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Historical PersPective of cMs reiMburseMent systeMs

Historical PersPective of cMs reiMburseMent systeMs In 1964 the Johnson administration avoided opposition from hospitals for passage of the Medicare and Medicaid programs by adopting retrospective reasonable cost-basis payment arrangements originally established by BlueCross. Reimburse- ment according to a retrospective reasonable cost system meant that hospitals reported actual charges for inpatient care to payers after discharge of the patient from the hospital. Payers then reimbursed hospitals 80 percent of allowed charges. Although this policy helped secure passage of Medicare and Medicaid (by entic- ing hospital participation), subsequent spiraling reimbursement costs ensued. Shortly after the passage of Medicare and Medicaid, Congress began inves- tigating prospective payment systems (PPS) (Table 9-1), which established pre- determined rates based on patient category or the type of facility (with annual increases based on an inflation index and a geographic wage index): ● Prospective cost-based rates are also established in advance, but they are based on reported health care costs (charges) from which a predetermined per diem (Latin meaning “for each day”) rate is determined. Annual rates are usually adjusted using actual costs from the prior year. This method may be based on the facility’s case mix (patient acuity) (e.g., resource utilization groups [RUGs] for skilled nurs- ing care facilities). ● Prospective price-based rates are associated with a particular category of patient (e.g., inpatients), and rates are established by the payer (e.g., Medicare) prior to the provision of health care services (e.g., diagnosis-related groups [DRGs] for inpatient care). TABLE 9-1 Prospective payment systems, year implemented, and type PROSPECTIVE PAYMENT SYSTEM YEAR TYPE Ambulance Fee Schedule 2002 Ambulatory Surgical Center (ASC) Payment Rates 1994 Clinical Laboratory Fee Schedule 1985 Durable Medical Equipment, Prosthetics/Orthotics, and Supplies (DMEPOS) Fee Schedule 1989 End-Stage Renal Disease (ESRD) Composite Payment Rate System 2005 Home Health Prospective Payment System (HH PPS) (Home Health Resource Groups [HHRG]) 2000 Hospital Inpatient Prospective Patient System (IPPS) 1983 Hospital Outpatient Prospective Payment System (HOPPS) 2001 Inpatient Psychiatric Facility Prospective Payment System (IPF PPS) 2004 Inpatient Rehabilitation Facility Prospective Payment System (IRF PPS) 2002 Long-Term (Acute) Care Hospital Prospective Payment System (LTCH PPS) 2001 Resource-Based Relative Value Scale (RBRVS) System (or Medicare Physician Fee Schedule 1992 [MPFS]) Skilled Nursing Facility Prospective Payment System (SNF PPS) 1998 Current Procedural Terminology © 2015 American Medical Association. All Rights Reserved. Cost-based Cost-based Cost-based Cost-based Price-based Price-based Price-based Price-based Cost-based Price-based Price-based Cost-based Cost-based

EXAMPLE: Prior to 1983, acute care hospitals generated invoices based on total charges for an inpatient stay. In 1982 an eight-day inpatient hospitalization at $225 per day (including ancillary service charges) would be billed $1,800. This per diem reimbursement rate actually discouraged hospitals from limiting inpa- tient lengths of stay. In 1983 the hospital would have been reimbursed a PPS rate of $950 for the same inpatient hospitalization, regardless of length of stay. The PPS rate encourages hospitals to limit inpatient lengths of stay because any reimbursement received in excess of the actual cost of providing care is retained by the facility. (In this example, if the $950 PPS rate had been paid in 1980, the hospital would have absorbed the $850 loss.) CASe MIX MANAGeMeNt The term case mix describes a health care organization’s patient population and is based on a number of characteristics, such as age, diagnosis, gender, resources consumed, risk factors, treatments received, and type of health insurance. A facility’s case mix reflects the diversity, clinical complexity, and resource needs of the patient population. A case mix index is the relative weight assigned for a facility’s patient population, and it is used in a formula to calculate health care reimbursement. If 1.000 represents an average relative weight, a weight lower than 1.000 (such as 0.9271) indicates that the resource needs of a hospital’s patient population are less complex. A facility’s case mix index is calculated by totaling all relative weights for a period of time and dividing by the total number of patients treated during that period of time. Thus, a facility assigned a lower case mix index will receive less reimbursement for services provided. Conversely, a facility assigned a higher case mix index will receive higher reimbursement for services provided. For example, a hospital’s case mix index is calculated by totalling all DRG relative weights for a period of time and dividing by the total number of patients treated during that period of time. (A list of DRG relative weights can be found at www.cms.gov.) Facilities typically calculate statistics for case mix management purposes by: ● ● Total relative weight (relative weight × total number of cases) Total payment (reimbursement amount per case × total number of cases) EXAMPLE: Hospital inpatients are classified according to diagnosis-related groups (DRGs) based on principal and secondary diagnosis, surgical proce- dures performed, age, discharge status, medical complexity (e.g., existence of comorbidities and/or complications), and resource needs. Each DRG has a relative weight associated with it, and that weight is related to the complex- ity of patient resources. Anywhere Medical Center’s case mix index (relative weight) is 1.135. In January, MS-DRG 123 had 54 cases with a reimburse- ment amount of $3,100 each. ● Total relative weight for MS-DRG 123 is 61.29 (1.135 × 54) ● Total payment for MS-DRG 123 is $167,400 (54 × $3,100)

cMs PayMent systeMs The federal government administers several health care programs, some of which require services to be reimbursed according to a predetermined reim- bursement methodology (payment system). Federal health care programs (an over- view of each is located in Chapter 2) include: ● CHAMPVA ● Indian Health Service (IHS) ● Medicaid (including the State Children’s Health Insurance Program, or SCHIP) ● Medicare ● TRICARE (formerly CHAMPUS) ● Workers’ Compensation (also a state health care program) Depending on the type of health care services provided to beneficiaries, the federal government requires that one of the payment systems listed in Table 9-1 be used for the CHAMPVA, Medicaid, Medicare, and TRICARE programs. aMbulance fee scHedule The Balanced Budget Act of 1997 required establishment of an ambulance fee schedule payment system for ambulance services provided to Medicare benefi- ciaries. Starting in April 2002, the ambulance fee schedule was phased in over a five-year period replacing a retrospective reasonable cost payment system for providers and suppliers of ambulance services (because such a wide variation of payment rates resulted for the same service). This schedule requires: ● Ambulance suppliers to accept Medicare assignment ● Reporting of HCPCS codes on claims for ambulance services ● Establishment of increased payment under the fee schedule for ambulance ser- vices furnished in rural areas based on the location of the beneficiary at the time the beneficiary is placed onboard the ambulance ● Revision of the certification requirements for coverage of nonemergency ambu- lance services ● Medicare to pay for beneficiary transportation services when other means of transportation are contraindicated. Ambulance services are divided into different levels of ground (land and water transportation) and air ambulance services based on the medically necessary treatment provided during transport EXAMPLE: A patient was transported by ambulance from her home to the local hospital for care. Under the retrospective reasonable cost payment system, the ambulance company charged $600, and Medicare paid 80 percent of that amount, or $480. The ambulance fee schedule requires Medicare to reimburse the ambu- lance company $425, which is an amount equal to the predetermined rate or fee schedule. aMbulatory surgical center PayMent rates An ambulatory surgical center (ASC) is a state-licensed, Medicare-certified supplier (not provider) of surgical health care services that must accept assignment on Medicare claims. An ASC must be a separate entity distinguishable from any

