Reimbursement

The Medicare Reimbursement series continues with a look at physician reimbursement in more detail. The source of this information is MedPAC’s Payment Basics.

Physician Reimbursement
Physicians payment is based on 3 factors: RVU, GPCI and the MEI conversion factor.

• Relative value units (RVUs) measure the relative costliness of three types of resources used to provide different physician services: physician work, practice expenses, and expenses for physicians’ professional liability insurance (PLI). Each of these three components of the RVU payment is adjusted separately for geographic cost variation (see GPCI discussion below).
• Geographic practice cost indexes (GPCI): Measures payments based on variation in the costs of providing services across 89 different geographical areas. Thirty four of these 89 geographical areas are state-wide. GPCI’s have a national average of 1.0. The law requires that the GPCIs be revised at least every three years.
  • Physician work GPCI: based on the earnings of professionals (lawyers, engineers, and others) reported in the decennial census
  • Practice expense GPCI: constructed to account for geographic differences in nonphysician staff wages (40% of the GPCI practice expense), office space costs (27% of the GPCI practice expense), and equipment and supplies (33% of the GPCI practice expense).
  • PLI GPCI: based on data CMS periodically collects from the largest malpractice insurers in each state
• Medicare Economic Index (MEI): Changes in the input prices for physician services are measured using the Medicare Economic Index (MEI), a weighted measure of average national prices for inputs needed to produce physicians’ services.

The Medicare Reimbursement series continues with the big money payments: acute inpatient hospital care, long-term care facilities and critical access hospitals. The sources of this information is MedPAC’s Payment Basics.

Hospital Acute Inpatient Services

• Payments made under the acute inpatient prospective payment system (IPPS) totaled $105 billion and accounted for about 25 percent of Medicare spending in 2006. These payments provide about 20 percent of hospitals’ overall revenues.
• In 2008, beneficiaries are liable for a deductible of $1,024 for the first hospital stay in an episode, and daily copayments of $256 are imposed beginning on the 61st day.
• Hospitals receive payment based on 2 factors: i) patient diagnosis and treatment and ii) hospital location. Each patient admission payment is based on Medicare severity diagnosis related groups (MS–DRGs), which is then adjusted by a geographic factor which measures labor costs in each local area.
• Clinical conditions are defined by patients’ discharge diagnoses, including the principal diagnosis—the main problem requiring inpatient care—and up to eight secondary diagnoses indicating other conditions that were present at admission (co-morbidities) or developed during the hospital stay (complications). The treatment strategy—surgical or medical—is defined by the presence or absence of up to six procedures performed during the stay.
• The MS-DRG is determined by the following factors:
  • Discharge base rates: Hospital are reimbursed a flat amount per discharge for the operating and capital costs that efficient facilities would be expected to incur in furnishing covered inpatient services.
  • MS–DRG relative weights: Medicare assigns a weight to each MS–DRG reflecting the average relative costliness of cases in that group compared with that for the average Medicare case.
  • New technology payments.
  • Wage Index: Medicare’s base operating and capital rates are adjusted by an area wage index to reflect the expected differences in local market prices for labor.
  • Bad Debts: Medicare reimburses acute-care hospitals for 70 percent of bad debts resulting from beneficiaries’ nonpayment of deductibles and copayments.
  • Indirect medical education: Teaching hospitals receive an additional payment.
  • Disproportionate share payments (DSH): Hospitals that treat a disproportionate share of low-income patients receive additional operating and capital payments .
  • Rural hospitals: Rural hospitals can receive extra money if they are a sole community hospital (SCH).
  • Outlier payments: These are additional payments for very costly patient cases.

Long Term Care Hospitals (LTCH)

