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Hospitals' Reimbursement Woes Continue With 2004 OPPS

Kate Traynor

The overall impact of the Centers for Medicare & Medicaid Services (CMS) hospital outpatient prospective-pricing system (OPPS) is evident, said Ernest R. Anderson Jr., director of pharmacy services at the Lahey Clinic in Burlington, Massachusetts.

"We are clearly losing money" on drugs for outpatient care of Medicare beneficiaries, he said.

Anderson estimated that, by the end of December, Lahey will have spent $2.8 million more on drug products for Medicare beneficiaries than the hospital will be reimbursed under OPPS. "In many cases," he explained, "reimbursement for the drugs was considerably less than the cost of the drugs" under this year's payment rates.

According to a November 7 Federal Register notice describing changes to OPPS, the picture for 2004 is a little brighter, with CMS projecting a 4.5% overall increase in reimbursement for hospital outpatient services, including pharmaceuticals. Using the recently revised 2004 reimbursement rates, Anderson's rough estimate is that Lahey will lose about $2.1 million on drugs for Medicare outpatient treatment next year.

"It's an improvement," Anderson said. "It's certainly not going to offset the losses, but it's definitely a small improvement over" this year.

The APCs of pass through. Lew M. Iacovelli, oncology pharmacy manager at Moses Cone Regional Cancer Center in Greensboro, North Carolina, said that CMS's removal of drugs from the transitional pass-through list has led to budgetary woes in the outpatient setting.

OPPS Facts for 2004

APC fluctuations. According to CMS, median values for about half of the items assigned an APC code rose for 2004 and half fell compared with last year's values. CMS stated that, "In most cases, the changes were modest and such changes from year to year are to be expected as hospitals find ways to reduce costs for some services and incur higher costs for others."

Transitional corridor payments. 2004 marks the end of transitional corridor payments for all institutions except qualifying cancer hospitals and children's hospitals. These payments, which CMS created to ease the transition to the prospective pricing system, are based on the difference between what the provider is paid under the OPPS and an estimate of what would have been paid before OPPS was implemented. According to the final rule, small rural hospitals are no longer eligible for the payments because these institutions did not provide sufficient feedback about the payments to CMS during the rule's comment period.

Nuclear medicine. The revised OPPS lists 23 APCs for nuclear medicine services. CMS states that the new APC structure better reflects the "type and complexity of the procedure" and the organ involved, and "is more homogeneous both clinically and in terms of resource consumption than the current APC structure."

Blood and blood products. Payment rates for blood and blood products for 2004 are set at the 2003 rates, reflecting CMS's concern that applying the agency's standard payment-calculation formula would result in inadequate reimbursement and affect patients' access to these products.

Orphan drugs. 2004 payment rates for nine of what CMS terms "single indication orphan drugs" are set at 88% of the April 1, 2003, single-drug pricer rate. The affected products are alpha1-proteinase inhibitor injection, gemtuzumab ozogamicin, oprelvekin injection, thyrotropin alfa injection, daclizumab, aldesleukin, denileukin diftitox, interferon gamma-1b, and basiliximab injection. The remaining two single-indication orphan drugs, imiglucerase and alglucerase, are reimbursed at 94% of AWP.

Full disclosure needed. When billing for high-dose brachytherapy services in the outpatient setting, hospitals fail to include charges for needles and catheters—a practice that restricted CMS's ability to accurately set reimbursement rates for the procedure. For 2004, high-dose brachytherapy is reimbursed at a lower rate in the outpatient setting than in physicians' offices. CMS emphasized that "it is important for hospitals to include charges for all services they furnish on the claim so that we can better ensure that the relative weights are based on the most accurate data possible."

The pass-through list was mandated by Congress to pay hospitals for newer drugs and biological products that CMS had not yet packaged into ambulatory payment classification (APC) groups. Products remain on the pass-through list for at least two but not more than three years and are then bundled into an APC group for their associated medical procedure or assigned a separate APC code.

Under the 2003 OPPS provisions, separate APC codes were created for drugs, biologicals, and radiopharmaceuticals for which CMS estimated per-dose costs of more than $150.

