A Pharmacy Perspective

Melsen Kwong, Pharm.D.; and Rita Shane, Pharm.D.
Cedars-Sinai Medical Center
Los Angeles, California
October 5, 2000

Background

As a mandate of the Balanced Budget Act of 1997 (BBA), the Health Care Financing Administration (HCFA) implemented the Medicare outpatient prospective pricing system (OPPS) on August 1, 2000. The final rule on Medicare OPPS was published April 7, 2000, in the Federal Register. This document is over 700 pages and is available in WordPerfect, Adobe PDF, and MS Excel formats at the HCFA Web site.

The goal of this article is to explore implications of the OPPS for pharmacists. To understand every aspect of OPPS is by no means an easy task. Readers are also referred to the article by Tzipora Lieder, titled "HCFA Launches PPS for Hospital Outpatient Services; Billing May Pose Challenge to Pharmacists" for additional information.

How are APCs determined?

OPPS consists of 451 groups of services known as ambulatory payment classification (APC) groups. The concept of APC payment is similar to the diagnosis-related group
(DRG) payment for inpatients.

Calculation of the APC payment is complex.1 Each APC is associated with a status indicator, proposed payment rate, relative weight, national unadjusted (not yet adjusted for wage index) coinsurance amount, and minimum unadjusted coinsurance amount. Sixty percent of the APC payment is considered labor related and is subject to local labor expenses. The following table depicts information for three APCs.

The status indicator provides information on the type of service represented by the APC. "S" represents significant APC procedures that are not subject to multiple procedural discounting. "T" represents significant APC procedures that are subject to multiple procedural discounting if the procedures are performed on the same day. For example, if several procedures with a "T" status indicator are performed on the same day, the procedure with the highest weight will be paid at 100% while each additional surgical procedure will be paid at 50%. "X" represents ancillary services billed on a unit basis.

The relative weight was calculated on the basis of the median cost (operating and capital) of the services included in the APC group. Median cost was derived from 1996 hospital outpatient claims and the hospital’s most recent cost report. Each Medicare provider is required to file a cost report every year. All costs, including salaries, supplies, overhead, and capital equipment, incurred by the provider for furnishing services to Medicare patients should be included on the report. The actual cost information in the report will be compared with the Medicare payment received during the same year. Providers will receive an additional payment if the costs exceeded the Medicare reimbursement already received. Providers must return overpayments if the Medicare reimbursement exceeded costs. The relative weights are then converted to payment rates by using a conversion factor that takes into account the volume of services for each APC group and an expenditure target specified in the law.

The national unadjusted coinsurance amount was calculated by HCFA on the basis of the median charge billed in 1996 for the services that constituted each APC group. The coinsurance amount represents the portion that the Medicare patient is responsible for paying. The minimum unadjusted coinsurance amount represents 20% of the APC payment rate. HCFA mandated that the coinsurance amount billed to beneficiaries cannot, under any circumstance, be lower than 20% of the APC payment made to the provider. Both national and minimum unadjusted coinsurance amounts must be adjusted by the wage index to determine the provider-specific amount.

Anesthesia, medications (with the exception of those eligible for "pass-through" payment), supplies, and operating and recovery room services are packaged under one APC payment rate. In the example of the tonsil/adenoid procedure, or APC 258, the provider would receive one payment for the surgical procedure, use of the operating and recovery rooms, anesthesia, medications (except for the ones eligible for pass-through payment), and supplies.

APC payment rates will be updated annually based on the market basket percentage applied to hospital discharges less 1% for the years 2000 through 2002.

Coding considerations

Under OPPS, providers must use valid HCFA common procedures coding system (HCPCS) codes on claims for professional services and supplies.2 Level I codes, used to bill for professional services, represent the American Medical Association’s current procedural terminology (CPT) coding system. This level consists of all numeric codes. Level II codes (national codes) are used to bill for medical services and supplies including medications. These codes are alphanumeric, a letter followed by four numbers. The codes for medications are usually designated with the letter "J." There are also "G," "Q," and "K" codes, which are temporary codes assigned for supplies and medications before establishment of permanent codes. Level III codes (local codes) are developed by Medicare fiscal intermediaries and carriers on an as-needed basis.

Historically, pharmacy departments in acute care hospitals have not been directly involved in Medicare coding and may not have been responsible for assigning HCPCS codes to the drug items in hospitals’ "charge master" listings. Before OPPS, outpatient drugs and procedures for Medicare patients were reimbursed based on the outpatient cost-to-charge ratio, which was specific to the hospital. The final reimbursement was then determined on the basis of the cost report filed at year-end.

