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Medicare Outpatient Payment System Undergoes Change

Donna Young

Many health systems could lose thousands, if not millions, of dollars next year on medications used for outpatient services because of policy and pricing-rate changes that take effect January 1, 2003, for Medicare’s hospital outpatient prospective pricing system (OPPS).

Health systems struggling with the difficulties and confusion of filing Medicare claims for outpatient services may already be cheating themselves out of eligible payments because of incorrectly filed claims, said Wayne L. Russell, director of pharmacy for Novation LLC, a group purchasing organization.

The loss of those legitimate payments, he said, could have a negative effect on a health system’s budget, forcing an institution to postpone expansion of needed outpatient services or even cut back on existing services. In addition, patients may not be receiving the most appropriate medications because the Centers for Medicare & Medicaid Services (CMS) is slow to make new therapies eligible for special payment under OPPS.

CMS published its latest revisions to OPPS in more than 600 pages of the Federal Register on November 1.

Update, 9 April 2003—CMS issued an update (PDF) to the 2003 hospital outpatient prospective pricing on April 2, affecting services provided on or after April 1. Some of these corrections pertain to medications eligible for pass-through payment. In addition, eligibility was newly extended to octafluoropropane injection, perflexane lipid microsphere injection, and ziprasidone mesylate injection.

OPPS was born of Congress’s attempt to rein in Medicare expenditures by replacing the traditional payment method, based on reasonable costs, with a system in which the government sets the price for specific aspects of health care and tells providers how much they will be paid.

This new system categorizes covered hospital outpatient services, including drugs, devices, and biologicals used in a procedure, into ambulatory payment classifications (APCs). CMS said it based the 569 APC payment rates for 2003 on median hospital costs calculated from 2001 claims data.

When OPPS first took effect in August 2000, CMS’s predecessor, the Health Care Financing Administration, based the payment rates on 1996 hospital claims data. Health systems and other organizations, in the months preceding implementation of OPPS, complained that the costs of newer medications and medical devices were not reflected in the 1996 data. Prompted by legislation, CMS established a separate classification, known as transitional pass-through, to pay hospitals for certain products used in outpatient services provided to Medicare beneficiaries.

The transitional pass-through payment for a drug or biological is the difference between the estimated acquisition price for the product and 95% of its average wholesale price (AWP), according to CMS.

Qualifications for Transitional Pass-Through Payment Status

The law authorizing transitional pass-through payments for medications set a two- to three-year limit on designation of this status and defined the group as consisting of 

  • Cancer chemotherapy agents,    
  • Supportive and adjunctive medications used with chemotherapy,    
  • Immunosuppressive agents,    
  • Orphan drugs,    
  • Radiopharmaceuticals, and    

Once each quarter, the Centers for Medicare & Medicaid Services (CMS) assigns new medications to transitional pass-through payment status in response to requests from the public. CMS does not make a pass-through payment for a medication given in the period between FDA’s approval of the product and the implementation date for the special status and does not guarantee payment for all uses of a medication.

Products may have transitional pass-through status for at least two but no more than three years.

In January 2003, 236 drug and biological products will lose their transitional pass-through status. The costs for about half of these products will be packaged into the APC payment for the procedures in which they are used.

Acquisition costs for about 115 medications no longer eligible for transitional pass-through payment are more than $150 per treatment episode. The government said it did not want to be responsible for providing an incentive for hospitals to cease using those products, so CMS established separate APC payments for the higher-cost therapies.

Those products are identified with a payment status indicator of "K," not to be confused with the alpha prefix, such as A, C, or J, in the government’s five-character common procedure coding system (HCPCS).

The payment status indicator for transitional pass-through drugs and biologicals is "G."

Using correct codes when filing claims, Russell said, is key to ensuring that a health system will receive the correct payment from Medicare.

CMS Prices Anemia Treatments the Same

Darbepoetin alfa was assigned transitional pass-through payment status for doses given in 2002 for the treatment of anemia caused by cancer chemotherapy. Under normal circumstances, hospitals would receive this payment for outpatient use of Amgen’s new product through at least the end of 2003.

But the Centers for Medicare & Medicaid Services (CMS) determined that darbepoetin alfa is functionally equivalent and nearly identical to epoetin alfa, marketed by Ortho Biotech Products for use in cancer patients with chemotherapy-related anemia and by Amgen for patients with anemia related to chronic renal failure (CRF).

Epoetin alfa, however, loses transitional pass-through payment status for chemotherapy-related anemia at the end of 2002 because of the time limit, but darbepoetin alfa does not.

Both of these biologicals, CMS decided, should be paid at the same rate but have separate ambulatory payment classifications and the payment status indicator "K."

CMS set the 2003 payment rate for epoetin alfa at $9.10 per 1000 units, down from a pass-through payment rate of $12.26 per 1000 units for non-CRF use. Based on a conversion ratio of 260 units to 1 mcg, CMS will pay for darbepoetin alfa at a rate of $2.37 per 1 mcg and reduce the transitional pass-through payment to zero; in 2002, the pass-through payment was $4.74 per 1 mcg.

Amgen announced 15 days after publication of the final rule for OPPS 2003 that the company was seeking legal recourse to stop CMS from reducing the overall payment rate for darbepoetin alfa.