• Payments to LTCHs were about $4.5 billion in 2007; Medicare beneficiaries accounted for about 70 percent of these hospitals’ revenues. In 2006, almost 116,000 Medicare beneficiaries had 130,000 discharges from LTCHs, and 392 facilities were Medicare certified. In order to qualify for LTCH payment, hospitals must have an average length of patient stay longer than 25 days.
• Beneficiaries transferred to an LTCH from an acute care hospital pay no additional deductible. However, beneficiaries admitted from the community are responsible for a deductible—$1,024 in 2008—as the first admission during a spell of illness, and for a copayment—$256 per day—for the 61st through 90th days.
• Since October 2002, Medicare has paid LTCHs predetermined per discharge rates based primarily on the patient’s diagnosis and market area wages.
• LTCH receive a flat per discharge rate to cover operating and capital costs. Payments for patient care as based on MS–LTC–DRGs, which are based on principal diagnosis, up to eight secondary diagnoses, up to six procedures performed, age, sex, and discharge status.
• Short-stay and high-cost outliers receive altered payment rates.
• The 25 percent rule reduces payments for LTCHs that exceed established percentage thresholds for patients admitted from certain referring hospitals during a cost-reporting period.
• There is no mechanism in law for updating payments to LTCHs. CMS intends to update LTCH PPS payment rates based on the most recent estimate of the Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket index (which measures the price increases of goods and services inpatient rehabilitation facilities, inpatient psychiatric facilities, and LTCHs buy to produce patient care).

Critical Access Hospitals (CAH)

• CAHs are limited to 25 beds and primarily operate in rural areas. Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on 101 percent of each hospital’s reported costs.
• To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital or be declared a “necessary provider” by the state. However, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 eliminated states’ ability to declare additional hospitals “necessary providers” starting in January 2006.
• Medicare’s cost-based payments to CAHs were roughly $6 billion in 2006, representing 4 percent of all Medicare inpatient and outpatient payments to hospitals.
• Most rural hospitals are either CAHs (56 percent), sole community hospitals (SCHs) (18 percent), or Medicare-dependent hospitals (MDHs) (6 percent). CHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).
• There are two main differences between CAH and other forms of rural hospitals. First, CAH receive cost-based payment for inpatient and outpatient care, but SCH and MDH receive cost based payment only for inpatient care. Second, SCHs’ and MDHs’ payments are based on historical costs trended forward.

Ambulatory Surgical Centers

• Payments to ASCs were $2.9 billion in 2007, including both program and beneficiary spending.
• In January 2008, Medicare began paying for surgery-related facility services provided in ASCs using a payment system based on the hospital outpatient prospective payment system (OPPS). In contrast to the old ASC payment system, which had only nine procedure groups, the new ASC system has several hundred procedure groups. The unit of payment in the ASC payment system is the individual surgical procedure.
• In 2008, CMS substantially expanded the list of services that qualify for facility payment in ASCs. Medicare began paying for all procedures that do not pose a significant safety risk when performed in an ASC and do not require an overnight stay.
• The 2008 ASC conversion factor is 65 percent of the OPPS conversion factor ($41.40). The ASC rates are less than the OPPS rates because of the budget neutrality requirement.
• To account for geographic differences in input prices, CMS adjusts the labor portion of the ASC rate (50 percent) by the hospital wage index. CMS does not adjust the non-labor portion (the remaining 50 percent).
• CMS updates the ASC relative weights annually based on changes to the OPPS weights and the physician fee schedule practice expense amounts.

The Medicare Reimbursement series continues with today’s focus on outpatient care. The sources of this information is MedPAC’s Payment Basics.

Outpatient Hospital Services

• Outpatient hospital procedures range from injections to complex surgical procedures that require anesthesia. Outpatient hospital care accounted for $19 billion of total Medicare spending in 2007.
• Currently, outpatient hospital reimbursement is based on the outpatient prospective payment system (OPPS); similar to the PPS for inpatient hospital care. Originally, outpatient hospital reimbursement was based on hospital cost. Under this system, copayments for outpatient care were about 50% of cost. Under the OPPS, copayments are declining each year as a share of total OPPS payments until they reach 20 percent. OPPS pays providers based on HCPCS coding, specifically the ambulatory payment classifications (APCs).
• Congress has legislated permanent hold-harmless status to cancer and children’s hospitals. In addition, beginning in 2006 rural sole community hospitals (SCHs) receive an additional 7.1 percent above standard payment rates on all OPPS services except drugs and biologicals.
• CMS assigns some new services to “new technology” APCs based only on similarity of resource use. CMS chose to establish new technology APCs because some services were too new to be represented in the data the agency used to develop the initial payment rates for the OPPS. Services remain in these APCs for two to three years, while CMS collects the data necessary to develop payment rates for them.
• CMS makes most OPPS payments on a per service basis, but CMS pays for partial hospitalizations on a per diem basis.
• Hospitals can receive three payments in addition to the standard OPPS payments: i) pass-through payments for new technologies, ii) outlier payments for unusually costly services, and iii) hold-harmless payments for cancer and children’s hospitals and rural hospitals with 100 or fewer beds.

