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Medicare's Hospital Outpatient Prospective Payment System: OPPS 101 (part 2 of 2)

what is outpatient prospective payment system

Part 1 of this article summarized the origins and structure of the Centers for Medicare and Medicaid Services (CMS) Outpatient Prospective Payment System (OPPS), including which services are reimbursed and at what rates. Here we further elaborate on a number of issues including costs, coding and reimbursement for drugs, facility fees, supervision of therapeutic services, and we briefly discuss the operational issues that can impede optimal financial performance for outpatient infusion services in the hospital setting.

Drugs for Outpatient Infusion

All providers that administer chemotherapy and the associated supportive drugs must obviously first acquire those drugs. Generally, drugs are acquired through one or more purchasing organizations and involve a complex system of wholesalers and distributors. Hospitals, like physician practices, are often under pressure by payers to use alternative channels (frequently lumped into the category of “brown bagging”). Unlike practices, the majority of community hospitals have resisted this trend, standing on regulatory and licensure requirements and citing the added risks caused by the sheer size and complexity of a hospital system. For example, perishable drugs delivered to a physician office will, theoretically, be readily directed to precisely the right person/location. For a hospital with multiple building addresses, receiving departments, and even pharmacy locations, the risks (again, theoretically, at least) increase. And, as with payer contracting terms, hospitals are larger consumers of products and therefore may have more clout with payers to resist such pressures.

Drug Cost

Among the most common assumptions we hear from clients is that hospitals get better pricing for drugs than office practices. When an institution is eligible for 340B pricing, this is most certainly the case for many (but not all) drugs. The 340B Drug Pricing Program resulted from enactment of Public Law 102-585, the Veterans Health Care Act of 1992, which is codified as Section 340B of the Public Health Service Act. Section 340B limits the cost of covered outpatient drugs to certain federal grantees, federally qualified health center look-alikes, and qualified disproportionate-share hospitals. This pricing is intended to mimic the pricing that is available to Veterans Affairs providers, which represents the lowest cost for drugs available to providers in the United States.

As of October 1, 2010, there were 3,650 covered entity sites, 1 and the Patient Protection and Affordable Care Act of 2010 expands eligibility to a handful of additional entities, creating concern from some physician practices worried that expanded 340B participation will further pressure their practices to move their office-based infusion services to the hospital outpatient department setting. The larger question, however, may be related to the definition and structure of 340B eligibility overall. Consider that health care reform seeks to ensure that all individuals carry health insurance. If the number of insured individuals increases, what will be the impact on the number of Medicaid enrollees? And if that number decreases, will many previously 340B-eligible institutions lose that eligibility, or will the formula for eligibility be redefined?

For institutions without access to 340B pricing, there is a curious mix in terms of drug acquisition costs.

Over-the-counter drugs along with all the basic supplies like gauze, tubing, and so on are generally less expensive to hospitals because they are able to buy in bulk. Prescription drugs, however, are another story. First, there are class-of-trade issues. 2 In short, although manufacturers are at liberty to set prices for their products, the regulations prohibit manufacturers from offering substantially better pricing for comparable purchases to similar purchasers. Although manufacturer pricing strategy is beyond the scope of this article, this regulation essentially divides provider purchasers into three groups: institutions, practices, and retail pharmacies. A recent client engaged the Oncology Management Consulting Group to determine which class of trade was most beneficial on the basis of their recent purchasing history. The findings indicated that some specific drugs were less costly under the hospital's purchasing contracts, whereas others were less costly under the office practice's contracts. Thus, the mix and volume of specific items purchased will dictate the least costly setting for drug purchasing.

Drug Reimbursement

As introduced in the first part of this two-part article, CMS reimburses hospitals for drugs differently than it does office-based practices. The major reason for this is that the office-based reimbursement of average sales price (ASP) plus 6% is a legislated rate, whereas the OPPS rate must retain budget neutrality for CMS (total projected CMS expenditures for all services cannot be increased on the basis of any one or more items without decreasing costs for others) and is set by using a payment-setting methodology based on hospital costs (calculated by CMS on the basis of aggregate hospital charges and reported cost-to-charge ratios). With this cost-based methodology, CMS determined that certain drugs carried costs low enough that the reimbursement for drug administration was sufficient to also cover the drug cost. This “packaging” threshold has increased slowly over the years and is set at $65.00/d for 2010 and is proposed to be set at $70.00/d for 2011. Thus, drugs that cost less than $70.00/d will not paid separately under OPPS.

Each year, to maintain budget neutrality, CMS makes numerous adjustments to the OPPS. Among the most notable is payment for drugs that are not packaged, which fall into two main groups: those with pass-through status and those without pass-through status (pass-through status is granted for only the first 2 to 3 years after a drug becomes payable under OPPS). Pass-through drugs are funded differently than drugs and services that fall under the regular mechanism that requires budget neutrality. Instead, they are paid partly through the regular funding mechanism and partly from other Congressionally allocated sources, allowing budget neutrality to be maintained while also allowing for somewhat higher payments for pass-through drugs. These pass-through drugs are generally paid under OPPS in a manner virtually identical to the rates paid to the private practice ( Table 1 ). Non–pass-through drugs that are not packaged (see above) have been paid at varying rates (ASP since 2005): in 2010, that rate was ASP plus 4%. For 2011, CMS has increased that rate to ASP plus 5%.

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