Press release



The Centers for Medicare & Medicaid Services today issued a final rule updating payment rates to hospitals under the outpatient prospective payment system (OPPS) that would increase aggregate payments to outpatient departments by about 4.5 percent. Payments for clinic and emergency department visits would increase under the 2004 OPPS update as would payments for preventive health services such as screening mammography and screening colonoscopy.

Medicare pays nearly 4,400 hospitals under the OPPS, which went into effect August 1, 2000. By law, CMS is required to update the payment rates annually. In 2004, CMS projects that total payments to hospitals under the OPPS will be about $22.8 billion.

The 2004 payment rates are based on actual hospital costs derived from 2002 claims for outpatient services. In addition to implementing new payment rates for 2004, the final rule includes several refinements to the OPPS rate setting methodology, such as increasing the number of claims used to develop relative payment weights for ambulatory payment classifications (APCs).

Under the Medicare law, CMS is required to impose an across-the-board reduction in temporary additional payments for drugs, biologicals, and devices (called pass-through payments) if estimated pass-through spending is projected to be more than 2 percent of total estimated OPPS payments for 2004. CMS does not estimate that pass-through spending in 2004 will exceed the cap, and therefore, the rule does not impose an across-the-board reduction.

Under the final rule, seven drugs and biologicals, and two device categories that met the criteria for transitional pass-through payments in 2002 and 2003 will come off the pass-through list in 2004. In the final rule, CMS has decided to package drugs with daily median costs below $50 as well as the cost of all implantable devices into the payment rate for the primary procedure or treatment with which the products are usually furnished. The proposed rule, as well as the 2003 final rule, had set the threshold for packaging drugs at $150.

CMS is creating separate APCs for drugs and biologicals with median costs at or above $50 and is setting payment rates for drugs and biologicals based on hospital cost data. However, for some products, including some less frequently used drugs, the payment rates based on the hospital cost data would significantly reduce payment to the hospital, compared with 2003 payment levels. As in the 2003 OPPS update, the rule will dampen the effect of the reduction for products for which the median costs decreased by 15 percent or more.

CMS is expanding the list of drugs that are eligible for payment as single indication orphan drugs to a total of 11 drugs. To be eligible for special payment under the OPPS, an FDA-designated orphan drug must have a single "indication". In other words, its use must be limited exclusively to treatment of an orphan condition. CMS is also changing how it pays for orphan drugs from a "reasonable cost" basis to a percentage of average wholesale price (AWP). Nine of the 11 single indication orphan drugs will be paid at 88 percent of the AWP. The remaining two will be paid at 94 percent of the AWP.

Earlier this year, the American Hospital Association and the American Health Information Management Association convened an independent expert panel to develop guidelines for coding hospital emergency department and clinic visits and to make recommendations to CMS. CMS has not yet had the opportunity to evaluate these guidelines, but would not anticipate any changes resulting from this process would go into effect before calendar year 2005.

In other provisions, the final rule:

  • Continues to pay separately for blood, blood products, and hemophilia clotting factors and freezes their payment rates at the 2003 levels.
  • Restructures new technology APCs to enable Medicare to pay more accurately for services assigned to these APCs.
  • Sets the threshold for outlier payments under the OPPS at 2.60 times the APC payment rate, but sets a separate outlier threshold (3.65 times the APC payment rate) for community mental health centers in an attempt to prevent further disproportionately high outlier payments to this group of providers.

The final rule, which can be found at, will be published in the November 7 Federal Register and will be effective for services on or after January 1, 2004.