology that the volume of services has increased beyond reasonable 
amounts established through such methodology, the Secretary may adjust the update 
to the conversion factor. (Note: At this point, HCFA has delayed implementation 
of a volume control mechanism.)

There shall be no administrative or judicial review of the 
development of the classification system, including the establishment of groups 
and relative payment weights, wage adjustment factors, other adjustments, and 
volume performance methodologies, the calculation of base amounts, periodic 
adjustments, and the establishment of a separate conversion factor for cancer 
hospitals.
BBRA-99
The Balanced Budget Refinement Act of 1999 (BBRA) contained 
the following major provisions that affected the development and implementation of OPPS: 

Outlier payments to cover some of the additional cost 
of providing care that exceeds established thresholds
Payments under OPPS must be budget neutral to the payments 
that hospitals receive currently
Extension of the 5.8 percent reduction in outpatient 
operating costs and 10 percent reduction in outpatient capital costs through 
the first date that OPPS is implemented
Annual updating of the OPPS payment weights, rates, payment 
adjustments and groups
Annual consultation with an expert provider advisory 
panel for the review and updating of payment groups
Budget neutral outlier adjustments based on charges adjusted 
to cost for all OPPS services included on the submitted outpatient bill for 
services furnished before January 1, 2002. Services furnished on or after 
January 1, 2002 will be based on the individual services billed
Transitional pass-through payments for the additional 
costs of new and current medical devices, drugs, and biologicals for at least 
2 years but not more than 3 years
OPPS payments for implant devices including Durable Medical 
Equipment (DME), prosthetics and those used in diagnostic testing
Transitional corridor payments to limit hospital and 
CMHC losses under OPPS; the additional payments for 3.5 years for most hospital 
facilities including rural hospitals (less than 101 beds), and permanent for the 10 cancer hospitals
Beneficiary coinsurance for individual services paid 
under OPPS limited to the inpatient hospital deductible amount for each APC

BBA-97 grants HCFA the authority to determine which services 
are included (with the exception of ambulance services for which a fee schedule 
is being separately created) in OPPS. HCFA has determined that the following 
services will continue to be paid based on their respective fee schedules:

Clinical diagnostic laboratory services
Orthotics, prosthetics (except as noted above) 
Take-home surgical dressings
Chronic dialysis (using the composite rate)

Note: Acute dialysis, e.g., for poisoning, will be paid under OPPS 

Screening mammographies (based on the current payment limitation)
Outpatient rehabilitation services (physical therapy 
including speech language pathology and occupational therapy) under the Medicare Physician Fee Schedule. 
Corneal tissue will be paid on cost basis

Note: The final rule implementing OPPS was published in 
the Federal Register on April 7, 2000 and is available on the HCFA web 
site www.hcfa.gov/regs/hopps. 
The text from the final rule has also been included in the appendix section 
of this document. 

AMBULATORY PAYMENT CLASSIFICATION (APC) GROUPS

OPPS will consist of groups of services known as Ambulatory 
Payment Classification (APC) groups. Services within an APC are similar clinically 
and require similar resource use. APCs require no changes to the billing form; 
however, hospitals are required to include HCPCS codes for all services in order 
to be paid accurately under OPPS. 

APC payment rates were calculated in the following manner:

Each APC group’s relative weight was calculated based on the median cost 
(operating and capital) of the services included in the group.
Median costs were developed from a database of CY96 hospital 
outpatient claims using "the most recent" cost report data available.
Hospital-specific and department-specific cost-to-charge 
ratios were used to convert billed charges to median costs for each group.
Weights were converted to payment rates using a conversion 
factor, which takes into account group weights, the volume of services for 
each group, and an expenditure target specified in the law.
Hospital outpatient payments that would have been effective 
in CY99 were calculated on a budget neutral basis to equal projected 1999 
payments to hospitals for services included under the OPPS.

The rates that will be effective when OPPS is implemented will be the 1999 rates 
updated by the hospital market basket minus one percent.

APC packaging will occur in the following manner:

Initially, there will be only minimal packaging, i.e., 
payment for a procedure or medical visit will not include payment for the 
related ancillary services such as laboratory tests or x-rays.
For example, payment for clinical diagnostic laboratory 
tests paid under the clinical diagnostic fee schedule and radiology services 
paid under OPPS will be made in addition to the OPPS payment for a surgical 
procedure or medical visit.
APC payments will include certain packaged items, such as anesthesia, supplies, 
certain drugs and the use of recovery and observation rooms.

Multiple APC surgical procedures furnished during the same operative session will be discounted. 
Discounting will be performed in following manner:

The full amount is paid for the procedure with highest weight; 50 percent is paid for any other-procedure(s) 
performed at the same time.

Similar discounting occurs now under the physician fee schedule and under the payment system for ambulatory surgical centers.

Surgical procedures terminated after patient is prepared for surgery but before induction of anesthesia 
will be paid at 50 percent of the APC payment.
Beneficiary coinsurance will be similarly reduced when multiple surgical procedures are performed.

BBA-97 requires APC payments to be adjusted to reflect geographic differences in labor-related costs.

Adjustments for differences in wages across geographic areas using inpatient hospital PPS wage index (post-reclassification, post-floor) will be made.


60 percent of the APC payment rate is considered to represent labor-related costs and will be subject to the geographic djustment.

BBA-97 requires HCFA to update payment rates annually based on the hospital market basket less one percent for the years 2000 through 2002.

New outpatient procedures and services will be added to the payment system as needed and weights will be adjusted to reflect changes in outpatient care.