Impact on health care organizations

The reduction in reimbursement resulting from OPPS has been estimated to range from $86,000 to $2.5 million per year, depending on the level of outpatient services provided; these figures are based on a study of 31 hospitals conducted by VHA West Coast.3 As a result of the reduction in reimbursement, providers might not be able to continue providing the same level of services; some outpatient programs may be downsized or eliminated. The Balanced Budget Refinement Act of 1999 made major revisions to OPPS to address some of the concerns about reduced reimbursement. These revisions include the following additions:

• Transitional pass-through payments (additional payments on top of the APC payment) for new and current medical devices, certain drugs, and biologicals for up to three years. A detailed description of transitional pass-through payments for drugs is addressed in the article by Lieder. That article also described the procedure and time frame for obtaining approval for additional items to be eligible for pass-through payments.
• Outlier adjustments in addition to the APC payment. The amount of the outlier adjustment is calculated on a claim-by-claim basis. A hospital’s costs for an outpatient visit or procedure are computed by applying the outpatient cost-to-charge ratio to the total charges for OPPS services provided by the organization for the visit or procedure. If the cost of the claim exceeds 250% of the OPPS payment, HCFA will pay an outlier adjustment equal to 75% of the cost in excess of the OPPS payment. See the example below.

In the example, the provider would receive a payment for the outlier adjustment in the amount of $3656.73; this would be on top of the base payment of $2,000.

• Transitional outpatient payments to prevent significant OPPS-related hospital losses from services furnished before January 1, 2002. For example, if the OPPS payment represents 90% of the pre-BBA amount, providers will receive an additional payment to cover 80% of the loss. Additional amounts will be reimbursed if the post-BBA reimbursement is less than 90% of the pre-BBA amount. The transitional outpatient payment, in addition to the OPPS payment, will be computed and paid monthly and is subject to a year-end settlement when the cost report is filed.

What should the pharmacy department do to prepare and meet the challenge of OPPS?

Drugs eligible for pass-through payment from Medicare need to be billed using revenue code 636. If another revenue code is used, the organization will not be paid the extra amount.

For many of the drugs, the billable dose does not correspond to the usual dose dispensed. Rather, they often represent fractions of the usual dose. For example, the usual dose for infliximab is between 300 and 400 mg. The HCPCS code assigned to infliximab is for 10 mg. To bill appropriately for a 300-mg infliximab dose, the billing unit or quantity appearing on the claim would have to be 30. This new way of billing creates several issues for pharmacy departments:

• The volume statistics or unit of services will be artificially inflated if the pharmacy system cannot separately track the billing units from the dispensing units. In the case of infliximab, the dispensing of a single dose will usually result in at least 30 units of service. The billing units will also appear on patients’ bills, which in turn may generate questions or complaints about the pharmacy charges.
• Pharmacy departments will need to create additional drug items on the charge master or the formulary file in order to bill Medicare for the appropriate quantities. In the case of infliximab, the pharmacy department must add "infliximab 10 mg" to the formulary file or charge master in order to bill Medicare for the appropriate quantity every time a dose is dispensed. Alternatively, the pharmacy computer system must be modified to include a conversion table that can convert one dose of infliximab 300 mg to an equivalent 30 units of infliximab 10 mg. The quantity "30" will then be billed on the Medicare claim.
• As the Institute for Safe Medication Practices (ISMP) described in its July 26, 2000, ISMP Medication Alert,⁴ OPPS presents a potential risk for medication errors because the billing units may be a lot higher than the dispensing units. If the pharmacy computer system prints the billing unit on the dispensing label, medication administration record, or cart-fill list, the number of doses can be erroneously interpreted by the pharmacy staff as well as the nursing staff, resulting in the dispensing and administration, respectively, of multiple doses of medication at one time.
• Another potential risk for medication errors exists if the billable unit is not associated with a National Drug Code (NDC), since most pharmacy computer systems rely on commercial databases to screen for allergies, drug-drug interactions, and so on and use the respective NDC to identify each drug. Therefore, if an item, such as infliximab 10 mg, which does not have an NDC, is added to the formulary file for billing purposes, the screening process will be compromised.

Posting medication charges in a timely manner is also important, because Medicare claims processors will scrutinize the date of service on the claim in order to package the services under one APC. To ensure proper payment under OPPS, every effort should be made to report all services performed on the same day on the same claim. Most of the claims related to a patient will be for a single date of service. The pharmacy charges eligible for pass-through payment will be denied if the date of service does not match the date on the single-date-of-service claim. The top of the Medicare claim form now has a field in which to specify the date range—the "from" and "through" dates. If a medication is listed with a date of service outside the date range specified at the top of the claim, or if the date of service is omitted, payment for the item will be denied. Additionally, providers billing under OPPS may not submit a late charge claim, because Medicare will not recognize late charge submissions. The hospital must then submit an adjustment bill, which in turn will delay payment.

