Overview
The Outpatient Prospective Payment System (OPPS) is a system used by the Centers for Medicare & Medicaid Services (CMS) to pay for hospital outpatient services. It was implemented in 2000 as a way to control rising Medicare outpatient spending and promote efficiency.
The OPPS pays predetermined rates to hospitals for services they provide to Medicare beneficiaries. Instead of paying for each individual service, Medicare makes a bundled payment that covers all services provided during an outpatient visit.
This bundled payment is based on the patient’s diagnosis and the costs of providing care. The OPPS categorizes services that are expected to have similar costs into Ambulatory Payment Classifications (APCs). Each APC is assigned a weight reflecting the relative cost of the services compared to other APCs. These weights are adjusted annually to reflect changes in medical practices and costs.
Key Components
There are several key components of the OPPS that determine payment rates:
Relative Weight – As mentioned, each APC has an assigned weight reflecting expected relative cost. Higher weight APCs receive higher payments.
Conversion Factor – A set dollar amount that is multiplied by the APC weight to calculate the base payment rate. This conversion factor is updated annually.
Adjustments – Additional payment adjustments are made for outlier costs, rural hospitals, cancer hospitals, new services, and other factors.
Packaging – Many ancillary services like drugs and supplies are “packaged” into the primary service payment.
Determining APC Assignments
Accurately assigning claims to APCs is crucial for appropriate OPPS reimbursement.
CMS uses the following process:
Healthcare Common Procedure Coding System (HCPCS) codes are assigned to APC groups so that services expected to have comparable costs are packaged together.
Cost data is analyzed to determine the relative resource use of each HCPCS code by calculating a ‘median cost’ for each service.
The median costs are used to determine a relative weight for each APC group.
The APC weights are scaled to establish a budget neutral payment system.
The weights and payments are updated annually.
Hospital Payments
- Hospital payment rates under OPPS depend on:
- Patient diagnoses and services provided (determines APC group)
- APC relative weight
- Applicable adjustments
- Wage index of geographic area (adjusts labor-related portion of payment)
The base payment rate
The base payment rate is the product of the conversion factor, APC weight, and wage index. Additional payments may also apply, such as:
Outlier payments – for extraordinarily high cost cases
Pass-through payments – for innovative medical devices, drugs, and biologicals
Separate payments – for certain costly drugs and devices
Updates and Changes
The OPPS faces ongoing evolution through regulatory and legislative updates:
Annual regulatory updates modify the relative weights, conversion factor, wage indexes, and make other changes. New HCPCS codes are assigned APC groups as new services emerge.
The 21st Century Cures Act increased payments for certain types of rural and cancer hospitals.
The Consolidated Appropriations Act changed reimbursement for covered outpatient drugs purchased through the 340B Drug Pricing Program.
Potential broader reforms have been proposed to further expand bundled payments in outpatient care.
The OPPS has brought increased efficiency, cost control, and flexibility to hospital billing and Medicare spending over the past 20 years.
However further changes aim to continually improve and modernize Medicare’s largest payment system as outpatient services take on greater prominence.
Implementation of the OPPS has impacted hospitals in several ways:
Financial incentives reward efficiency instead of volume. Hospitals must focus on reducing unnecessary services.
Coding, billing, and cost accounting systems must be meticulously maintained to maximize legitimate reimbursement under the APC model.
Budgeting is more predictable when based on fixed payments instead of charges and costs. However, hospitals bear more financial risk.
Greater IT infrastructure and analytics are needed to manage new data demands and identify areas for improved efficiency.
Hospitals have consolidated into larger systems to spread fixed costs as easy revenue gains have been achieved under OPPS.
While imposing considerable administrative demands, the payment principles of the OPPS have remained intact over 20 years and are likely to continue guiding Medicare outpatient reimbursement.
Relationship between ICD and “Outpatient Prospective Payment System (OPPS)”
The International Classification of Diseases (ICD) codes play an important role in the Outpatient Prospective Payment System (OPPS) by determining diagnosis-related groupings and payment amounts. Specifically:
ICD diagnosis codes reported on Medicare outpatient claims are a key factor used to assign claims to Ambulatory Payment Classifications (APCs) under the OPPS. The APC assignment determines the payment rate for the outpatient visit.
CMS uses historical ICD diagnosis data along with HCPCS procedure codes to calculate the relative resource costs and weights for each APC group during the annual OPPS rulemaking updates. So the specific ICD codes reported impact future years’ OPPS payment rates.
Some APCs are only eligible for payment if specific ICD diagnosis codes are present. For example, certain cardiology or orthopedic APCs require corresponding circulatory or musculoskeletal diagnoses codes to qualify for reimbursement at those higher rates.
Hospitals must ensure accurate, specific ICD diagnosis coding to maximize appropriate APC assignment and OPPS payments. More detailed coding under ICD-10 has enabled better capture of patient complexity and severity in OPPS reimbursement.