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other entity or facility, and it must have its own employer identifier number (EIN) as well as processes for: ● Accreditation ● Administrative functions ● Clinical services ● Financial and accounting systems ● Governance (of medical staff) ● Professional supervision ● Recordkeeping ● State licensure In 1980 Medicare authorized implementation of ambulatory surgical center payment rates as a fee to ambulatory surgery centers (ASCs) for facility services furnished in connection with performing certain surgical procedures. (Physi- cian’s professional services are separately reimbursed by the Medicare physi- cian fee schedule, discussed later in this chapter.) Effective January 1, 2008, the MMA of 2003 mandated implementation of the outpatient prospective payment system (OPPS) payment amount as a substitute for the ASC standard overhead amount for surgical procedures performed at an ASC. Medicare allows payment of an ASC facility fee for any surgical procedure performed at an ASC, except those surgical procedures that Medicare has determined are not eligible for the ASC facility fee. This means that instead of maintaining and updating an “inclusive list of procedures,” Medicare maintains and updates an “exclusionary list of procedures” for which an ASC facility fee would not be paid (e.g., any procedure included on the OPPS inpatient list). Under the payment system (Table 9-2), Medicare uses the ambulatory pay- ment classification (APC) groups and relative payment weights for surgical pro- cedures established under the OPPS as the basis of the payment groups and the relative payment weights for surgical procedures performed at ASCs. Relative payment weights are based on the average resources used to treat patients in a particular APC, with a weight of 1.000 being the average; when a relative pay- ment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher. These payment weights would be multiplied by an ASC conversion factor to calculate the ASC payment rates. The ASC relative payment weights are updated each year using the national OPPS relative payment weights for that calendar year and, for office-based pro- cedures, the practice expense payments under the physician fee schedule for that calendar year. Medicare makes the relative payment weights budget neutral to ensure that changes in the relative payment weights from year to year do not cause the estimated amount of expenditures to ASCs to increase or decrease as a function of those changes. clinical laboratory fee scHedule The Deficit Reduction Act of 1984 established the Medicare clinical laboratory fee schedule (Figure 9-1), which is a data set based on local fee schedules (for outpatient clinical diagnostic laboratory services). Medicare reimburses laboratory services according to the (1) submitted charge, (2) national limi- tation amount, or (3) local fee schedule amount, whichever is lowest. The local fee schedules are developed by Medicare administrative contractors who are: ● ● Local contractors that process Medicare Part B claims, including claims submitted by independent laboratories and physician office laboratories Local contractors that process Medicare Part A claims, including outpatient labo- ratory tests performed by hospitals, nursing homes, and end-stage renal disease centers.

durable Medical equiPMent, ProstHetics/ ortHotics, and suPPlies fee scHedule The Deficit Reduction Act of 1984 also established the Medicare durable medical equipment, prosthetics/orthotics, and supplies (DMEPOS) fee schedule (Figure 9-2). Medi- care reimburses DMEPOS either 80 percent of the actual charge for the item or the fee schedule amount, whichever is lower. (Fee schedule amounts are annu- ally updated and legislated by Congress.) The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) authorized Medicare to replace the current durable medical equipment (DME) payment methodology for certain items with a competitive acquisition process to improve the effectiveness of its methodology for estab- lishing DME payment amounts. The new bidding process established payment amounts for certain durable medical equipment, enteral nutrition, and off-the- shelf orthotics. Competitive bidding provides a way to create incentives for suppliers to provide quality items and services in an efficient manner and at reasonable cost. end-stage renal disease (esrd) coMPosite rate PayMent systeM Medicare’s ESRD benefit allows patients to receive dialysis treatments, which remove excess fluids and toxins from the bloodstream. Patients also receive items and services related to their dialysis treatments, including drugs to treat conditions resulting from the loss of kidney function, such as anemia and low blood calcium. CMS traditionally divided ESRD items and services into two groups for payment purposes: ● Dialysis and associated routine services (e.g., nursing, supplies, equipment, cer- tain drugs, and certain laboratory tests) are reimbursed according to a composite rate (one rate for a defined set of services). Paying according to a composite rate (or fixed) is a common form of Medicare payment, also known as bundling. ● End-Stage Renal Disease (ESRD) composite payment rate system bundles ESRD drugs and related laboratory tests with the composite rate payments, resulting in one reimbursement amount paid for ESRD services provided to patients. The rate is case-mix adjusted to provide a mechanism to account for differences in patients’ utilization of health care resources (e.g., patient’s age, documentation, and report- ing of comorbidities) (Table 9-3). The Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003 required Medicare to change the way it pays facilities for dialy- sis treatments and separately billable drugs. A key purpose of the MMA was to eliminate the cross-subsidization of composite rate payments by drug payments. These revisions also resulted in more accurate reimbursement for drugs and the composite rate. Medicare spends the same amount of money as would have been spent under the prior system, but the cross-subsidy was eliminated. EXAMPLE: A health care facility’s composite rate is $128.35, which means that Medicare reimburses the facility $128.35 for an ESRD service. According to Table 9-3, that rate applies only to patients whose ages range from 60 to 69. When a 58-year-old patient receives ESRD services, the facility’s reimbursement increases to $135.41 because the composite rate ($128.35) is multiplied by the case-mix index (1.055).

HoMe HealtH ProsPective PayMent systeM The BBA of 1997 called for implementation of a Medicare home health prospec- tive payment system (HH PPS), which uses a classification system called home health resource groups (HHRGs) to establish prospective reimbursement rates for each 60-day episode of home health care, which is the period of time (two months) during which care is provided for a particular condition. If a patient is eligible for care after the end of the first episode, a second episode can begin, and there are no limits to the number of episodes of care a patient who remains eligible for the home health benefit can receive. EXAMPLE: A patient is discharged from the hospital after knee replacement sur- gery, and she begins a 60-day episode of home health care that includes physical therapy on July 5. Home health care concludes on September 2, and the patient is mobile. A second 60-day episode of care is not needed. Home health resource groups (HHRGs) classify patients into groups, which range in severity level. Each HHRG has an associated weight value that increases or decreases Medicare’s payment for an episode of home health care. Weight values are based on the average resources used to treat patients in a particular HHRG, with a weight of 1.000 being the average; when a relative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher. HHRGs are reported to Medicare on HH PPS claims (UB-04, discussed later in this chapter) using the health insurance prospective payment system (HIPPS) code set. Codes in this set are five-character alphanumeric codes that represent case-mix groups about which payment determinations are made for the HH PPS. CMS originally created the HIPPS code set for the skilled nursing facility prospective payment system (SNF PPS) in 1998, and reporting requirements for the HH PPS (and inpatient rehabilitation facility PPS) were added later. HIPPS codes are determined after patient assessments using the Outcomes and Assessment Information Set (OASIS) are completed. Grouper software is used to determine the appropriate HHRG after Outcomes and Assessment Information Set (OASIS) data (Figure 9-3) are input on each patient (to measure the outcome of all adult patients receiving home health ser- vices). Home Assessment Validation and Entry (HAVEN) data entry software is then used to collect OASIS assessment data for transmission to state databases. HosPital inPatient ProsPective PayMent systeM Before 1983, Medicare payments for hospital inpatient care were based on a ret- rospective reasonable cost system, which meant hospitals received 80 percent of reasonable charges. Since 1983, when the inpatient prospective payment system (IPPS) was implemented, Medicare has reimbursed hospitals for inpatient hospital services according to a predetermined rate for each discharge. Each discharge is categorized into a diagnosis-related group (DRG), which is based on the patient’s principal and secondary diagnoses (including comorbidities and complications) as well as surgical and other procedures (if performed) (Figure 9-4). The DRG determines how much payment the hospital receives. Diagnosis-related groups are organized into mutually exclusive categories called major diagnostic categories (MDCs), which are loosely based on body systems (e.g., nervous system).