A J code assigned by HCFA may not always match the X code assigned by Medicaid for the same drug. For example, HFCA has a J code assigned to sargramostim 50 mcg; however, California’s state Medicaid agency, Medi-Cal, has X codes assigned to sargramostim 250 mcg and 500 mcg. Another example is respiratory syncytial virus (RSV) immune globulin: The J code is for 50 mg of the drug, and the X code is for 250 mg. In order to bill Medicare and Medi-Cal appropriately, the correct J or X code must be billed with the item. One could conclude that pharmacy departments in California must list two codes—one for Medicare billing and the other for Medi-Cal billing—for each charge item in the formulary file or charge master. However, at the time that pharmacy posts its charges, staff members do not always know whether the patient has Medicare or Medi-Cal coverage or neither. As a result, the pharmacy department will not know which code to select for billing. The pharmacy will have to decide, based on the demographics of the patients who generally receive the particular drugs, which codes to maintain. For example, RSV immune globulin is used to prevent serious lower-respiratory-tract infections caused by RSV in children less than 24 months of age who have bronchopulmonary dysplasia or were born prematurely. Almost none of the patients receiving RSV immune globulin will have Medicare coverage. Therefore, it would make sense to maintain the X code for the drug in order to bill Medi-Cal for optimal reimbursement. Another example is sargramostim, which is used to accelerate myeloid recovery in patients with non-Hodgkin’s lymphoma, acute lymphoblastic leukemia, or Hodgkin’s disease who are undergoing autologous bone marrow transplantation. Patients receiving sargramostim may have Medicare or Medi-Cal coverage. It would make sense for the pharmacy department to maintain either code, J or X, based on the predominance of Medicare or Medi-Cal outpatients treated at the hospital.

Reimbursement reduction to be imposed by HCFA

Aside from the OPPS, HCFA is reducing the reimbursement for medications as a result of a recent survey that compared average wholesale prices (AWPs) with acquisition costs. The survey showed that the AWP was much higher than the acquisition cost for a number of medications. Historically, both Medicare and Medicaid have reimbursed providers based on the AWP. The Department of Justice (DOJ) concluded that pharmaceutical manufacturers have been inflating the AWP, .which is published in the Redbook, Blue Book, or Medispan.5, 6 The DOJ provided these AWPs to data processor First DataBank, which in turn forwarded the data to state Medicaid programs in May 2000. Some state Medicaid programs have already adopted these new AWPs.

HCFA sent out a "program memorandum" (PDF)to fiscal intermediaries on September 8, 2000, asking them to reduce the Medicare payment rates for 32 drugs based on the AWPs compiled by the DOJ from wholesalers’ catalogs.6 The new rates for these 32 drugs will become effective January 2001 and will be substantially less than the rates reported in trade publications. HCFA also instructed fiscal intermediaries to continue the current payment rates for 14 oncology drugs and three hemophilia drugs.

Conclusion

As Medicare OPPS continues to evolve, pharmacy managers must stay abreast of legislative developments and HCFA communications in order to meet the many challenges associated with this new system. Pharmacy leaders should work closely with their finance departments in analyzing Medicare reimbursement data both pre-OPPS and post-OPPS. Pharmacy staff should also work with clinical departments to analyze drug use in outpatient areas and determine opportunities for developing evidence-based medication-use guidelines. Finally, it is important for all pharmacists to share information about OPPS on a local as well as national basis so that colleagues throughout the country can learn from each other. The ASHP Web site can serve as an excellent forum for information exchange.

References

1. Outpatient Prospective Payment System Training Session. Accessed 2000 Jun 7
2. Shane R. Detecting and preventing health care fraud and abuse—we’ve only just begun. Am J Health-Syst Pharm. 2000; 57:1078-80.
3. Oppliger K. The Balanced Budget Act of 1997: implications for pharmacy. Paper presented at VHA West Coast Pharmacy Conference. Lake Tahoe, CA; 1999 Sep 18.
4. OPPS or OOPS? New outpatient prospective payment billing system could compromise safety. ISMP Medication Safety Alert. 2000 Jul 26.
5. Mortenson LE, Guidi TU, Bowers ML. What you can do about HCFA’s proposed cuts to Medicare reimbursement for oncology drugs?. Accessed 2000 Jul 20.
6. An additional source of average wholesale price data in pricing drugs and biologicals covered by the Medicare program. HCFA program memorandum transmittal AB-00-86. (PDF) Accessed 2000 Sep 19.

This article is provided on the ASHP Web site as a service of the ASHP Section of Practice Managers.