At the beginning of this year, CMS stripped 236 drugs and biological products of transitional pass-through status, for which payment rates had been set at the difference between the estimated acquisition price for the product and 95% of its average wholesale price (AWP). About half of the products met the $150 threshold and were assigned a separate APC code for 2003, and the rest were packaged into a procedural APC.

Iacovelli said that the 2003 revision to the pass-through list cut his Medicare outpatient reimbursement "to the point where you don't even get what it costs you to buy the drug. That's a huge issue that everyone is facing across the country," he said.

The 2004 revision to OPPS lowers to $50 per treatment episode the threshold at which drugs are assigned a separate APC code. According to the 2004 final rule for hospital OPPS, CMS made this decision because the agency determined "that packaging drugs, biologicals and radiopharmaceuticals costing in excess of the $50 threshold per patient per day would not provide adequate payment in 2004 and could adversely affect beneficiary access to important therapies."

"It definitely is good news," Anderson said of the new APC threshold for drugs. He said that the change will allow Lahey to be paid for "oncology adjunct therapy, like for nausea and vomiting," particularly certain serotonin type-3 receptor antagonists.

Iacovelli likewise praised the lower APC threshold for drugs and said that it "will allow us to bill for a lot of the expensive antiemetic medications that we use to treat patients."

But CMS cautioned in the November 7 final rule that the agency reserves the option "to revisit our packaging policy in the future."

Choosing therapy. Iacovelli said that the economics of OPPS are affecting the way his hospital evaluates drug therapy.

"We've gone from more of a cost-conscious environment now to a reimbursement-conscious environment," he said. Instead of focusing primarily on whether a drug will benefit patients, he said, "we look at whether we're going to be reimbursed" for the product.

"That's a sad state of affairs," he added.

Iacovelli said that, instead of changing therapy to mesh with covered treatments, Moses Cone has chosen to treat some patients with drugs that are not reimbursed under Medicare.

"But you can't continue to do business that way," he cautioned.

Anderson said he believes that reimbursement issues are influencing patient care strategies. "I think that if there are equivalent treatments," he said, "people are making decisions from a financial perspective when the clinical qualifications are that these are equivalent drugs."

Why the disconnect? Under OPPS, CMS uses hospital charge data to calculate reimbursement rates for drugs instead of relying on hospital acquisition costs or a product's AWP—a value that CMS has long contended is inflated. But CMS has made certain assumptions about hospital charge data that do not necessarily hold true.

Judith J. Baker, executive director of the health care consulting company Resource Group Ltd. in Dallas, Texas, said that CMS assumes that hospitals use a "uniform markup" for their charges.

The problem is that "not all hospitals do that," Baker said. She added that preliminary data from a nationwide survey by Resource Group indicate that "a substantial number of hospitals" use a tiered system to calculate charges. Put simply, items that cost more have a lower markup than lower-priced items on the hospital's charge master.

Baker said that CMS acknowledged in the final rule "that their assumption was the uniform markup, and if indeed you had a structure that was not uniform, that the higher cost items would basically come up with an [artificially] lower" reimbursement amount.

Anderson said he conducted an informal survey of charging practices at about 30 hospitals, mostly in New England, and presented his results to the General Accounting Office last year. What Anderson found was that "formulas for billing are very different from one hospital to the next."

At some hospitals, Anderson said, billing for drugs is based on AWP. Others use a "cost-plus" or "cost-times" calculation for charges, and some use tiered pricing, he said.

"The result of all of that is that it's hard to back out costs from charge data, which is basically what CMS tries to do, if all of the methodologies to get to the charge are different," he said. "I don't think [CMS] fully appreciates the lack of reimbursement that they're providing on drugs because of the methodology that they used to back out costs."

Infusion administration codes. The final rule contains important changes from CMS's original proposal for the use of "Q" codes in claims for drugs administered by infusion. CMS dropped its proposal to allow billing for infusion services only once per day and now allows additional billing if the patient leaves the outpatient department but returns later that day for new therapy. But CMS does not allow separate billing for coadministered drugs that are packaged into the same APC code. According to the final rule, the administration codes Q0081, Q0083, and Q0084 are used "to report all services in a single visit, regardless of the number of drugs administered during that visit."