Because the IPPS payment is based on an adjusted average payment rate, some cases receive Medicare reimbursement in excess of costs (rather than billed charges), whereas other cases receive payment that is less than costs incurred. The system is designed to provide hospitals with an incentive to manage their operations more efficiently by finding areas in which increased efficiencies can be instituted without affecting the quality of care and by treat- ing a mix of patients to balance cost and payments. Note that a hospital’s pay- ment is not affected by the length of stay prior to discharge (unless the patient is transferred). It is expected that some patients will stay longer than others and that hospitals will offset the higher costs of a longer stay with the lower costs of a reduced stay. Each DRG has a payment weight assigned to it, based on the average resources used to treat Medicare patients in that DRG. Payment weights are based on the average resources used to treat patients in a particular DRG, with a weight of 1.000 being the average; when a relative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher. The reimbursement rate can be adjusted according to the following guidelines: ● Disproportionate share hospital (DSH) adjustment. Hospitals that treat a high percent- age of low-income patients receive increased Medicare payments. ● Indirect medical education (IME) adjustment. Approved teaching hospitals receive increased Medicare payments. The adjustment varies depending on the ratio of residents-to-beds (to calculate operating costs) and residents-to-average-daily- census (to calculate capital costs). ● Outlier. Hospitals that treat unusually costly cases receive increased medical pay- ments. The additional payment is designed to protect hospitals from large finan- cial losses due to unusually expensive cases. Outlier payments are added to DSH or IME adjustments, when applicable. Several DRG systems were developed for use in the United States, including: ● Diagnosis-related groups (DRGs) ° Original system used by CMS to reimburse hospitals for inpatient care provided to Medicare beneficiaries ° Based on intensity of resources, which is the relative volume and types of diagnos- tic, therapeutic, and inpatient bed services used to manage an inpatient disease ° Replaced in 2008 by Medicare severity DRGs (MS-DRGs) (discussed below) ● All-Patient diagnosis-related groups (AP-DRGs) ° Original DRG system adapted for use by third-party payers to reimburse hospi- tals for inpatient care provided to non-Medicare beneficiaries (e.g., BlueCross BlueShield, commercial health plans, TRICARE) ° Based on intensity of resources ● All-Patient Refined diagnosis-related groups (APR-DRGs) ° Adopted by Medicare in 2007 to reimburse hospitals for inpatient care provided to Medicare beneficiaries (but discontinued when MS-DRGs were adopted in 2008) ° Expanded original DRG system (based on intensity of resources) to add two sub- classes to each DRG that adjusts Medicare inpatient hospital reimbursement rates for severity of illness (SOI) (extent of physiological decompensation or organ system loss of function) and risk of mortality (ROM) (likelihood of dying) ° Each subclass, in turn, is subdivided into four areas: (1) minor, (2) moderate, (3) major, and (4) extreme. ● Medicare severity diagnosis-related groups (MS-DRGs) ° Adopted by Medicare in 2008 to improve recognition of severity of illness and resource consumption and reduce cost variation among DRGs ° Bases DRG relative weights on hospital costs (instead of hospital charges that are associated with pre-2008 DRGs), and expanded number from 538 DRGs to over 750 MS-DRGs, but retained improvements and refinements made to DRGs since 1983 ° Recognized approximately 335 “base” DRGs, which are further refined by complications (undesirable effect of disease or treatment that can change the patient’s outcome and may require additional treatment), conditions that arise during hospitalization, and/or comorbidities (coexisting conditions treated during hospitalization) (CC) ° Re-evaluated CC list to assign all ICD-10-CM codes as non-CC status (conditions that should not be treated as CCs for specific clinical conditions), CC status, or major CC status, which prevents Medicare from paying additional costs of treating patients who acquire conditions (e.g., infections) during hospitalization ° Assigned diagnoses closely associated with patient mortality (cardiogenic shock, cardiac arrest, other shock without mention of trauma, respiratory arrest, and ventricular fibrillation) to different CC subclasses, depending on whether the patient lived or expired ° Emphasized the importance of proper documentation of patient care, relating it to reimbursement optimization (e.g., increased diagnosis specificity to justify more severe illnesses, resulting in increased reimbursement)—facilities imple- mented clinical documentation improvement (CDI) programs to ensure thorough and accurate documentation in patient records CodING for dIAGNoSIS-relAted GroupS (drGs) Diagnoses and procedures are assigned ICD-10-CM and ICD-10-PCS codes, and they are sequenced according to CMS official coding guidelines and the Uniform Hospital Discharge Data Set (UHDDS). This means that hospitals are not required to assign codes to every diagnosis and procedure documented in the patient record. However, hospitals must evaluate their institutional data needs to develop coding policies, which will determine the assignment of ICD-10-CM and ICD-10-PCS codes to diagnoses and procedures. When assigning codes to comorbidities (coexisting conditions) and complications (conditions that develop during inpatient admission), be sure to carefully review patient record documentation to assign the most specific code possible. Revisions to the MS-DRGs comorbidities and complications (CC) list eliminated many diagnoses that were considered CCs in the past. As a result, physicians must be educated about the importance of proper documentation practices. EXAMPLE: Under MS-DRGs: ● Chronic obstructive pulmonary disease (COPD) (J44.9) is not a CC. How- ever, acute exacerbation of COPD (J44.1) is a CC. ● Congestive heart failure (CHF) (I50.9) is not a CC. However, chronic sys- tolic heart failure (I50.22) is a CC and acute systolic heart failure (I50.21) is a major CC (MCC). ICD-10-PCS codes are assigned for documented OR (operating room) and non-OR procedures. (Non-OR procedures are performed in the patient’s room, emergency department, radiology department, and so on.) Whether ICD-10-PCS codes are assigned to other procedures, such as ancillary tests (e.g., EKG, laboratory tests, and so on), is dependent on the hospital’s coding policy. The present on admission (POA) indicator differentiates between patient conditions present upon inpatient admission and those that develop during the inpatient admission. Claims that do not report the POA indicator are returned to the facility for correction. Hospital-acquired conditions that are reported as not present at the time of admission are not considered when calculating the MS-DRG payment. This means that such conditions, even if included on the CC and MCC lists, are not considered a CC or MCC if diagnosed during the inpatient stay and the facility will not receive additional payment for such conditions.

