HEALTH-SYSTEM EDITION
BUSINESS/MANAGEMENT

Final OPPS rule shows some gains, some losses

The Centers for Medicare & Medicaid Services (CMS) has published its final rule for Outpatient Prospective Payment System rates for 2003. The news looks good: OPPS payments will rise by nearly 6% next year.

Much of the increase, however, is earmarked for emergency departments, diagnostic procedures such as colonoscopies and mammograms, and rural hospitals. Most pharmacy-based operations will see less money. A few outpatient clinics will see no financial impact.

"We way overpaid on many drugs last year," said CMS administrator Tom Scully in announcing the final rule. "We are putting a greater emphasis on basic services and less toward high tech." Pushing basic services means that pharmacy is taking a bigger hit than medical services or medical devices.

"We project a decrease in gross margins from 34% to 4% for Medicare oncology patients," said Steve Rough, assistant director of pharmacy services at the University of Wisconsin Hospital. "Especially concerning is the number of pass-through payments that go away entirely. That's going to cost us $1.2 million. Starting Jan. 1, we will be losing our shirts on Medicare patients."

Many hospital outpatient operations will see similar revenue drops, warned Gary Stein, director of federal regulatory affairs for ASHP. The precise impact in dollars depends on each institution's patient mix and Medicare population, but Stein said the final rule is no improvement over CMS' proposed OPPS rule published in August. "We see the same fiscal impact to every other outpatient clinic," he said. "Hospitals can afford to lose only so much money before they have to stem the tide of red ink."

Stein sees two significant issues with OPPS. The first is the transitional pass-through payments for certain higher-cost drugs and biologics. Pass-through payments are supposed to ease hospitals' financial woes by boosting payments for drugs approved within the past two to three years. New drugs typically carry higher-than-average price tags.

The problem: Almost all pass-through products, including oncology drugs, will be rolled into Ambulatory Payment Classifications (APCs) as of Jan. 1, 2003. Many APCs will increase with a higher-cost drug component, but the increase is more than offset by the loss of pass-through payments. Overall revenues will drop for many outpatient clinics.

There are also difficulties with the way CMS calculates APC payments. The agency generally relies on billing data from hospitals in setting OPPS rates. But that does not take into account billing errors, which Rough said could be significant.

Ernest Anderson, pharmacy director at the Lahey Clinic in Burlington, Mass., agrees. Medicare billing errors are rife, especially in oncology, and the range from low-end to high-end billing for the same drug can be a hundredfold. "That tells me somebody has been underbilling." Many hospital computer systems, he noted, are not set up to bill in the dose increments required by CMS. In the past, it was less expensive to underbill than to rewrite billing software. That underbilling is now cutting payments to all providers.

Hospital billing charges also fail to recognize the difference in markup being applied to relatively low-cost items and high-cost drugs, Rough said. Thus the low percentage markup on the most expensive drugs, which account for a large portion of total expenditures, is also being applied to lower-cost drugs. The lower overall markup slices outpatient clinic margins that pay for items such as drug administration, pharmacy services, and administrative overhead.

"These cuts pose a real question for hospitals," Rough said. "Can we afford to continue our oncology program? It's a hospital-by-hospital choice everyone must make."

Anderson has already made the choice. "Based on our volume of drugs that remain on the active pass-through, we will be reimbursed $2.8 million less than our cost," he said. "We're going to be looking to other third parties to cover Medicare costs. We can't turn patients away."

Besides shifting Medicare costs to other payers, clinics can also lower costs by shifting treatment to older, less expensive drugs. The problem, Anderson noted, is that older drugs may also be less effective.

Clinics have another choice: Encourage Medicare patients to use other providers. Rough said CMS is giving hospitals a positive financial incentive to move patients away from outpatient clinics and into inpatient beds or physician offices. "We will see hospitals shift care from the clinic to physician offices," he predicted. "You are going to see more errors as a result of administering care in a less safe environment that lacks the doublechecks, pharmacy oversight, and palliative care provided in the clinic. You are going to see more expensive drugs used and more negative patient outcomes. It's a whole set of intended consequences, all of them bad."

Fred Gebhart

Fred Gebhart. Final OPPS rule shows some gains, some losses.

Drug Topics

2002;23:HSE39.