Outpatient Dialysis Services

• In 1972, the Social Security Act extended all Medicare Part A and Part B benefits to individuals with ESRD (of any age) who are entitled to receive Social Security benefits. ESRD beneficiaries account for 1% of Medicare enrollment.
• Spending for the 450,000 enrolled ESRD beneficiaries in 2006 was $20 billion. Of this, $8.4 billion was spent on dialysis.
• The base payment rate for each dialysis treatment is $132.49 for freestanding facilities and $136.68 for hospital-based facilities. By 2009, however, this rate will be the same for both types of facilities. The base rate is adjusted for patient age, BMI, body surface area as well as a geographic cost adjustment factor.
• Medicare pays dialysis facilities a predetermined payment for each dialysis treatment they furnish. Medicare covers two methods of dialysis—hemodialysis and peritoneal dialysis. The composite rate currently excludes several injectable drugs—such as erythropoietin, vitamin D, and iron—for which physicians are separately reimbursed.
• The Medicare Improvements for Patients and Providers Act of 2008 adjust payments in a number of ways. In the near future, injections will also be included in the composite rate. A P4P program is being instituted which evaluates physicians based on anemia management, dialysis adequacy, patient satisfaction, iron management, bone mineral metabolism, and vascular access.

Medicare reimburses providers based on the type of service they provide. In the Medicare claims data there are three types of procedure codes:

• Current Procedural Terminology (CPT): CPT codes are designed by the American Medical Association. They describe medical, surgical, and diagnostic services and are designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. The CPT codes are republished and updated annually by the AMA.
• International Statistical Classification of Disease and Related Health Problems (ICD): “The ICD is used to provide a standard classification of diseases for the purpose of health records. The World Health Organization (WHO) assigns, publishes, and uses the ICD to classify diseases and to track mortality rates based on death certificates and other vital health records.”  Code lookup. The most recent version of the ICD classification is the tenth edition (i.e., ICD-10).
  
• Healthcare Common Procedure Coding System (HCPCS): “The HCPCS is divided into two principal subsystems, referred to as level I and level II of the HCPCS. Level I of the HCPCS is comprised of CPT (Current Procedural Terminology), a numeric coding system maintained by the American Medical Association (AMA)… Level I of the HCPCS, the CPT codes, does not include codes needed to separately report medical items or services that are regularly billed by suppliers other than physicians…Level II of the HCPCS is a standardized coding system that is used primarily to identify products, supplies, and services not included in the CPT codes, such as ambulance services and durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) when used outside a physician’s office. Because Medicare and other insurers cover a variety of services, supplies, and equipment that are not identified by CPT codes, the level II HCPCS codes were established for submitting claims for these items.”

Also there are 7 types of Medicare claims. These are:

• inpatient (IP),
• outpatient (OP),
• skilled nursing facility (SNF),
• hospice (HS),
• home health (HH),
• Part B or carrier (PB), and
• durable medical equipment (DME).

The first five claim types are deemed “institutional” claims and the last two are deemed “non-institutional.”

The Medicare Reimbursement Series Continues. The sources of this information is MedPAC’s Payment Basics.

Clinical Laboratory Services:

• Under Part B, Medicare covers medically diagnostic and monitoring laboratory services ordered by a physician.
• Medicare does not cover routine screening tests except for cholesterol and blood lipid tests, fecal occult blood testing, Pap smear tests, prostate-specific antigen tests, and diabetes screening tests.
• In 2007, Medicare payments for clinical lab services totaled $6.8 billion. Overall lab spending declined by 1 percent between 2006 and 2007 due to a drop in hospital-based lab spending. Medicare spending for lab services grew by an average of 9 percent per year between 1999 and 2006.
• Medicare sets payment rates for more than 1,100 Healthcare Common Procedure Coding System (HCPCS) codes used in billing for laboratory services.
• For new lab tests, CMS “crosswalks” to assign the test to a similar existing HCPCS. If the new lab test is dissimilar from all existing tests, CMS relies on a “gapfilling” method in which the carriers independently set rates for the first year of use.
• There is no beneficiary copayment.