To determine an IPPS payment, hospitals submit a UB-04 claim for each patient to a Medicare administrative contractor (MAC), which is a third-party payer that contracts with Medicare to carry out the operational functions of the Medicare program. MACs process claims and perform program integrity tasks for Medicare Part A and Part B and DMEPOS; each contractor makes program coverage decisions and publishes a newsletter, which is sent to providers who receive Medicare reimbursement. (Medicare transitioned fiscal intermediaries and carriers to create Medicare administrative contractors.) Based on the infor- mation provided on the UB-04, the case is categorized into a DRG, which deter- mines the reimbursement provided to the hospital. (DRG payments are adjusted as discussed previously.) The IPPS 3-day payment window (or IPPS 72-hour rule) requires outpatient pre- admission services provided by a hospital on the day of or during the three days prior to a patient’s inpatient admission to be covered by the IPPS DRG payment and reported on the UB-04 with ICD-10-PCS procedure codes (not CPT codes) for: ● Diagnostic services (e.g., lab testing) ● Therapeutic (or nondiagnostic) services for which the inpatient principal diagnosis code (ICD-10-CM) exactly matches that for preadmission services In addition, an IPPS transfer rule states that certain patients discharged to a post- acute provider are treated as transfer cases, which means hospitals are paid a graduated per diem rate for each day of the patient’s stay, not to exceed the prospective payment DRG rate. (Outliers are also recognized for extraordinarily high-cost cases.) Hospital-Acquired Conditions and Present on Admission Indicator Reporting Payment under the Medicare program for inpatient hospital services is gener- ally based on the inpatient prospective payment system (IPPS), and hospitals receive reimbursement for each inpatient discharge based in part on diagnosis codes that identify a Medicare severity diagnosis-related group (MS-DRG). Assignment of an MS-DRG can take into account the presence of secondary diagnoses, and payment levels are adjusted to account for a number of hospital- specific factors. The Deficit Reduction Act of 2005 (DRA) expanded hospital quality measures collected by Medicare and allowed for the adjustment of payments to hospitals for certain preventable hospital-acquired conditions (HACs), which are medical conditions or complications that patients develop during inpatient hospital stays and that were not present at admission (e.g., pressure ulcers, hospital-acquired infections, pulmonary emboli). HACs are categorized as those that (1) are high cost, high volume, or both; (2) result in the assignment of a case to a MS-DRG that has a higher payment when present as a secondary diagnosis; and (3) could reasonably have been prevented through the applica- tion of evidence-based guidelines. In 2002, the National Quality Forum (NQF) published Serious Report- able Events in Healthcare: A Consensus Report, which listed the previously noted adverse events, which were serious, largely preventable, and of concern to both the public and health care providers. These events were originally known as never events (now called adverse events). The Medicare program addressed certain adverse events through national coverage determinations (NCDs). Similar to any other patient population, Medicare (and Medicaid) beneficiaries may experience serious injury and/or death if they undergo erro- neous surgical or other invasive procedures and may require additional health care to correct adverse outcomes that may result from such errors. To address and reduce the occurrence of these surgeries, CMS issued three national coverage determinations (NCDs). Under these NCDs, CMS does not cover a particular surgical or other invasive procedure performed to treat a particular medical condition when the practitioner erroneously performs (1) a different procedure altogether; (2) the correct procedure but on the wrong body part; or (3) the correct procedure but on the wrong patient. Medicare and Medicaid also do not cover hospitalizations and other services related to these noncov- ered procedures. Since October 1, 2007, hospitals subject to the IPPS have been required to sub- mit information on Medicare claims specifying whether diagnoses were present on admission (POA), which is a condition that exists at the time an order for inpatient admission occurs. All claims submitted for inpatient admissions to general acute care hospitals or other health care facilities are required to report the present on admission (POA) indicator, which is assigned by the coder to the principal and secondary diagnoses and external cause of injury code reported on the UB-04 or 837 Insti- tutional (837I) electronic claim. The coder reviews the patient record to determine whether a condition was present on admission or not. Any issues related to inconsistent, missing, con- flicting, or unclear documentation are resolved by the provider as a result of the physical query process when coders contact responsible physicians to request clarification about documentation (so that specific codes can be assigned). In this context, present on admission is defined as present at the time the order for inpatient admission occurs. Thus, conditions that develop during an outpatient encounter, including emergency department, observation, or outpa- tient surgery, are considered as present on admission upon admission of the patient as a hospital inpatient. CMS reporting options and definitions include the following, and payment is made for “Y” and “W” indicators: ● Y = Yes (diagnosis was present at the time of inpatient admission) ● N = No (diagnosis was not present at the time of inpatient admission) ● U = Unknown (documentation is insufficient to determine if the condition was pres- ent at the time of inpatient admission) ● W = Clinically undetermined (provider is unable to clinically determine whether the condition was present at the time of inpatient admission) ● Blank = Unreported/not used (exempt from POA reporting; the field is blank for factors that do not represent a current disease or for a condition that is always present on admission) The HAC-POA indicator payment provision applies to IPPS hospitals only, and the following is a list of the Medicare HACs for which CMS does not reim- burse hospitals. The Patient Protection and Affordable Care Act (PPACA) of 2010 also authorized CMS to make payment adjustments to applicable hospitals based on risk-adjustment quality measures. (Effective July 2012, Medicaid also does not reimburse hospitals for these HACs.) ● Foreign object retained after surgery ● Air embolism ● Blood incompatibility ● Stage III and IV pressure ulcers ● Falls and trauma ° Fractures ° Dislocations Intracranial injuries ° Crushing injuries ° Burns ° Other injuries ● Manifestations of poor glycemic control ° Diabetic ketoacidosis ° Nonketotic hyperosmolar coma ° Hypoglycemic coma ° Secondary diabetes with ketoacidosis ° Secondary diabetes with hyperosmolarity ● Catheter-associated urinary tract infection (UTI) ● Vascular catheter-associated infection ● Surgical site infection, mediastinitis, following coronary artery bypass graft (CABG) ● Surgical site infection following bariatric surgery for obesity ° Laparoscopic gastric bypass ° Gastroenterostomy ° Laparoscopic gastric restrictive surgery ● Surgical site infection following certain orthopedic procedures ° Spine ° Neck ° Shoulder ° Elbow ● Surgical site infection following cardiac implantable electronic device (CIED) ● Deep vein thrombosis (DVT)/pulmonary embolism (PE) following: ° Total knee replacement ° Hip replacement ● Iatrogenic pneumothorax with venous catheterization Value-Based Purchasing Hospital value-based purchasing (VBP) is part of a long-standing CMS effort to link Medicare’s inpatient prospective payment system (IPPS) to a value-based system for the purpose of improving health care quality, including the quality of care pro- vided in the inpatient hospital setting, which affects payment for inpatient stays to over 3,500 hospitals. Participating hospitals are paid for inpatient acute care ser- vices based on quality of care, not just quantity of services provided. The inpatient hospital VBP was authorized by the Patient Protection and Affordable Care Act (PPACA). A hospital quality data reporting infrastructure was developed as part of the Hospital Inpatient Quality Reporting (IQR) Program, as authorized by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). (Refer to chapter 5 in this textbook for information about the hospital IQR program.) HosPital outPatient ProsPective PayMent systeM The BBA of 1997 authorized CMS to implement an outpatient prospective payment system (OPPS) for hospital outpatient services provided to Medi- care patients. (The OPPS was implemented in 2000.) Also reimbursed under the OPPS are certain Medicare Part B services furnished to hospital inpa- tients who have no Part A coverage, as well as partial hospitalization ser- vices furnished by community mental health centers. All services are paid according to ambulatory payment classifications (APCs), which group ser- vices according to similar clinical characteristics and in terms of resources required. A payment rate is established for each APC and, depending on services provided, hospitals may be paid for more than one APC for a patient encounter (Figure 9-5). The Medicare beneficiary coinsurance was also recalculated under the OPPS and was based on 20 percent of the national median charge for services in the APC. (Both the total APC payment and the portion paid as coinsurance amounts are adjusted to reflect geographic wage variations.) Each CPT and HCPCS level II code is assigned a status indicator (SI) as a payment indicator to identify how each code is paid (or not paid) under the OPPS. For example, status indicator “S” refers to “significant procedures for which the multiple procedure reduction does not apply.” This means that the CPT and/or HCPCS level II code is paid the full APC reimbursement rate. OPPS status indicator “T” refers to “services to which the multiple procedure payment reduction applies.” (CPT modifier, -51 is not added to codes reported for OPPS payment consideration.) This means that the reported CPT and/or HCPCS level II code will be paid a discounted APC reimbursement rate when reported with other procedures on the same claim.

APC grouper software is used to assign an APC to each CPT and/or HCPCS level II code reported on an outpatient claim, as well as to appropriate ICD- 10-CM diagnosis codes. Outpatient code editor (OCE) software is used in con- junction with the APC grouper to identify Medicare claims edits and assign APC groups to reported codes. EXAMPLE: OCE software reviews “to/from” dates of service to identify and reject claims that are submitted for reimbursement as hospital-based outpatient care when, in fact, the claim should be processed as inpatient care. The unit of payment for the OPPS is an outpatient visit or encounter. (The unit of payment for the IPPS discussed earlier is an inpatient hospital admis- sion.) An outpatient encounter (or outpatient visit) includes all outpatient proce- dures and services (e.g., same-day surgery, x-rays, laboratory tests, and so on) provided during one day to the same patient. Thus, a patient who undergoes multiple outpatient procedures and receives multiple services on the same day will be assigned to one or more outpatient groups (called APCs). Each APC is weighted and has a prospective payment amount associated with it; if a patient is assigned multiple APCs, the payments are totaled to provide reim- bursement to the hospital for the encounter. Weights are based on the average resources used to treat patients in a particular APC, with a weight of 1.000 being the average; when a relative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher. (APC payments may be discounted when certain procedures or services are provided, such as bilateral proce- dures.) A wage index adjusts payments to account for geographic variations in hospitals’ labor costs. In addition, add-ons such as pass-through payments provide additional reimbursement to hospitals that use innovative (new and improved) biologicals, drugs, and technical devices. Outlier payments for high- cost services, hold harmless payments for certain hospitals, and transitional payments to limit losses under the OPPS can also increase payments. (The hospital profits if the payment rate is higher than the cost of care provided; the hospital loses money if the payment rate is lower than the cost of care provided.) inPatient PsycHiatric facility ProsPective PayMent systeM The inpatient psychiatric facility prospective payment system (IPF PPS) was implemented as a result of Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) provisions that required implementation of a per diem patient classification system that reflects differences in patient resource use and costs. The IPF PPS replaced a reasonable cost-based payment system, affect- ing approximately 2,000 facilities, to promote long-term cost control and utiliza- tion management. Licensed psychiatric facilities and hospital-based psychiatric units were reimbursed according to the new PPS, which was phased in over a three-year period beginning in 2004. (General health care facilities that are not licensed for specialty care but that occasionally treat patients with behavioral health or chemical dependency diagnoses are exempt from the IPF PPS.) Health information department coders will use ICD-10-CM and ICD-10- PCS to assign codes to inpatient behavioral health diagnoses and procedures and will enter data into DRG software to calculate the IPF PPS rates. Inpatient psychiatric facilities are reimbursed according to a per diem payment that is calculated using DRG data, wage-adjusted rates, and facility-level adjusters (Figure 9-6). (IPPS MS-DRGs reimburse acute care hospitals a flat payment based on ICD-10-CM and ICD-10-PCS codes and other data.) Providers will use the Diagnostic and Statistical Manual (DSM) published by the American Psychiatric Asso- ciation. Although DSM codes do not affect IPF PPS rates, the manual contains diagnostic assessment criteria that are used as tools to identify psychiatric disor- ders. The DSM includes psychiatric disorders and codes, provides a mechanism for communicating and recording diagnostic information, and is used in the areas of research and statistics. inPatient reHabilitation facility ProsPective PayMent systeM The BBA of 1997 authorized the implementation of a per-discharge prospective payment system (PPS) for inpatient rehabilitation hospitals and rehabilitation units, also called inpatient rehabilitation facilities (IRFs). Implemented in 2002, the IRF PPS utilizes information from a patient assessment instrument to clas- sify patients into distinct groups based on clinical characteristics and expected resource needs. Separate payments are calculated for each group, including the application of case- and facility-level adjustments. A patient assessment instrument classifies patients into IRF PPS groups based on clinical characteristics and expected resource needs. Separate IRF PPS payments are calculated for each group and include case- and facility-level adjustments. Elements of the IRF PPS include: ● Minimum Data Set for Post Acute Care (MDS-PAC) (patient-centered assessment instrument completed by each Medicare patient that emphasizes the patient’s care needs instead of the provider’s characteristics; it classifies patients for Medicare payment and contains an appropriate quality-of-care monitoring system, including the use of quality indicators) ● Case-mix groups (CMGs) (classification of patients into function-related groups, which predict resources needed to furnish patient care to different types of patients; data elements from the MDS-PAC are used to classify a patient into a CMG) ● CMG relative weights (weights that account for the variance in cost per discharge and resource utilization among CMGs; reimbursement is based on a national for- mula that adjusts for case mix; weights are based on the average resources used to treat patients in a particular CMG, with a weight of 1.000 being the average; when a relative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is cor- respondingly higher) ● CMG payment rates (predetermined, per-discharge reimbursement amount that includes all operating and capital costs associated with providing covered in– patient rehabilitation services) Inpatient Rehabilitation Validation and Entry (IRVEN) software (Figure 9-7) is the computerized data entry system used by inpatient rehabilitation facilities to create a file in a standard format that can be electronically transmitted to a national database. The data collected are used to assess the clinical character- istics of patients in rehabilitation hospitals and rehabilitation units in acute care hospitals. It provides agencies and facilities with a means to objectively measure and compare facility performance and quality. It will also pro- vide researchers with information to support the development of improved standards.