For 2004, CMS has abandoned a proposed plan to split the Q codes to correct what the agency believes are overpayments for the infusion of drugs that have separate APC codes and underpayments for drugs that are bundled into a medical procedure's APC code. Had the infusion codes been split, Baker said, "you would be paid one amount if you were infusing a drug that was being billed separately, and you would have been paid another, higher amount if you were infusing a drug that had been packaged."

Baker pointed out that code Q0085, the administration of cancer chemotherapy by infusion and another technique, has been eliminated for 2004. Now, she said, "if you are administering in two methods, you use the appropriate code for each method. Previously, you were not able to do that."

Baker explained that when CMS lowered the packaging threshold to drugs costing more than $50 per dose, the agency did away with the need to split the administration codes. She said that the decision allowed hospitals to avoid a particularly thorny issue—the proposed requirement from CMS that hospitals include the Healthcare Common Procedure Coding System, or HCPCS, code "on every line item on the claim for a packaged drug."

From a software standpoint, Baker said, "this was an enormous systems change. . . . You just can't easily do that." Some hospitals, she added, most likely "didn't even know that was menacing them."

"I truly say, the bullet missed you on that one," she added. "Implementation of that [requirement] for most hospitals would have been very burdensome."

Looking for relief. Iacovelli said that Moses Cone has explained OPPS reimbursement issues to drug manufacturers in an effort to "come up with some creative contracting to try to get their prices lower."

"Several of the manufacturers," he said, "have helped us out," especially for products that are available from more than one source. But he said that manufacturers of single-source oncology products "don't have any incentive to do any price-cutting," and those products often cost more than the payment rate set by OPPS.

Iacovelli added that the pharmacy department is "trying to budget for a data-management person, so that we can actually dig down and see what we're getting reimbursed for drugs" and attempt to limit the losses.

Anderson said that a legislative fix to OPPS could take place if the House and Senate pass a Medicare reform bill. He said that current legislation under debate in a conference committee contains a "noncontroversial" provision with bipartisan support to base OPPS drug payments on a percentage of AWP.

"I am still hopeful that Medicare reform will pass," Anderson said in mid-November. "But if it does not pass, I think we need to start over again and get some new legislation passed through the House and the Senate just to reform OPPS and not necessarily try to tie it to total Medicare reform."


Medications with Transitional Pass-Through Payment Status in 2004

ProductBillable UnitHow Supplied­
Agalsidase beta i.v. injection1 mg35-mg single-use vial­
Alefacept i.m. injection­7.5 mg15-mg single-use vial­
Alefacept i.v. injection­7.5 mg­7.5-mg single-use vial­
Argatroban injection­5 mg­250-mg single-use vial­
Bivalirudin injection­1 mg250-mg single-use vial­
Bortezomib i.v. injection­3.5 mg­3.5-mg single-use vial­
Dermagraft­37.5 cm2­37.5-cm2­ single-use device­
Ertapenem sodium injection­500 mg­1000-mg single-use vial­
Fulvestrant injection­25 mg250-mg prefilled syringe­
Laronidase i.v. injection­2.9 mg­2.9-mg single-use vial­
Nesiritide injection­0.5-mg vial­1.5-mg single-use vial­
Orcel­36 cm2­36-cm2­ device­
Oxaliplatin injection­5 mg50- or 100-mg single-use vial­
Palonosetron hydrochloride i.v. injection0.25 mg0.25-mg single-use vial­
Pantoprazole sodium injection­vial40-mg vial­
Pegfilgrastim injection­6-mg vial6-mg prefilled syringe­
Perflexane lipid microspheres injection­10-mL vial­10-mL single-use vial­
Perflutren lipid microsphere injection­2 mL­3-mL single-use vial­
Transcyte­247 cm2­­Two 247-cm2­ devices­
Triptorelin pamoate injection­3.75 mg­3.75-mg single-dose vial (Trelstar depot) and 11.25-mg single-dose vial (Trelstar LA)­
Ziprasidone mesylate injection10 mg­20-mg single-use vial­
Zoledronic acid injection­1 mg4-mg vial­