Press release



The Centers for Medicare & Medicaid Services today issued a proposed rule updating payment rates to hospitals under the outpatient prospective payment system (OPPS) that would increase payments for individual services provided to Medicare beneficiaries in hospital outpatient departments by 3.8 percent in calendar year 2004. However aggregate payments to outpatient departments under the proposed rule would increase by about 5.7 percent. Payments for clinic and emergency department visits would increase under the 2004 OPPS update as would payments for preventive health services such as diagnostic 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, up from an estimated $21.6 billion in 2003.

Payment rates proposed in the 2004 update are based on actual hospital costs derived from 2002 claims for outpatient services. In addition to proposing new payment rates for 2004, the proposed rule includes several proposed 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).

The proposal projects that it will not be necessary for CMS to impose an across-the-board reduction on temporary additional payments (called pass-through payments) for new drugs and devices because it is not expected that these payments will exceed 2 percent of total payments under the OPPS, the cap on estimated pass-through payments imposed by Medicare law for 2004. In both 2002 and 2003, excessive demand on the pass-through pool for new drugs and devices required CMS to make difficult policy choices to restructure payments throughout the outpatient payment system.

Under the proposed rule, eight drugs and biologicals, and two device categories that met the criteria for transitional pass-through payments in 2002 and 2003 would come off the pass-through list in 2004. As in 2003, CMS is proposing to package the costs of drugs and biologicals with median costs below $150 as well as the cost of implantable devices into the payment rate for the primary procedure or treatment with which the products are usually furnished.

CMS is proposing to create separate APCs for drugs and biologicals with median costs at or above $150 and to set payment rates based on an analysis of hospital cost data. For some products, including some drugs that are less frequently used, the payment rates based on the hospital cost data would result in a significant decrease in payment to the hospital, compared with 2003 payment levels. As in the 2003 OPPS update, CMS is proposing to dampen the effect of the reduction in median costs for products that would suffer a cut of 15 percent or more.

CMS is expanding the list of drugs that are eligible for payment as orphan drugs to a total of 11 drugs. CMS is also proposing to change how it pays for orphan drugs from a "reasonable cost" basis to the same methodology used to set payment rates for other non-pass-through drugs that are above the $150 threshold, based on hospital claims data.

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. Currently, hospitals have to report these services using codes that were designed for use by physicians. The proposed rule includes a process that CMS proposes to use in order to give hospitals and other interested parties an opportunity to review and comment on the panel's recommendations.

In other provisions, the proposed rule would:

  • Continue to pay separately for blood, blood products, and hemophilia clotting factors and limit payment decreases for these items to approximately 10 percent.
  • Restructure new technology APCs to enable Medicare to pay more accurately for services assigned to these APCs.
  • Set the proposed threshold for outlier payments under the OPPS at 2.75 times the APC payment rate, but set a separate outlier threshold amount for community mental health centers that appear to have received disproportionately high outlier payments.

The proposed rule, which can be found at, will be published in the August 12 Federal Register. Comments will be accepted until October 6, and a final rule will be published later in the fall. The rule will be effective for services on or after January 1, 2004.