long-terM (acute) care HosPital ProsPective PayMent systeM The BBRA of 1999 authorized the implementation of a per-discharge DRG long-term (acute) care hospital prospective payment system (LTCH PPS) for cost reporting periods beginning on or after October 1, 2002. This new prospective payment system replaced the reasonable cost-based payment system under which long- term (acute) care hospitals (LTCHs) were previously paid. (In 2008, Medicare severity long-term care diagnosis-related groups [MS-LTC-DRGs] were adopted for the LTCH PPS.) Long-term (acute) care hospitals are defined by Medicare as having an average inpatient length of stay of greater than 25 days. Major elements of the LTCH PPS include: ● Patient classification system (Patients are classified according to long-term [acute] care diagnosis-related groups [LTC DRGs] based on clinical characteristics and aver- age resource needs. The LTC DRGs are based on existing IPPS DRGs, which have been weighted to reflect the resources required to treat medically complex patients in long-term care hospitals. Weights are based on the average resources used to treat patients in a particular LTC DRG, with a weight of 1.000 being the average. When a rel- ative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher.) ● Relative weights (the MS-LTC-DRGs primary element that accounts for variations in cost per discharge, because the weights reflect severity of illness and resource consumption for each diagnosis) Payment rate (LTCH PPS payments for Medicare patients will be predetermined, per-discharge amounts for each MS-LTC-DRG.) ● Adjustments (LTCH PPS payments are adjusted for short stay cases, interrupted stay cases, cases discharged and readmitted to co-located providers, and high- cost outlier cases. In addition, adjustments are made for differences in area wages and a cost-of-living adjustment [COLA] for LTCHs in Alaska and Hawaii.) skilled nursing facility ProsPective PayMent systeM The BBA of 1997 modified reimbursement for Medicare Part A (inpatient) skilled nursing facility (SNF) services. Beginning in 1998, SNFs were no longer paid on a reasonable cost basis but rather on the basis of a prospective payment system. Major elements of the SNF PPS include: ● Payment rate (Federal rates are determined using allowable costs from facility cost reports, and data are aggregated nationally by urban and rural area to determine standardized federal Per diem rates to which case-mix and wage adjustments apply.) ● Case-mix adjustment (Per diem payments for each admission are case-mix adjusted using a resident classification system called Resource Utilization Groups, based on data from resident assessments and relative weights developed from staff time data. Relative weights are based on the average resources used to treat patients in a particular RUG, with a weight of 1.000 being the average. When a relative payment weight is higher than 1.000, such as 1.435, that means more resources are required to treat the patient and, thus, the payment is correspondingly higher.) ● Geographic adjustment (Labor portions of federal rates are adjusted for geo- graphic variation in wages using the hospital wage index.) Computerized data entry software entitled Resident Assessment Validation and Entry (RAVEN) is used to enter MDS data about SNF patients and transmit those assessments in CMS-standard format to individual state databases. RAVEN also allows facilities to generate system reports (Figure 9-8).

Medicare PHysician fee scHedule As of 1992, physician services and procedures are reimbursed according to a payment system known as the Resource-Based Relative Value Scale (RBRVS). The RBRVS replaced the Medicare physician payment system of “customary, prevailing, and reasonable” (CPR) charges under which physi- cians were reimbursed according to the historical record of the charge for the provision of each service. This system, now called the Medicare physician fee schedule (MPFS), reimburses providers according to predetermined rates assigned to services and is revised by CMS each year. All services are stan- dardized to measure the value of a service as compared with other services provided. These standards, called relative value units (RVUs), are payment com- ponents consisting of: ● Physician work, which reflects the physician’s time and intensity in providing the service (e.g., judgment, technical skill, and physical effort) ● Practice expense, which reflects overhead costs involved in providing a service (e.g., rent, utilities, equipment, and staff salaries) ● Malpractice expense, which reflects malpractice expenses (e.g., costs of liability insurance) Payment limits were also established by adjusting the RVUs for each locality by geographic adjustment factors (GAF), called geographic cost practice indices (GCPIs), so that Medicare providers are paid differently in each state and also within each state (e.g., New York state has five separate payment localities). An annual conversion factor (dollar multiplier) converts RVUs into payments using a formula (Figure 9-9). Although the Medicare physician fee schedule is used to determine payment for Medicare Part B (physician) services, other services, such as anesthesia, pathology/laboratory, and radiology, require special consideration. ● Anesthesia services payments are based on the actual time an anesthesiologist spends with a patient and the American Society of Anesthesiologists’ relative value system. ● Radiology services payments vary according to place of service (e.g., hospital radiology department vs. freestanding radiology center). ● Pathology services payments vary according to the number of patients served: ° Pathology services that include clinical laboratory management and supervision of technologists are covered and paid as hospital services. ° Pathology services that are directed to an individual patient in a hospital setting (e.g., pathology consultation) are paid under the physician fee schedule. Nonparticipating Physicians When the nonparticipating provider (nonPAR) does not accept assignment from Medicare, the amount Medicare reimburses for services provided is subject to a 5 percent reduction of the Medicare physician fee schedule (MPFS) amount. In addition, Medicare requires the nonPAR to charge the patient no more than the difference between what Medicare reimburses and the limiting charge, which is calculated by multiplying the reduced MPFS (or allowable charge) by 115 percent. Use the following formula to calculate the limiting charge: [MPFS − (MPFS × 5 percent)] × 115 percent = limiting charge

