Hospitals say they expect tighter belts and thinner billfolds starting Aug. 1, when Medicare starts paying them fixed sums for ambulatory services.
But among those who don't adhere to the party line, there's a growing consensus that this latest radical redesign of a Medicare payment system won't be all that bad.
"Other than the mechanics of it, it shouldn't have a major effect on (hospitals') financial performance," says John Hindelong, who analyzes publicly traded hospital companies for the New York investment firm Donaldson, Lufkin and Jenrette.
"In fact, for the for-profit chains it will be a modest positive."
The new outpatient prospective payment system, mandated by the Balanced Budget Act of 1997 and codified in a final set of regulations issued in April, completely changes how Medicare pays hospitals for most outpatient procedures.
Congress conceived the new system to slow growth in Medicare costs and create incentives for hospitals to operate more efficiently.
Medicare payments for hospital outpatient-care charges had risen 13.4% annually from 1984 to 1994, when they reached $11.9 billion.
Fixed payments. Instead of reimbursing hospitals for expenses, the new Medicare system will pay hospitals set amounts for each of about 700 groups of procedures. Hospitals can keep payments that exceed costs but may lose money if their costs exceed the fixed payments. Payments are based on national average historical costs, adjusted to account for regional differences in wages. The new PPS erases most payment differences among hospitals and makes them predictable.
Congress also wanted to use the new payment system to reduce beneficiary copayments. Patients must make a 20% copayment on outpatient services, but currently that's 20% of charges rather than 20% of the lesser sum that Medicare actually pays.
Starting Aug. 1, HCFA will freeze copayments at current levels, estimated to average about 47% of Medicare payments under the new system. Over time, copayments will account for a gradually smaller percentage of the total, eventually reaching 20% for most services during a period of about 40 years. Hospitals won't lose out, because Medicare payments will make up the shortfall.
How hospitals will fare under the outpatient PPS depends on how you look at it. Total payments for ambulatory care will fall $9 billion to $74 billion from 2000 to 2004, compared with projected levels before the budget law, according to a Lewin Group study commissioned by the American Hospital Association. The study was published before the rules for the new outpatient payment system were completed.
But Medicare outpatient payments to hospitals will rise 4.6% next year compared with current levels, according to HCFA projections for the new PPS.
The difference is significant. For most hospitals, Medicare outpatient payments account for between 5% to 15% of overall revenue. And as hospitals continue to move services to the outpatient setting, those numbers are sure to grow.
Ready or not. Whether one subscribes to the AHA's or to HCFA's interpretation, what hospitals are really worried about is just getting ready.
To prepare for the new system, hospitals have to overhaul their coding, billing and medical-records systems so that they can assign codes and bill correctly under the new system. Many hospitals are still engaged in that time-consuming task.
Added to that is the uncertainty whether HCFA and the fiscal intermediaries that process the bills will have their systems up and ready on time.
"One of the things people don't realize is that this system represents enormous change both in the way that hospitals deal with the billing and claims process and also in the way the Medicare program pays for care," says Carmela Coyle, senior vice president for policy at the AHA.
"There's a lot that HCFA has to do, a lot that the fiscal intermediaries have to do, before hospitals can even start."
For instance, HCFA hasn't answered some important technical questions about implementation and isn't sure that the software used to process claims will work properly, she says.
The AHA, with other hospital groups, used HCFA's spotty preparation for the new system to successfully lobby for a one-month delay of the PPS.
A gargantuan task. Hospitals, too, have a lot to do.
"It's like when you go to clean the closet and you thought it was in pretty good shape," says Cathy Idema, president of Health Systems Management Network, a consultant firm based in Chatham, N.Y.
"Once you start the improvement process you begin to find out how big this is," she says. "Most hospitals are desperately struggling to come up to speed."
Idema says that none of the about 20 chief financial officers she's helped gear up for the PPS are projecting a positive financial impact.
In fact, she says, many dismiss HCFA's projected increase of 4.6% as one more flawed number from an agency that has admitted to numerous mistakes in its published regulations and doesn't have ready answers to industry questions about the very regulations it developed.
Historically, healthcare providers have raised a hue and cry every time there's a change in how they're paid. But soon after Medicare created a fixed payment system for inpatient stays in 1983 and again following its redistribution of physician payments in 1992, resistance quickly gave way to an adjustment period from which providers emerged, if not unscathed, at least alive and kicking.
No big deal. So it's not surprising to find some providers who aren't so worried.
Joanne Tucker, vice president of business services at 356-bed Hoag Memorial Hospital Presbyterian, has budgeting for a 2% decline in Medicare outpatient revenue once the new system kicks in.
About 10% of the Newport Beach, Calif., hospital's revenue comes from Medicare payments for outpatient services, so even the budgeted decline puts minimal pressure on the bottom line.
And Tucker's the first to say that payments are sure to come in over-budget.
"We think we'll be OK," she says.
The proof's in the emergency room, Tucker says. Under the old system, hospitals were paid on the basis of how much they spent to take care of a patient. Codes didn't affect payments, so most ER visits were assigned the lowest-intensity code simply as a matter of convenience.
Now that codes will determine payments, hospitals will start assigning higher-paying codes to higher-intensity visits. Because the hospital's payment projections don't factor in those higher codes, they understate what the true revenue will be, she says.
Payment levels aside, the new coding-intensive system will require more manpower.
"We're pretty far along and we have a feel for what the impact is going to be financially," Tucker says. The hospital has completed most of the technical preparation that's possible to do at this point, she says. "I think we'll be prepared except for the number of bodies we need to have code."
