United States: MedPAC Recommends Reduction To Hospital Outpatient Department, LTCH Payment Rates, Increases To Inpatient Acute Care Hospital Rates: Changes Seek To Reduce "Site-Of-Service" Payment Differences

Last Updated: February 5 2014
Article by John Perry and Judd A. Harwood

On January 16, the Medicare Payment Advisory Committee (MedPAC) unanimously voted to recommend that Congress direct the Secretary of Health and Human Services to:

  1. Reduce Medicare payment rates for certain ambulatory services provided in hospital outpatient departments (OPDs), including provider-based billing facilities;
  2. Reduce Medicare payment rates for care provided in long-term care hospitals (LTCHs) to non-chronically critically ill patients; and
  3. Use the resulting savings to increase acute care hospital inpatient and outpatient prospective payment rates.

MedPAC's recommended reductions are based upon its perception that current payment rates encourage providers to shift care to higher-cost sites absent evidence that doing so improves outcomes. These recommendations follow MedPAC's 2012 recommendation to eliminate differences in reimbursement for evaluation and management visits based on site of service.

Ambulatory Services in OPDs

MedPAC recommended reduction in OPD payment rates for 66 specific ambulatory payment classification codes (APCs). In formulating its recommendation, the committee concluded that the higher payment rates for OPDs, as compared to payment rates for freestanding physician offices, are sometimes, but not always, justified. MedPAC concluded that such differences are not justified for APCs that (1) are provided in a physician's office more than 50% of the time, (2) have minimal differences in packaging of supplies and ancillaries services in the payment rates, (3) are infrequently provided in emergency departments, (4) occur when patient severity is no greater in OPDs than in physician offices, and (5) are not a 90-day global code in the physician fee schedule.

MedPAC identified 24 APCs that satisfied all five of those criteria and recommended reducing OPD payment rates to levels equal to those paid in freestanding physician offices. MedPAC also identified 42 APCs that involve a higher degree of packaging of ancillary services and supplies in OPD rates but met the remaining four criteria. For those APCs, MedPAC recommended reducing OPD rates, but to levels that remain somewhat higher than those paid in freestanding physician offices in order to account for the differences in packaging. A list of the APCs identified by MedPAC can be found here.

MedPAC anticipates that adjusting these payment rates would result in a reduction in payments by the Medicare program and beneficiaries of $1.1 billion per year, which would reduce hospitals' total Medicare revenue by 0.6%.


MedPAC's LTCH recommendation is based upon its view that LTCHs should enjoy higher reimbursement than acute care hospitals, but only for chronically critically ill (CCI) cases. Under MedPAC's recommendation, to qualify as a CCI case, a patient would have to be admitted to a LTCH after acute care hospital admission involving either (1) eight or more days in an intensive care unit or (2) prolonged time on a ventilator. For all other cases, MedPAC recommended that LTCHs receive payment equivalent to that made to acute care hospitals under the inpatient prospective payment system.

The MedPAC recommendation would result in a drastic reduction in LTCH payments. The committee estimated that only 41% of current LTCH cases would qualify for CCI payment rates, while the remaining 59% of current LTCH cases would be paid amounts equal to those paid to acute care hospitals under the inpatient prospective payment system. MedPAC estimated that if there was no change in LTCH patient admissions resulting from the changes in payment rates, LTCH payments would be reduced by approximately $2 billion by the end of the recommended three-year phase-in period.

Payment Rates for Acute Care Hospitals

MedPAC recommended that savings from the reductions in payment rates for OPDs and LTHCs be used to fund a 3.5% increase in the inpatient and outpatient prospective payment systems for acute care hospitals. This increase would include allocating the savings from the LTCH payment reform to increase outlier payments for CCI cases in acute care hospitals.

What This Means for Providers

Whether MedPAC's recommendations will be adopted remains to be seen. However, the committee's recommendations demonstrate its clear view of the need to correct what it terms "distortions" in payment rates that encourage providing care in higher-cost settings without respect to whether doing so results in improved outcomes.

Even prior to Congressional action, however, providers should:

  • Review the list of APCs identified by MedPAC and consider how to address potential reductions in outpatient department payment rates.
  • Where physician practice acquisitions or other contractual arrangements are based upon favorable provider-based billing or other outpatient department payment rates, continue to consider whether to include provisions to "unwind" transactions or make other adjustments to account for possible payment reform.
  • For health systems with freestanding or "hospital within a hospital" LTCHs, apply MedPAC's recommended CCI definition to existing LTCH populations to quantify possible payment reductions and begin to plan for changes in LTCH and acute care hospital patient loads.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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