For example, [$80 − ($80 × 5 percent)] × 115 percent = $76 × 115 percent = $87.40 (limiting charge). (Medicare reimburses the nonPAR based on the $76 reduced MPFS amount, such as 80 percent of that reduced MPFS. The patient is responsible for reimbursing the nonPAR for the difference between what Medi- care reimburses the nonPAR and the limiting charge, or $26.60, which includes any copayment.) Limiting charge information appears on the Medicare Summary Notice (MSN) (Figure 9-10) (previously called an Explanation of Medicare Benefits, or EOMB), which notifies Medicare beneficiaries of actions taken on claims. The limiting charge policy is intended to reduce the amount patients enrolled in Medicare are expected to pay when they receive health care services. If a participating (PAR) and a nonparticipating (nonPAR) physician charge the same fee for an office visit, amounts billed and reimbursement received are different for each physician. EXAMPLE: A PAR and nonPAR physician each charge $50 for an office visit (CPT code 99213). The Medicare physician fee schedule for CPT code 99213 is $40. The nonPAR is reimbursed a maximum of $38 by Medicare (because of the 5 percent reduction of the MPFS rate) and the limiting charge is $43.70 ($38 × 115 percent). The PAR physician is reimbursed: Medicare payment (80 percent of $40) Beneficiary coinsurance (20 percent of $40) TOTAL REIMBURSEMENT TO PAR $40.00 The nonPAR physician is reimbursed: Medicare payment (80 percent of $38) Beneficiary is billed the balance of the $43.70 limiting charge TOTAL REIMBURSEMENT TO NONPAR $43.70 Generally, participating physicians report their actual fees to Medicare but adjust, or write off, the uncollectible portion of the charge when they receive payment. NonPAR doctors usually report only the limiting charge as their fee. Billing write-off or adjustment amounts to beneficiaries is called balance billing and is prohibited by Medicare regulations. In the preceding example, using CPT code 99213, the write-off amounts are: Participating physician $10.00 (because $50 − $40 = $10) NonPAR physician $6.30 (because $50 − $43.70 = $6.30) The patient pays $5.30 more ($13.30 − $8 = $5.30) to the nonPAR, which can be significant for people living on a fixed income. Beneficiaries frequently ask, “Does the doctor participate in Medicare?” when calling for an appointment. With very few exceptions, people who qualify for Medicare are not allowed to purchase other primary health insurance. CMS must be certain that Medicare beneficiaries are not required to pay excessive out-of-pocket amounts for health care services. To protect Medicare enrollees financially, providers must comply with extensive rules and regulations.

Medicare Secondary Payer (MSP) refers to situations in which the Medicare pro- gram does not have primary responsibility for paying a beneficiary’s medical expenses. The Medicare beneficiary may be entitled to other coverage that should pay before Medicare. From the time the Medicare program began in 1966, providers of health care grew accustomed to billing Medicare first for ser- vices to Medicare beneficiaries. Thus, the MSP program was initiated in 1980, and when a Medicare beneficiary also has coverage from one of the following groups, Medicare is a secondary payer: ● Automobile medical or no-fault insurance ● Disabled individual covered by a large group health plan (LGHP) or who has coverage under the LGHP of a family member who is currently employed. A large group health plan (LGHP) is provided by an employer who has 100 or more employ- ees or a multi-employer plan in which at least one employer has 100 or more full- or part-time employees. ● End-stage renal disease program. Exception: For a Medicare patient who has ESRD and who is covered by both Medicare and an employer or union group health plan, the group health plan is primary and Medicare is secondary. After the first 30 months, Medicare is primary and the group health plan is secondary. ● Federal black-lung program ● Other liability insurance (e.g., general casualty insurance, homeowner’s liability insurance, malpractice insurance, or product liability insurance) ● Veterans Administration benefits ● Workers’ compensation ● Working age coverage by an employer group health plan (EGHP), or an individual age 65 or older who is covered by a working spouse’s EGHP. (The working spouse can be any age.) An employer group health plan (EGHP) is contributed to by an employer or employee pay-all plan and provides coverage to employees and depen- dents without regard to the enrollee’s employment status (i.e., full-time, part-time, or retired). These provisions are applicable regardless of the size of the employer. Upon claims submission, the amount of secondary benefits payable is the lowest of the: ● Actual charge by the physician or supplier minus the amount paid by the primary payer ● Amount Medicare would pay if services were not covered by the primary payer ● Higher of the Medicare physician fee schedule (or other amount payable under Medicare or the third-party payer’s allowable charge) minus the amount actually paid by the primary payer To calculate the amount of Medicare secondary benefits payable on a given claim, the following information is required: ● Amount paid by the primary payer ● Primary payer’s allowable charge This information can be obtained from the primary payer’s remittance advice or the patient’s explanation of benefits (EOB). Some Medicare beneficiaries are covered by an employer plan if they are still working or if the spouse is employed and the health plan covers family mem- bers. Medicare has very specific rules about payment when another insurance is primary. This billing order is discussed in Chapter 14 of this text.

