Federal outpatient reimbursement system scheduled for test in Iowa

October 12, 1994

Freestanding imaging centers may escape rate scheduleThe freewheeling outpatient health-care segment is set to receivea healthy dose of economic discipline courtesy of Uncle Sam, whois threatening to rein in outpatient costs with a system

Freestanding imaging centers may escape rate schedule

The freewheeling outpatient health-care segment is set to receivea healthy dose of economic discipline courtesy of Uncle Sam, whois threatening to rein in outpatient costs with a system similarto the diagnosis-related groups (DRGs) rate schedule applied toinpatient procedures. While radiology payments will probably behit hard by the new plan, independent imaging centers may escaperelatively unscathed due to a loophole exempting such centersfrom the new rate schedule.

The implementation of DRGs in 1983 caused major changes tothe health-care landscape. By establishing a set rate schedulefor Medicare and Medicaid reimbursement of hospital inpatientprocedures, federal regulators curtailed the freedom of hospitalsto set the prices they charged for procedures like imaging exams.The system did not apply to outpatient procedures, however, andhospitals responded by moving as many procedures as possible tooutpatient settings.

This shift has not gone unnoticed by the federal government.To curb outpatient reimbursement, the Health Care Financing Administrationhas been examining an extension of DRGs to outpatient facilities.Known as ambulatory patient groups (APGs), this system would bundleoutpatient services and assign a set fee to be paid to health-careproviders.

HCFA has developed a draft APG rate schedule and has forwardedthe plan to Congress, but implementation is not expected until1996. In the meantime, a test application of an APG system wasscheduled to begin in Iowa in December.

The implementation of the Iowa APG system will cover procedurespaid for by Medicaid, according to Vicki Sipple, marketing managerfor the APG project at 3M Health Information Systems in Wallingford,CT. The Department of Health and Human Services has contractedwith 3M to develop the APG system.

While the Iowa system will apply initially to Medicaid patients,it could be applied on a broader basis to Medicaid and Medicarepatients across the country. It will eventually be used nationwidefor Medicare, said Dr. Donn G. Duncan, an advisor to HCFA, whichruns the Medicare program. But the APG system is still monthsor even a year away from such usage.

When it is implemented, radiology could be the first to feelthe impact.

"Data indicate that over one-half of the radiology chargesare related to procedures done in the outpatient environment,"Duncan said. "If (APGs) are implemented in part, radiologywould be done first."

Imaging center loophole. Interestingly, there appears to bea gaping loophole in the outpatient reimbursement system thatcould benefit independent imaging centers. As currently configured,the APG system will apply only to outpatient environments associatedwith hospitals. It will, therefore, have no effect on freestandingimaging centers that are not affiliated with hospitals. Theseimaging centers, particularly those that perform the more expensiveimaging procedures such as MRI and CT, will continue to be reimbursedon a cost basis, according to Duncan.

"In general, the procedures done at the imaging centerwill not fall within the packaging (bundling) algorithm,"he said. "CT and MRI would be paid as they have been, onan individual basis."

As a result, extending a DRG-like system selectively to hospital-affiliatedimaging centers could act as an incentive for the most expensiveimaging exams to be done at independent imaging centers.

The Iowa APG implementation is an important first test of theway outpatient services might be handled. Officials at HCFA, atother federal agencies and at 3M will watch the Iowa experimentclosely to see what information can be gathered from the implementationand what modification, if any, needs to be made based on the experiencein Iowa.

The roots of the APG system reach back to 1990, when Congressordered HHS, of which HCFA is a part, to develop a prospectivepayment system to cover hospital outpatient services. The departmentissued a contract for its development to Health Systems International,which has since been acquired by 3M. Duncan, who now advises HCFAand 3M, was chairman of Health Systems International at the timethe contract was awarded. HHS and 3M developed the draft reporton APGs that was recently sent to Congress.

The outpatient environment is one of the last vestiges of theold cost-based Medicare system. The APG plan would replace itwith 116 surgical and 20 radiological groupings as part of 300ambulatory patient groups. In practice, the APG system would requirethat a plain film x-ray, for example, be included in the paymentfor setting a broken bone.

"It (the x-ray procedure) will be packaged along withother ancillaries and the cost will be distributed across theAPG payment system," Duncan said.

The actual amount paid for performing such an exam, he explains,will depend on the frequency with which the facility usually doesx-rays under those conditions.

"If, for a fracture of the wrist, the data show that awrist x-ray is taken only half the time, then one-half the normalcost will be distributed for each wrist fracture that is treatedin the outpatient facility," he said.

The physician fee is not currently bundled with the APG payment.The APG system might be extended to include physician paymentin the future, but that is speculative, Duncan said.

"Professional fees are not included at this time in theAPG payment schedule," he said. "There is, however,an ongoing project to determine if the professional componentof an APG visit should someday be included in the payment model."

Duncan noted that the APG system could also be extended toinclude services performed at independent imaging centers. Butsuch an extension is not likely in the near future, he said.