Durable Medical Equiment (DME)

• Medicare spent about $8.6 billion on DME in fiscal year 2007. Medicare spending for oxygen and related supplies accounts for one-quarter of total DME expenditures.
• Generally, current fees are an average of the allowed charges from 1986 and 1987, adjusted by the consumer price index for all urban consumers to account for inflation.  However, there are exceptions to this for pharmaceuticals associated with DME use, home oxygen, and customized equipment.
• Each state has its own fee schedule to take into account regional cost variation.
• A pilot program using competitive bidding method was found to decrease DME costs 17%-22%.  A competitive bidding process for DME was to be phased in nationwide, starting with 10 metropolitan statistical areas (MSAs) in 2008 and expanding to 80 MSAs by 2009.  However, this schedule may be delayed due to problems with bidding software and organizational issues.

This week, I will be discussing Medicare Reimbursement in detail.  The Medicare Payment Advisory Commission (MedPAC) has a high-quality series of reports analyzing Medicare’s reimbursement system. Findings from these reports includes:

Physician Services

• In 2006, about 569,000 physicians billed Medicare.
• In 2007, Medicare paid $60 billion for physician services.
• All physician services are reported to CMS according to the Healthcare Common Procedure Coding System (HCPCS), which contains codes for about 6,700 distinct services. Payment rates are based on RVUs.
• Under the Medicare incentive payment program, physicians receive bonus payments when they provide services in health professional shortage areas (HPSAs).
• For most physician services, Medicare pays the provider 80 percent of the fee schedule amount. The beneficiary is liable for the remaining 20 percent coinsurance.
• Services billed separately and provided by nurse practitioners are paid at 85 percent of physicians’ fees.

Oxygen and Oxygen Equipment

• “Beginning in January 2006, section 510(b) of the Deficit Reduction Act of 2005 (DRA) limited rental of oxygen equipment to a period of 36 months of continuous usage. After 36 months, Medicare only pays for contents and non-routine maintenance…According to the Office of Inspector General (OIG), 22 percent of beneficiaries who started renting equipment in 2001 rented for 36 months or longer.”
• Medicare has instituted competitive billing for the purchase of Durable Medical Equipment. A demonstration showed that “competitive bidding lowered prices for home oxygen between 17 and 21 percent.”

Psychiatric Hospital Services

• Medicare payments to psychiatric facilities are estimated to be $4.1 billion in 2007.
• In 2006, 312,000 beneficiaries had 473,500 Medicare discharges from Inpatient Psychiatric Facilities (IPF) for a psychiatric or substance abuse disorder.
• Beneficiaries treated in IPFs are responsible for a $1,024 deductible for the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
• IPFs recieve a base payment rate of $638 per day (in 2009) which is increase with patient age, severity of diagnosis, and the presence of comorbidities and payment declines with the length of the hospital stay. Payments are also adjusted based on geographic factors, if the hospital is a teaching hospital, and whether or not there is an emergency room.

Inpatient Rehabilitation Facilities (IRFs) and Skilled Nursing Facilities, (SNFs) and

• For treatment after an illness, injury or surgery, some patients need to visit an inpatient rehabilitation facility (IRF).
• Medicare payments to IRFs were an estimated $5.6 billion in 2007. Medicare accounts for about 70 percent of IRF cases. In 2006, there were about 404,000 Medicare discharges from IRFs.
• Similar to psychiatric services, beneficiaries are responsible for a $1,024 deductible as the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
• Reimbursement is based on the severity of patient illness.  Patients are classified into one of 92 case mix categories and one of four tiers based on comorbidities.  Patients with very short stays (less than 4 days) receive a discounted rate and those with very long stays get more generous reimbursement.
• To be considered an IRF, you must meet the 60% rule.  This means that 60% of all admissions must fall into one of these categories: stroke, spinal cord injury, congenital deformity, amputation, major multiple trauma, hip fracture, brain injury, neurological disorders, burns, severe arthritis conditions, joint replacement for both knees or hips.
• Skilled Nursing Facilities (SNFs) are used for short-term inpatient skilled care a hospital stay. Medicare reimburses SNFs prospectively, giving them a flat rate for every day of care, up to 100 days in the facility. Payments for SNF are adjusted for: differences in local labor costs and type of patients through Resource Utilization Groups (RUGs). Patients with more severe conditions, worse ADL scores, and who need more therapy get higher RUGs scores and thus a higher reimbursement rate.