Nonphysician Practitioners Medicare reimburses professional services provided by nonphysician practi- tioners, including nurse practitioners, clinical nurse specialists, and physi- cian assistants. A nurse practitioner (NP) is a registered nurse licensed to practice as an NP in the state in which services are furnished, is certified by a national association (e.g., American Academy of Nurse Practitioners), and has a master’s degree in nursing. NPs often work as primary care providers along with phy- sicians, and they must accept assignment to receive reimbursement from Medicare. A clinical nurse specialist (CNS) is an advanced practice registered nurse licensed by the state in which services are provided, has a graduate degree in a defined clinical area of nursing from an accredited educational institution, and is certified as a CNS. A physician assistant (PA) must be legally authorized and licensed by the state to furnish services, have graduated from a physician assistant educational program that is accredited by the Accreditation Review Commission on Education for the Physician Assistant, and have passed the national certification examination of the National Commission on Certification of Physician Assistants (NCCPA). Some states (e.g., Texas) require PAs to work under a supervising physician who is approved by the state to direct and man- age professional activities and who ensures that services provided are medi- cally appropriate for the patient. Nonphysician practitioner reimbursement rules include the following: ● Reimbursement for services provided by nonphysician practitioners is allowed only if no facility or other provider is paid in connection with such services. ● Payment is based on 80 percent of the actual charge or 85 percent of the Medi- care physician fee schedule, whichever is less. Medicare reimburses 80 percent of the resultant payment, and the patient pays 20 percent. ● Direct payment can be made to the nonphysician practitioner, the employer, or the contractor (except for services provided by PAs, for which payment must be made to the employer). ● If nonphysician practitioners provide services outside of the office setting, they must obtain their own Medicare provider numbers. ● Services provided by nonphysician practitioners may also be reported to Medicare as incident to the supervising physician’s service. (Nonphysician practitioners do not have to have their own Medicare provider numbers when billing incident-to services.) Incident-to services are reimbursed at 100 percent of the Medicare physician fee schedule, and Medicare pays 80 percent of that amount directly to the physician. Reimbursement is available for services provided by nonphysician practitioners who work in collaboration with a physician (e.g., DO or MD), which means that a written agreement is in place specifying the services to be provided by the nonphy- sician practitioner, who must work with one or more physicians to deliver health care services. These providers receive medical direction and appropriate super- vision as required by state law. The types of services nonphysician practitioners provide include those traditionally reserved to physicians, such as physical examination, minor surgery, setting casts for simple fractures, interpreting x-rays, and other activi- ties that involve independent evaluation or treatment of the patient’s condi- tion. Also, if authorized under the scope of their state licenses, nonphysician practitioners may furnish services billed under all levels of evaluation and management codes and diagnostic tests if furnished in collaboration with a physician. Location of Service Adjustment Physicians are usually reimbursed on a fee-for-service basis with payments established by the Medicare physician fee schedule (MPFS) based on RBRVS. When office-based services are performed in a facility, such as a hospital or outpatient setting, payments are reduced because the doctor did not provide supplies, utilities, or the costs of running the facility. This is known as the site of service differential. Other rules govern the services performed by hospital-based providers and teaching physicians. This chapter discusses rules that affect pri- vate practice physicians billing under the MPFS. CMS Manual System The Centers for Medicare and Medicaid Services (CMS) publish Internet-only manuals (IOMs) (e.g., Medicare Claims Processing Manual) on their website. The manuals include CMS program issuances (e.g., transmittal notices, national coverage determinations, and so on), day-to-day operating instructions, policies, and procedures that are based on statutes, regulations, guidelines, models, and directives. The CMS program components, providers, contractors, Medicare Advantage organizations, and state survey agencies use the IOMs to administer CMS programs. They are also a good source of Medicare and Medicaid informa- tion for the general public. CMS program transmittals communicate new or changed policies and/or pro- cedures that are being incorporated into a specific CMS Internet-only program manual. The CMS Quarterly Provider Update (QPU) is an online CMS publication that contains information about regulations and major policies currently under development, regulations and major policies completed or canceled, and new or revised manual instructions. cHargeMaster The chargemaster (or charge description master [CDM]) is a document that contains a computer-generated list of procedures, services, and supplies with charges for each. Chargemaster data are entered in the facility’s patient accounting system, and charges are automatically posted to the patient’s bill (UB-04). The bill is then submitted to the payer to generate payment for inpatient, ancillary, and other services (e.g., emergency department, laboratory, radiology, and so on). The chargemaster allows the facility to accurately and efficiently bill the payer for services rendered, and it usually contains the following: ● Department code (refers to the specific ancillary department where the service is performed) ● Service code (internal identification of specific service rendered) ● Service description (narrative description of the service, procedure, or supply) ● Revenue code (UB-04 revenue code that is assigned to each procedure, service, or product) ● Charge amount (dollar amount facility charges for each procedure, service, or supply) ● Relative value units (RVUs) (numeric value assigned to a procedure; based on dif- ficulty and time consumed) Chargemaster maintenance is the process of updating and revising key elements of the chargemaster (or charge description master [CDM]) to ensure accurate reimbursement. Because a chargemaster allows a health care facility to capture charges as procedures are performed and services are provided, inaccurate and outdated chargemasters can result in claims rejection, fines and penalties (for submitting false information on a claim), and overpayment or underpayment. A chargemaster team jointly shares the responsibility of updating and revising the chargemaster to ensure its accuracy, and it consists of representatives of a variety of departments, such as coding compliance financial services (e.g., billing depart- ment), health information management, information services, other departments (e.g., laboratory, pharmacy, radiology, and so on), and physicians. Chargemaster maintenance requires expertise in billing regulations, clinical procedures, coding guidelines, and patient record documentation. While the entire chargemaster is reviewed periodically (e.g., annually to incorporate coding updates), the charge- master team could be gathered any time a new procedure or service is offered by the facility so that appropriate data can be added to the chargemaster. A revenue code is a four-digit code preprinted on a facility’s chargemaster to indicate the location or type of service provided to an institutional patient. (They are reported in FL42 of the UB-04.) Note: Prior to 2002, revenue codes contained just three digits. EXAMPLE: REVENUE CODES COMPLETE CODE DESCRIPTION 0270 Medical/surgical supplies 0450 Emergency department services 0981 Emergency department physician fee revenue cycle ManageMent ABBREVIATED DESCRIPTION MED SURG SUPPLIES EMER/FACILITY CHARGE EMER/PHYSICIAN FEE Revenue cycle management (Figure 9-12) is the process by which health care facilities and providers ensure their financial viability by increasing revenue, improving cash flow, and enhancing the patient’s experience. Revenue cycle management includes the following features, typically in this order: ● Physician ordering (Physician order for inpatient admission or outpatient services is documented by the responsible physician.) Patient registration (Patient is admitted as an inpatient or scheduled for outpatient services.) ° Appropriate consents for treatment and release of information are obtained. ° Patient demographic and insurance information is collected. ° Patient’s insurance coverage is validated and utilization management is per- formed (e.g., clinical reviews) to determine medical necessity. ° Preadmission clearance (e.g., precertification, preauthorization, screening for medical necessity) is given. Charge capture (or data capture) (Providers use chargemasters or encounter forms to select procedures or services provided. Ancillary departments, such as the laboratory, use automated systems that link to the chargemaster.) Diagnosis and procedure coding (Assignment of appropriate ICD-10-CM and ICD-10-PCS or CPT/HCPCS level II codes is typically performed by health informa- tion management personnel, to assign APCs, DRGs, and so on.) Patient discharge processing (Patient information is verified, discharge instructions are provided, patient follow-up visit is scheduled, consent forms are reviewed for signatures, and patient policies are explained to the patient.) Billing and claims processing (All patient information and codes are input into the billing system, and CMS-1500 or UB-04 claims are generated and submitted to third-party payers.) Resubmitting claims (Before reimbursement is received from third-party payers, late charges, lost charges, or corrections to previously processed CMS-1500 or UB-04 claims are entered, and claims are resubmitted to payers—this may result in payment delays and claims denials.) Third-party payer reimbursement posting (Payment from third-party payers is posted to appropriate accounts, and rejected claims are resubmitted with appro- priate documentation; this process includes electronic remittance, which involves receiving reimbursement from third-party payers electronically.) Appeals process (Analysis of reimbursement received from third-party payers identifies variations in expected payments or contracted rates and may result in submission of appeal letters to payers.) Patient billing (Self-pay balances are billed to the patient; these include deduct- ibles, copayments, and noncovered charges.) Self-pay reimbursement posting (Self-pay balances received from patients are posted to appropriate accounts.) Collections (Payments not received from patients in a timely manner result in col- lection letters being mailed to patients until payment is received; if payment is still not received, the account is turned over to an outside collections agency.) Collections reimbursement posting (Payments received from patients are posted to appropriate accounts.) Revenue Cycle Monitoring Revenue cycle monitoring involves assessing the revenue cycle to ensure finan- cial viability and stability using the following metrics, which are standards of measurement: ● Cash flow (total amount of money transferred into and out of a business; mea- sure of liquidity, which is the amount of capital available for investment and expenditures) Days in accounts receivable (number of days outstanding money is owed the orga- nization; measure of how long it usually takes for a service/procedure to be paid by all financially responsible parties, such as third-party payers, government health programs, and patients) EXAMPLE: Last year, the medical practice’s gross charges for procedures/ services totaled $750,000. The current accounts receivables (A/R) are $95,000, and the credit balance (from the previous year) is $9,500. The formula for calculat- ing Days in A/R = [Receivables − (Credit Balance)] ÷ [Gross Charges ÷ 365 days]. Thus, [$95,000 − ($9,500)] ÷ [$750,000 ÷ 365] = $85,500 ÷ $2,055 = 42 days. According to national standards, A/R should average 35 days or less; therefore, this medical practice needs to audit its revenue cycle to identify and improve areas of poor performance so that the number of days in A/R decreases. ● Percentage of accounts receivable older than 30, 60, 90, and 120 days (measure of the organization’s ability to get procedures/services paid in a timely manner) According to national standards, A/R > 120 should be less than 12 percent. This organization’s A/R > 120 is 3.5 percent, which is excellent. Net collection rate (percentage received of allowed reimbursement; measure of the organization’s effectiveness in collecting reimbursement) EXAMPLE: The hospital’s payments received is $945,000. Refunds paid to pay- ers and patients (for charges not supported by documentation in the patient record) total $30,000. The total charge for inpatient and outpatient services is $1,500,000. Total write-offs are $525,000. The formula for calculating the Net Collection Rate = [(Payments − Refunds) ÷ (Charges − Write-offs)] × 100. Thus, [($945,000 − $30,000) ÷ ($1,500,000 − $525,000)] × 100 = [$915,000 ÷ $975,000] × 100 = 0.938 × 100 = 93.8 percent. The calculated net collection rate of 93.8 percent is very poor, which means the hospital needs to audit its revenue cycle to identify and correct areas of poor performance such as chargemaster accu- racy, filing claims in a timely manner, obtaining preauthorization, and so on. Denial rate (percentage of claims denied by payers; measure of the organization’s effectiveness in submitting clean claims, which are claims paid in full upon initial submission; the formula for calculating the denial rate = [total dollar amount of denied claims ÷ total dollar amount of claims submitted] × 100; denial rates should be less than 5 percent) EXAMPLE: The hospital’s total dollar amount of denied claims is $250,000, and the total dollar amount of claims submitted is $2,500,000. The formula for calculat- ing the Denial Rate = [total dollar amount of denied claims ÷ total dollar amount of claims submitted] × 100. Thus, [$250,000 ÷ $2,500,000] × 100 = 10 percent. The calculated denial rate of 10 percent is unacceptable, which means the hospital needs to audit its revenue cycle to identify and correct areas of filing claims in a timely manner, following up on rejected and unpaid claims, and so on. Revenue Cycle Auditing Revenue cycle auditing is an assessment process that is conducted as a follow-up to revenue cycle monitoring so that areas of poor performance can be identified and corrected. Auditing processes include: ● Compliance monitoring (level of compliance with established managed care con- tracts is monitored; provider performance per managed care contractual require- ment is monitored; compliance risk is monitored) ● Denials management (claims denials are analyzed to prevent future denials; rejected claims are resubmitted with appropriate documentation) ● Tracking resubmitted claims and appeals for denied claims (resubmitted claims and appealed claims are tracked to ensure payment by payers) ● Posting late charges and lost charges (performed after reimbursement for late claims is received and appeals for denied claims have been exhausted) Resource Allocation and Data Analytics Resource allocation is the distribution of financial resources among competing groups (e.g., hospital departments, state health care organizations). Resource allocation monitoring uses data analytics to measure whether a health care provider or organization achieves operational goals and objectives within the confines of the distribution of financial resources, such as appropriately expending budgeted amounts as well as conserving resources and protecting assets while providing quality patient care. Data analytics are tools and systems that are used to analyze clinical and financial data, conduct research, and evaluate the effective- ness of disease treatments: ● Data warehouses (databases that use reporting interfaces to consolidate multiple databases, allowing reports to be generated from a single request; data is accu- mulated from a wide range of sources within an organization and is used to guide management decisions) ● Data mining (extracting and analyzing data to identify patterns, whether predict- able or unpredictable) EXAMPLE 1: The quality manager at a medical center has been charged with perform- ing a study to determine the quality of care and costs of providing procedures and ser- vices to the practice’s patient population. The manager will access and study clinical and financial data that is located in reports generated by the facility’s electronic health record, and preestablished criteria will be used when conducting the study. The man- ager submits a report request to the information technology department, which then uses a data warehouse to generate the results. The request submitted by the man- ager is specific as to patient demographics, conditions, procedures and services, and so on. The manager uses the generated reports to conduct data mining, which results in the identification of quality-of-care issues associated with providing patient care as well as procedures/services that are profitable and nonprofitable. The manager then prepares a report of findings for discussion with the quality management committee (consisting of facility staff and physicians). The result is an action plan to: ● Eliminate deficiencies in quality of care to its patient population (e.g., in-service education to facility staff, purchase of technologically advanced equipment) ● Increase the number of profitable procedures/services (e.g., increase human and other resources) ● Decrease or eliminate nonprofitable procedures/services (e.g., partner with another health care organization that offers such procedures/services) EXAMPLE 2: The Department of Veterans Affairs (VA) provides health care services to almost three million veterans annually, but veterans nationwide have traditionally not had equitable access to these services. Congress enacted legislation in 1996 requir- ing the VA to develop a plan for equitably allocating resources to “ensure that veterans who have similar economic status and eligibility priority and who are eligible for medical care have similar access to such care regardless of the region of the United States in which such veterans reside.” In response, the VA implemented the Veterans Equitable Resource Allocation (VERA) resource allocation monitoring system to improve equity of access to veterans’ health care services. VERA allocated resources to regional VA health care networks, known as Veterans Integrated Services Networks (VISN), which allocate resources to their hospitals and clinics. The VA continuously assesses the effectiveness of VERA by monitoring changes in health care delivery and overseeing the network allocation process used to provide veterans with equitable access to services. ub-04 claiM The UB-04 claim (Figure 9-13) (previously called the UB-92) contains data entry blocks called form locators (FLs) that are similar to the CMS-1500 claim blocks used to input information about procedures or services provided to a patient.

