For Medicare payment purposes, an outpatient service  consists of a primary service and packaged services, the additional services  or items associated with that primary service. A hospital can receive multiple APC payments for  a single outpatient visit if more than one primary service is delivered during  that visit. On  single-service claims, claims with one primary service, CMS can associate  packaged services with the primary service and calculate a total cost for  the service (see fig. Payment Rates May Not Uniformly Reflect Hospitals’ Costs

The OPPS rate-setting methodology used by CMS may result in APC  payment rates for drugs, devices, and other outpatient services that do not  uniformly reflect hospitals’ costs. Two areas of CMS’s methodology are  particularly problematic. First, the claims that CMS uses to calculate  hospitals’ costs and set payment rates may not be a representative sample  of hospital claims, as CMS excluded many multiple-service claims when  calculating the cost of OPPS services, including those with drugs and  devices. However, if the types or costs of services on excluded  claims differ from the types or costs of services on included claims, the  payment rates of some or all APCs may not uniformly reflect hospitals’  costs of providing those services. Second, when 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, not all hospitals use this methodology, and 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. When calculating  the cost of all OPPS services, including drugs and devices, to set payment  rates, CMS excluded over 40 percent of all multiple-service claims because  CMS could not associate particular packaged services with a specific  primary service on these claims. Drug and device industry  representatives we spoke with raised concerns that certain drugs and  devices are often billed on multiple-service claims that are largely excluded  from rate setting. Because of the structure of the outpatient claim, the data CMS has  available do not allow for the comparison of single-service claims and  multiple-service claims to determine whether excluding many multiple- service claims has an effect on OPPS payment rates. We received information from 113 hospitals, although not all hospitals  responded to each question. Third,  the Administrator 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. Scope and Methodology

We analyzed Medicare claims data used by the Centers for Medicare &  Medicaid Services (CMS) to set the 2003 outpatient prospective payment  system (OPPS) payment rates.
Why GAO Did This Study

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.

What GAO Found

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.