Both the AHA and HCFA agree that projections are averages, so payments to some hospitals will rise and others will fall. And both agree a hospital's relative preparedness will also affect its ability to capture reimbursement.
"I think some of the larger systems have bigger challenges because they are huge, they provide a vast array of types of services and they tend to service the patient who goes to multiple sites of service, " consultant Idema says.
"Sometimes the smaller ones do better because they are small."
Indeed, the new PPS explicitly protects small rural hospitals, guaranteeing them at least pre-PPS payment levels until 2004.
That's good news for 21-bed Sioux Center (Iowa) Community Hospital and Health Center. Unlike many small-town hospitals these days, this one's profitable, reporting an operating income of $104,000 on patient revenue of $11 million for the year ended June 30, according to Administrator Marla Toering.
Sioux Center, with a population of about 5,600, is a 45-minute drive from Sioux City, Iowa. About half of the hospital's patients are Medicare beneficiaries.
Business office and health information manager Yevonne TeGrotenhuis is coordinating the outpatient PPS implementation proces there.
TeGrotenhuis and her team have revamped the coding and held educational training sessions, and are now combing through claims to gauge the new payment system's likely impact on revenue. On some procedures, revenue's up. On others, it's down, she says.
TeGrotenhuis wouldn't guess as to where the hospital would come out overall, or whether service delivery would ultimately be affected.
"We're just going to provide (the administration and the board) the adequate tools to make those decisions," she says.
Ray Stoupa, vice president of finance at two-hospital Nebraska Methodist Health System, Omaha, says he expects Medicare outpatient revenue to stay flat under the new system, if everything goes as planned. But he's not sure it will.
It's all in the coding. "The impact studies are based on the fact that coding is done correctly. With all the added documentation and coding requirements, the chance for error is significantly increased," he says.
The hospital has hired three new coders to handle what he expects will be triple the current amount of coding. But, he says, "I don't see how there's any way, based on the volume of procedures, that providers will be able to get every dollar."
Earlier this year, Methodist opened a $17 million ambulatory-care center on Omaha's west side. Stoupa says that though the services cost less to provide there than they would in a hospital, the administrative burden of documentation and coding will ultimately lower the bottom line.
Martin McElroy, vice president of finance for ambulatory services at four-hospital Mercy Health System of Southeastern Pennsylvania in Conshohocken, agrees.
"Cash-flow implications are the biggest issue," he says. Hospitals won't get paid if their claims aren't technically correct, and many are still working on such basic issues as making sure their systems are coding correctly, he says.
It's also unclear whether hospitals will be able to bill beneficiaries once the system comes on line.
Hospitals will be urged not to do so until HCFA can calculate the correct amounts for copayments and deductibles. Since copays under the new system average 47% of total payments, according to data from the Medicare Payment Advisory Commission, delaying collection of those funds could hurt hospitals, McElroy says.
To James Doyle, senior vice president of finance at Elmhurst (Ill.) Memorial Hospital, the new PPS has its upsides.
"You finally know what you are going to get paid and you can plan around that payment as opposed to the mess it is today," he says. Under current policy, the government uses hospital costs as a basis for payment but adjusts payments with several formulas.
"But as all prospective payment systems do, it gives power to the government, which has a much easier time of cutting our payments," he says.
Doyle says he won't know what impact the payment system will have on outpatient revenue until he gets the results of a fiscal impact study he's commissioned.
For answers to other questions about the new payment system, Doyle will have to ask the government.
One question is whether Elmhurst hospital's new $50 million outpatient facility must provide emergency services if it is to qualify as a provider-based facility under the new rules and receive the higher payments such facilities are allotted.
Larry Oday, an attorney with the Washington law firm Vinson & Elkins who maintains the new regulations are rife with legal pitfalls, says such requirements are included in the regulations. "Even off-campus departments have an obligation to establish protocols for handling emergencies," Oday says.
Provider-based clinics are subject to several other stringent requirements under the new rules, and the AHA's Coyle says some inner-city and rural hospital clinics might not be able to meet them all. "If they don't qualify, they can continue to provide services, but they won't be paid at the higher hospital rate. What we're hearing is that without those higher payment levels they will be taking a loss," Coyle says.
Doyle's not sure what the government's response to his query will be. But, he says, creating a full-blown emergency room is out of the question. "It's just not going to happen," he says.
Memorial Hospital in Colorado Springs, Colo., will open its ambulatory surgery center on Aug. 1, but as a freestanding facility it won't have to meet the new PPS requirements for hospital-based clinics. "The surgical facilities at the hospital are packed," says CFO Dick Eitel. "By moving to a freestanding facility (we can have) better turnaround time, lower costs and an increase in market share."
The timing was coincidental but fortunate, Eitel says. Until April 1, 2001, when ambulatory surgery centers are subject to a new Medicare PPS, they'll continue to be paid fixed sums calculated under a system much simpler than the outpatient PPS. That results in temporary savings to 334-bed Memorial on coding costs.
Hospital executives have other qualms with the new rules. Attorney Oday takes particular umbrage with an appendix that lists about 1,700 procedures that are excluded under the outpatient payment system. If a hospital wants payment for such procedures, it has to admit the patient first.
"HCFA is substituting its judgment for the judgment of the attending physician," Oday says.
Hoag Hospital's Tucker cites the gamma knife surgery as an example. The tool, which is generally used on an outpatient basis, employs sharply focused rays of radiation to disintegrate inoperable brain tumors. But the new coding system doesn't allow hospitals to bill for such surgery except on an inpatient basis, she says.
"The issue now is, how do you medically justify the need for an inpatient admission if you've been doing it as an outpatient?" Tucker asks.
A query to the hospital's fiscal intermediary hasn't yet been answered, she says.