Although some institutions manually complete the UB-04 claim and submit it to third-party payers for reimbursement, others perform data entry of UB-04 infor- mation using commercial software (Figure 9-14). However, most institutions do not complete the UB-04 because it is automatically generated from chargemaster data entered by providers (e.g., nurses, therapists, laboratory, and so on). UB-04 Claim Development and Implementation Institutional and other selected providers submit UB-04 (CMS-1450) claim data to payers for reimbursement of patient services. The National Uniform Billing Committee (NUBC) is responsible for developing data elements reported on the UB-04 in cooperation with State Uniform Billing Committees (SUBCs). National Uniform Billing Committee (NUBC) Like the role of the National Uniform Claims Committee (NUCC) in the develop- ment of the CMS-1500 claim, the National Uniform Billing Committee (NUBC) is responsible for identifying and revising data elements (information entered into UB-04 form locators or submitted by institutions using electronic data interchange). (The claim was originally designed as the first uniform bill and called the UB-82 because of its 1982 implementation date. Then, the UB-92 was implemented in 1992.) The current claim is called the UB-04 because it was developed in 2004 (although it was implemented in 2007). The NUBC was created by the American Hospital Association (AHA) in 1975 and is represented by major national provider (e.g., AHA state hospital association representatives) and payer (e.g., BlueCross BlueShield Association) organizations. The intent was to develop a single billing form and standard data set that could be used by all institutional providers and payers for health care claims processing. In 1982 the NUBC voted to accept the UB-82 and its data set (a compilation of data elements that are reported on the uniform bill) for implementation as a national uniform bill. Once the UB-82 was adopted, the focus of the NUBC shifted to the state level, and a State Uniform Billing Committee (SUBC) was created in each state to handle implementation and distribution of state-specific UB-82 manuals (that contained national guidelines along with unique state billing requirements). When the NUBC established the UB-82 data set design and specifications, it also implemented an evaluation process through 1990 to determine whether the UB-82 data set was appropriate for third-party payer claims processing. The NUBC surveyed SUBCs to obtain suggestions for improving the design of the UB-82, and the UB-92 was implemented in 1992 to incorporate the best of the UB-82 with data set design improvements (e.g., providers no longer had to include as many attachments to UB-92 claims submitted). UB-04 revisions emphasize clarification of definitions for data elements and codes to eliminate ambiguity and to create consistency. The UB-04 also addresses emergency department (ED) coding and data collection issues to respond to concerns of state public health reporting sys- tems. The NUBC continues to emphasize the need for data sources to continue to support public health data reporting needs. Data Specifications for the UB-04 When reviewing data specifications for the UB-04, the NUBC balanced the payers’ need to collect information against the burden of providers to report that information. In addition, the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) are applied when developing data elements. Each data element required for report- ing purposes is assigned to a unique UB-04 form locator (FL), which is the initial determination, good cause must be demonstrated. A reopened claim is also a separate and distinct process from the appeals process, and a reopening will not be granted if an appeal decision is pending or in process. Form locators 4 (type of bill) and 18–28 (condition codes) are completed. UB-04 Case Study Use the blank UB-04 claim (Figure 9-13) to enter data from the outpatient case study (Figure 9-15). Codes (e.g., ICD, CPT/HCPCS, revenue) required for comple- tion of the UB-04 claim are included in the case study. Refer to Table 9-4 for instructions on completing the UB-04 claim. Then, compare your completed claim to the answer key in Figure 9-16.

Health care costs increased dramatically with the implementation of government-sponsored health pro- grams in 1965. This led to the creation and implementation of prospective payment systems and fee schedules for government health programs as a way to control costs by reimbursing facilities accord- ing to predetermined rates based on patient category or type of facility (with annual increases based on an inflation index and a geographic wage index). The Centers for Medicare and Medicaid Services (CMS) manage implementation of Medicare PPS, fee schedules, and exclusions according to prospec- tive cost-based rates and prospective price-based rates. Prospective cost-based rates are based on reported health care costs (e.g., charges) from which a pro- spective per diem rate is determined. Annual rates are usually adjusted using actual costs from the prior year. This method may be based on the facility’s case mix (types and categories of patients that reflect the need for different levels of service based on acuity). Prospective payment systems based on this reimbursement methodology include resource utilization groups (RUGs) for skilled nursing care. Prospective price-based rates are associated with a particular category of patient (e.g., inpatients), and rates are established by the payer (e.g., Medicare) prior to the provision of health care services. Pro- spective payment systems based on this reimbursement methodology include Medicare severity diagnosis-related groups (MS-DRGs) for inpatient care. Typically, third-party payers adopt prospective payment systems, fee schedules, and exclusions after Medicare has implemented them; payers modify them to suit their needs. A fee schedule is cost-based, fee-for-service reimbursement methodology that includes a list of maxi- mum fees and corresponding procedures/services, which payers use to compensate providers for health care services delivered to patients. Exclusions are “Medicare PPS Excluded Cancer Hospitals” (e.g., Roswell Park Memorial Institute in Buf- falo, New York) that applied for and were granted waivers from mandatory participation in the hos- pital inpatient PPS. The UB-04 claim contains data entry blocks called form locators (FLs) that are similar to the CMS-1500 claim blocks used to input information about procedures or services provided to a patient. Revenue codes are four-digit codes preprinted on a facility’s chargemaster to indicate the location or type of service provided to an institutional patient, and they are reported on the UB-04. The chargemas- ter (or charge description master, CDM) is a document that contains a computer-generated list of procedures, services, and supplies with charges for each. Chargemaster data is entered in the facil- ity’s patient accounting system, and charges are automatically posted to the patient’s bill (UB-04). Although some institutions actually complete the UB-04 claim and submit it to third-party payers for reimbursement, most perform data entry of UB-04 information using commercial software.

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