Only 15 drug and biological products with transitional pass-through status in 2002 will remain eligible in 2003 (see table at the end). Two new drug products, AstraZeneca’s fulvestrant injection and GlaxoSmithKline’s argatroban injection, have been added to the products eligible for pass-through payments in 2003. The pass-through payment for Amgen’s darbepoetin alfa, first marketed in mid-2001, will be zero.

To promote vaccinations, influenza vaccine and pneumococcal vaccine will be paid on the basis of reasonable cost, have a payment status indicator of "L," and will not be subject to a deductible or copayment.

CMS has boasted that it will increase overall Medicare payments to hospitals for outpatient services by 3.7% in 2003.

But Ernest R. Anderson, director of pharmacy services for Lahey Clinic in Burlington, Massachusetts, said he has "crunched the numbers" and determined that 2003 OPPS rates for many drug and biological therapies are well below his hospital’s acquisition costs and do not adequately reimburse for pharmaceutical services and other costs associated with delivering outpatient care.

Anderson estimated that, in 2003, his hospital will lose $2.37 million on drug products used for outpatient services provided to Medicare beneficiaries.

"Where you used to be able to cover the cost of the drugs before, now you can’t do it," he said.

Anderson indicated that some health systems are considering moving their oncology services to physician practices. But, he said, physicians might soon be under the same pressure as hospitals concerning Medicare’s payments for medications, because Congress has been hinting that the government might drop the AWP-based payment system for physicians.

Health systems, Anderson said, must consider the costs of drug and biological products when deciding which to use.

Lower payments from Medicare, he added, could cause some health systems to choose to use less expensive products that may not be the most appropriate for patients.

How OPPS will affect a health system’s finances, Russell said, depends on several factors, including the types of outpatient services provided and whether those services include the use of expensive medications.

Many patients, he said, visit outpatient facilities only to receive infusions of drug or biological therapies. In those cases, Medicare payments fall short of covering the costs to health systems for delivering the therapies.

The 2001 claims data used by CMS in calculating APC payments are fundamentally flawed, said Anderson.

"A lot of hospitals were underbilling because they did not have correct [dose] increments in their system, or their systems did not allow for that conversion," he said, referring to facilities’ computer systems.

For instance, Medicare accepts claims for some injectable medications in 50-mg increments, not whole vials. But, Anderson said, some health systems report the number of vials rather than dose increments used. A health system that administered a 750-mg dose of medication, he explained, might have used one 500-mg vial and one 250-mg vial and billed Medicare for two units—the number of vials—rather than 15 50-mg dose increments. The health system, in turn, would receive a Medicare payment for the 100 mg billed instead of the 750 mg used.

Because people had such difficulty getting this methodology into their computer systems, both in pharmacy and billing systems, I think [health systems] have grossly understated what they should have been reimbursed," Anderson said. Therefore, the 2001 claims data used by CMS, he said, grossly underestimated health systems’ medication costs.

Anderson recently discovered that his facility had been underbilling for infliximab treatments because the patient encounter form used listed the incorrect increments.

Infliximab, a new biological whose use is eligible for transitional pass-through payment until January 2003, is billable under OPPS in 10-mg dose increments ($63.24 per increment) but supplied by the manufacturer in 100-mg single-use vials.

Health systems must also pay strict attention to dates when billing Medicare for medications, Anderson said.

If the billing date for a medication does not match the billing date of other services, such as infusion therapy, rendered the same day, Medicare will reject the drug claim, he added.

Health systems can resubmit Medicare claims to obtain the correct payments, Anderson said, but too often a facility fails to fix a problem at its origin.

Russell said he is baffled at how many health systems are still struggling with OPPS-related issues and is aware of several organizations that have lost money because they incorrectly billed for outpatient services.

Russell’s company, Novation, has contracted with Omega Health Systems, a software developer and information technology consulting firm in Tampa, Florida, to help health systems solve problems with Medicare OPPS billing errors.

Omega recently helped one teaching hospital discover that, in one month, it had underbilled Medicare for $300,000, Russell said.

Omega’s fees are based on a percentage of the Medicare payments it helps a health system recover.

Health systems will continue to lose money, Russell said, if they do not understand OPPS and stay on top of changes that CMS makes to the system.

"For some of these hospitals, it could be the difference between sink or swim," he said.

Medications with Transitional Pass-Through Payment Status in 2003a

Drug or Biological

Billable Unit

Alemtuzumab injection 1 mL
Argatroban injection 5 mg
1 mg-ampul
Bivalirudin injection 250-mg vial
100 units
Caspofungin acetate injection 5 mg
37.5 cm2
3-mL single-dose vial
<1-g vial</td />
Fulvestrant injection 50 mg
Leuprolide acetate implant 65 mg
Nesiritide injection <1.5-mg vial</td />
OrCelb 36 cm2
Pantoprazole sodium injection vial
6-mg single-dose vial
Perflutren lipid microsphere injection 2 mL
Zoledronic acid injection 2 mg
aExcept for argatroban and fulvestrant, all medications listed in the table had transitional pass-through payment status for at least part of 2002. Adapted from documents of the Centers for Medicare and Medicaid Services. bFDA classifies this wound-healing product as a device.