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The Next Wave of Medicare PPS

February 1, 1998
by Polly Schneider
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The Health Care Financing Administration’s goals for a Medicare prospective payment system throughout the spectrum of care are finally becoming a reality. Prospective payment system (PPS) plans for hospital outpatient departments, skilled nursing facilities, home health agencies, rehabilitation facilities and ambulance services were included in the Balanced Budget Act of 1997: Skilled nursing will be the first area to comply, with the final policy coming out this summer. Final rules for the hospital outpatient PPS will be released in October, and the system will go into effect on January 1, 1999.

The classification system for hospital outpatient, Ambulatory Patient Groups (APG), was developed by 3M Corporation beginning in 1988: It includes about 300 different payment categories to cover the gamut of outpatient services, and this number may increase by next year.

Remembering DRGs
"To a large extent what’s going to happen will be much the same as what happened with inpatient PPS back in 1983," says Larry Goldberg, director of Washington national affairs in healthcare at Deloitte & Touche, Washington, D.C. "There will be a rush to understand how the payment mechanism works, how various services get coded and what those services are worth."

Decision support systems will play a key role in helping providers track costs and identify areas of over-utilization--and will require better data collection and storage to do so, according to Kim Sheets, an APG expert in 3M’s healthcare information systems division. "Outpatient reporting is so unsophisticated that a lot of hospitals don’t even know down to the procedure level what they’re doing." Sheets recommends that providers begin testing historical claims data against the APG system to determine the possible financial impact of the regulations.

The quality of outpatient coding will also have to improve, she adds, and providers will need to implement a grouper and a pricer module in billing systems in order to reconcile claims later. 3M is one of several firms selling an APG grouper application that assigns the APG codes and calculates the expected payment; another is Codemaster, Santa Cruz, Calif.

Vendors Get Ready
Some of the leading healthcare IS vendors are modifying their systems now. MEDITECH spokesperson Paul Berthiaume says the company’s Case Mix Management application has an interface to the 3M grouper; an interface from the grouper to the billing system is under way. IDX Corp., Burlington, Vt., does not plan to incorporate a grouper but is modifying its systems to allow for storage of the grouped data, according to spokesperson Heather Miller. HBOC, Atlanta, has decided to wait until HCFA releases the proposed regulations before developing a grouper or taking other action, according to the company’s regulatory affairs and standards office.

Home care squeeze
While some hospitals will suffer losses from the new PPS, home care may feel the most pain since it is largely Medicare-paid--accounting for $16.7 billion of the Medicare pie in fiscal year 1996--and is one of the fastest-growing sectors in healthcare. "There is no doubt that home health as a percentage is going to incur the largest reductions in growth," Goldberg says. An interim payment system that places a per visit fee cap and an aggregate beneficiary cap is being implemented in home health agencies now.

Many home health agencies will need to diversify outside of the Medicare population to stay afloat, says Tom Williams, home health IS consultant with Stony Hill Management, Inc., Fredonia, Wis. "As a result, they’re going to need systems that support different types of contracting and reimbursement arrangements," he says.

The proposed regulations for hospital outpatient are due out this spring for public comment. The home health PPS will go into effect on October 1, 1999, with a public notice due out in February of that year.

Polly Schneider is news editor at Healthcare Informatics.