October 2000 Bulletin

HCFA has new payment plan for outpatient care

By Laura Nuechterlein

The Health Care Financing Administration (HCFA) introduced a new prospective payment system (PPS) for hospital outpatient departments on Aug. 1, 2000. This system represents a major change in the way hospitals, community mental health centers and other entities are paid for the outpatient services they provide to Medicare beneficiaries. Beneficiary copayments will also decrease under the new system.

While the outpatient PPS will not have a direct effect on Medicare physician reimbursement, orthopaedic surgeons may receive questions about the new system from their patients. Furthermore, a similar plan for freestanding ambulatory surgery centers is scheduled to be implemented in the next several months. HCFA was required to develop the outpatient PPS under provisions of the Balanced Budget Act of 1997.

The outpatient PPS is based on ambulatory payment classifications (APCs), which are groups of services considered similar both clinically and in the quantity of resources required by hospitals to provide them. This is similar in concept to the diagnosis-related groups used for inpatient billing. There are a total of 451 APCs, with the majority of musculoskeletal procedures grouped into 25 APCs.

The payment for each APC is a fixed amount based on the median historic costs of the services within that group. All services directly related to providing a service or performing a procedure are packaged together under this single payment. These include the use of an operating suite or procedure room, use of recovery room, use of observation bed, medical or surgical supplies and equipment, surgical dressings, anesthesia supplies and equipment, capital-related costs, costs incurred to procure donor tissue (other than corneal tissue), and various incidental services. Casting, splinting and strapping services and supplies are packaged under a separate APC.

Along with the APCs, HCFA has developed a separate list of more than 1,700 procedures that will be reimbursed by Medicare only if performed on an inpatient basis. HCFA believes these procedures require inpatient care because of the invasive nature of the operation, the need for postoperative care or the underlying physical condition of the patient. However, Medicare data indicates that several of the procedures on the inpatient-only list have been frequently performed in an outpatient setting in recent years. Four surgical procedures frequently performed by orthopaedic surgeons were done more than 2,000 times each on an outpatient basis in 1998. (See table on p. 19) HCFA promises to review and update the inpatient-only list on a regular basis, to take into account any technological advances or changes in medical practice that allow procedures to be safely provided in an outpatient setting.

One of the biggest changes resulting from the new outpatient PPS will be in the copayment amount paid by the beneficiary. Under the old rules, the beneficiary was charged 20 percent of the hospital’s actual itemized charges, which amounted to about half of the total allowed Medicare payment. The new system is designed to eventually reach a beneficiary copayment equal to 20 percent of the Medicare payment rate. This will be done by temporarily freezing the dollar amount of the copayment. As the APC payment amount is updated every year, the percentage paid by the beneficiary will gradually decline until it reaches 20 percent of the total payment. At that point, the dollar amount of the copayment will be adjusted every year along with the APC payment rate.

The length of time before the copayment amount reaches the 20 percent level will vary from hospital to hospital, and among APCs within a hospital. For procedures where copayment is currently a high percentage of the total payment, the process could take many years.

The financial impact on hospitals of the new system remains to be seen. Generally speaking, the outpatient PPS will result in increased payments for some procedures and reduced payments for others. The most efficient providers will likely see the greatest benefit. In the short term, the biggest challenge for hospitals will be adjusting to new coding and billing requirements.

Physicians who are involved with independent, freestanding ambulatory surgery centers should keep an especially close watch on how hospitals are dealing with the new system. Final regulations on a new PPS for freestanding centers, based on the same APC concept, will be published this autumn.

Sample Musculoskeletal Ambulatory Payment Classification (APC)



CPT Descriptor

Payment Rate


Arthroplasty with Prosthesis



Arthroplasty, elbow; with distal humeral prosthetic replacement


Arthroplasty, elbow; with implant and fascia lata ligament reconstruction


Arthroplasty, elbow; with distal humeral and proximal ulnar prosthetic replacement (e.g., total elbow)


Arthroplasty, radial head; with implant


Arthroplasty with prosthetic replacement; distal radius


Arthroplasty with prosthetic replacement; distal ulna


Arthroplasty with prosthetic replacement; scaphoid (navicular)


Arthroplasty with prosthetic replacement; lunate


Arthroplasty with prosthetic replacement; trapezium


Arthroplasty with prosthetic replacement; distal radius and partial or entire carpus (total wrist)


Arthroplasty metacarpophangeal joint; with prosthetic replacement, each joint


Arthroplasty, interphalangeal joint, with prosthetic replacement, each joint


Arthroplasty, patella; with prosthesis

Frequently performed outpatient procedures on "inpatient-only" list


CPT Descriptor


Open treatment of femoral fracture, proximal end, neck, internal fixation or prosthetic replacement (direct fracture exposure)


Open treatment of intertrochanteric, pertrochanteric, or sub-trochanteric femoral fracture; with plate/screw type implant, with or without cerclage


Laminotomy (hemilaminectomy), with decompression of nerve root(s), including partial facetectomy, foraminotomy and/or excision of herniated intervertebral disk; one interspace, lumbar (including open or endoscopically-assisted approach)


Laminectomy, facetectomy and foraminotomy (unilateral or bilateral with decompression of spinal cord, cauda equina and or nerve root(s), (e.g., spinal or lateral recess stenosis)), single vertebral segment; lumbar

Laura Nuechterlein is senior policy analyst in AAOS health policy department.

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