Medicare:

Information Needed to Assess Adequacy of Rate-Setting Methodology for Payments for Hospital Outpatient Services

GAO-04-772: Published: Sep 17, 2004. Publicly Released: Sep 17, 2004.

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Under the Medicare hospital outpatient prospective payment system (OPPS), hospitals receive a temporary additional payment for certain new drugs and devices while data on their costs are collected. In 2003, these payments expired for the first time for many drugs and devices. To incorporate these items into OPPS, the Centers for Medicare & Medicaid Services (CMS) used its rate-setting methodology that calculates costs from charges reported on claims by hospitals. At that time, some drug and device industry representatives noted that payment rates for many of these items decreased and were concerned that hospitals may limit beneficiary access to these items if they could not recover their costs. GAO was asked to examine whether the OPPS rate-setting methodology results in payment rates that uniformly reflect hospitals' costs for providing drugs and devices, and other outpatient services, and if it does not, to identify specific factors of the methodology that are problematic.

The rate-setting methodology used by CMS may result in OPPS payment rates for drugs, devices, and other services that do not uniformly reflect hospitals' costs of providing those services. Two areas of the methodology are particularly problematic. The hospital claims for outpatient services that CMS uses to calculate hospitals' costs and set payment rates may not be a representative sample of all hospital outpatient claims. For Medicare payment purposes, an outpatient service consists of a primary service and the additional services or items associated with the primary service, referred to as packaged services. CMS has excluded over 40 percent of multiple-service claims, claims that include more than one primary service along with packaged services, when calculating the cost of all OPPS services, including those with drugs and devices. It excludes these multiple-service claims because, when more than one primary service is reported on a claim, CMS cannot associate each packaged service with a specific primary service. Therefore, the agency cannot calculate a total cost for each primary service on that claim, which it would use to set payment rates. The data CMS has available do not allow for a determination of whether excluding many multiple-service claims has an effect on OPPS payment rates. However, if the types or costs of services on excluded claims differ from those on included claims, the payment rates of some or all services may not uniformly reflect hospitals' actual costs of providing those services. In addition, in calculating hospitals' costs, CMS assumes that, in setting charges within a specific department, a hospital marks up the cost of each service by the same percentage. However, based on information from 113 hospitals, GAO found that not all hospitals use this methodology: charge-setting methodologies for drugs, devices, and other outpatient services vary greatly across hospitals and across departments within a hospital. CMS's methodology does not recognize hospitals' variability in setting charges, and therefore, the costs of services used to set payment rates may be under- or overestimated.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: CMS used information from almost 84 million single and generated-single procedures to set the APC rates for services paid under Medicare OPPS for 2005 and used over 17 million individual claim line-items to set the APC rates for drugs and biologicals paid under OPPS for 2005. This compares favorably to the 2004 OPPS in which CMS used 44 million single and generated-single procedure claims to set payment weights for procedural APCs and used 7 million individual line-items to set APC rates for drugs and biologicals. CMS continues to seek ways to use as many of the claims for services paid under OPPS as possible.

    Recommendation: The Administrator of CMS should gather the necessary data and perform an analysis that compares the types and costs of services on single-service claims to those on multiple-service claims.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  2. Status: Closed - Not Implemented

    Comments: CMS has nothing to add at this time to the 2004 comments that it submitted related to this recommendation. CMS believes that its previous response to this recommendation still stands and CMS has nothing further to add. The agency intends no further action.

    Recommendation: The Administrator of CMS should analyze the effect that the variation in hospital charge-setting practices has on the OPPS rate-setting methodology.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

  3. Status: Closed - Not Implemented

    Comments: CMS has nothing to add at this time to the 2004 comments that it submitted related to this recommendation. CMS believes that its previous response to this recommendation still stands and CMS has nothing further to add and plans no additional action.

    Recommendation: The Administrator of CMS should, in the context of the first two recommendations, analyze whether the OPPS rate-setting methodology results in payment rates that uniformly reflect hospitals' costs of the outpatient services they provide to Medicare beneficiaries, and, if it does not, make appropriate changes in that methodology.

    Agency Affected: Department of Health and Human Services: Centers for Medicare and Medicaid Services

 

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