[Federal Register: August 14, 2007 (Volume 72, Number 156)]
[Rules and Regulations]               
[Page 45359-45377]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14au07-17]                         

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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 199

[DOD-2007-HA-0048]
RIN 0720-AB16

 
TRICARE; Outpatient Hospital Prospective Payment System (OPPS)

AGENCY: Office of the Secretary, DoD.

ACTION: Interim final rule.

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SUMMARY: This interim final rule implements a prospective payment 
system for hospital outpatient services similar to that furnished to 
Medicare beneficiaries, as set forth in section 1833(t) of the Social 
Security Act. The rule also recognizes applicable statutory 
requirements and changes arising from Medicare's continuing experience 
with this system including certain related provisions of the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003. The 
Department is publishing this rule as an interim final rule to 
implement existing statutory requirements for adoption of Medicare 
payment methods for institutional care. Interim final rule publication 
will ensure the expeditious implementation of a proven hospital OPPS, 
providing incentives for hospitals to furnish outpatient services in an 
efficient and effective manner. However, public comments are invited 
and will be considered for possible revisions to the final rule.

DATES: Effective Dates: September 13, 2007.
    Comments: Written comments received at the address indicated below 
by October 15, 2007 will be accepted.

ADDRESSES: You may submit comments, identified by docket number and or 
RIN number and title, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 

Follow the instructions for submitting comments.
     Mail: Federal Docket Management System Office, 1160 
Defense Pentagon, Washington, DC 20301-1160.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) for this 
Federal Register document. The general policy for comments and other 
submissions from members of the public is to make these submissions 
available for public viewing on the Internet at http://regulations.gov 

as they are received without change, including any personal identifiers 
or contact information.

FOR FURTHER INFORMATION CONTACT: David E. Bennett, TRICARE Management 
Activity, Medical Benefits and Reimbursement Systems, telephone (303) 
676-3494.

SUPPLEMENTARY INFORMATION:

I. Justification for Interim Final Rule (IFR) Making

    In accordance with Title 5, Part I, Chapter 5, Subchapter II, Sec.  
553(b)(3)(B) of the Administrative Procedures Act, the following 
rationale is being provided for implementing TRICARE's OPPS under the 
IFR process.
    In the National Defense Authorization Act for Fiscal Year 2002 
(NDAA-02), Public Law 107-107 (December 28, 2001), several reforms were 
enacted relating to TRICARE coverage and payment methods for skilled 
nursing and home health services which were all implemented through 
interim final rule (IFR) making to ensure expeditious implementation of 
Congressionally mandated reimbursement systems. In addition to the 
requirement that TRICARE establish an integrated sub-acute care program 
consisting of skilled nursing facility and home health care services 
modeled after the Medicare program, Congress also--in section 707 of 
NDAA-02--changed the statutory authorization (in 10 U.S.C. 1079(j)(2)) 
that TRICARE payment methods for institutional care ``may be'' 
determined to the extent practicable in accordance with Medicare 
payment rules to a mandate that TRICARE payment methods ``shall be'' 
determined to the extent practicable in accordance with Medicare 
payment rules. Section 707(c) required that the amendments made by this 
section shall take effect on the date that is 90 days after the date of 
the enactment of the Act.
    In the supplementary sections of both the Sub-Acute Care Program 
interim and final rules (67 FR 40597, June 13, 2002, and 70 FR 61377--
Supplementary Information, VIII. Payment Methods for Hospital 
Outpatient Services), the public was informed of the Agency's intent to 
adopt and implement the Medicare Prospective Payment System to the 
extent practicable. However, because of complexities of the Medicare 
transition process and the lack of TRICARE cost report data comparable 
to Medicare's, it was not practicable for the Department to adopt 
Medicare OPPS for hospital outpatient services at that time.
    It was recognized that adoption of the Medicare OPPS would require 
full commitment by the Agency to ensure expeditious implementation of 
the OPPS given the fact that Medicare's outpatient reimbursement system 
had been in effect since August 1, 2000. A formal OPPS work group was 
formed over 2\1/2\ years ago to finalize operational requirements and 
develop sophisticated software for processing and payment of hospital 
outpatient claims. Although the agency was committed to mirroring the 
basic Medicare reimbursement methodology as closely as possible (i.e., 
Medicare Ambulatory Payment Classification (APC) system, national APC 
payment rates, geographical wage adjustments, discounting, coding 
requirements, etc.), there were modifications that had to be done to 
the software grouping and pricing components to accommodate TRICARE's 
unique beneficiary and benefit structure. The continual updating of 
grouping and pricing software based on ongoing Medicare quarterly 
updates, along with TRICARE specific requirements, have been a 
challenge to both TRICARE and its Managed Care Support Contractors.
    Based on the agency's requirement to implement OPPS as mandated 
under section 707 of NDAA-02 (i.e., the statutory change to 10 U.S.C. 
1079(j)(2)) that TRICARE payment methods for institutional care shall 
be determined to the extent practicable in accordance with Medicare 
payment rules), and to maximize the administrative efficiencies and 
cost-savings of this new reimbursement system, TRICARE opted to go with 
the same interim final rule making process that it used in implementing 
the two previously mandated Medicare reimbursement systems (i.e., the 
TRICARE Home Health Agency and the Skilled Nursing Facility Prospective 
Payment System, which also statutorily mandated under the same NDAA as 
OPPS--which was section 707 of NDAA-02).
    The fact that TRICARE will be following Medicare changes to the 
extent practicable (i.e., outpatient services provided in hospitals 
subject to Medicare OPPS as specified in 42 CFR Sec.  413.65 and 42 CFR 
Sec.  419.20 will be paid in accordance with the provisions

[[Page 45360]]

outlined in section 1833(t) of the Social Security Act and its 
implementing Medicare regulation (42 CFR 419)) would make it difficult 
to conform to the traditional proposed and final rule making process 
since changes would be continual and ongoing based on Medicare rules 
and policy transmittals. The IFR process would most accurately reflect 
the provisions of the payment methodology at the time of 
implementation, while at the same time affording public review and 
comment which will be addressed in the Final Rule.
    It is estimated that going with proposed and final rulemaking 
instead of interim final and final rule making would result in at least 
a 12-month delay in implementation of the TRICARE Outpatient 
Prospective Payment System, which in turn would result in the program 
foregoing projected cost-savings in the amount of $50 to $70 million.
    TRICARE's Managed Care Support Contractors (MCSCs) have fully 
integrated the OPPS Outpatient Code Editor and Pricer into their claims 
processing systems (i.e., the software modules that were developed to 
process and accurately price hospital outpatient claims). A 12-month 
delay in implementation of OPPS would result in an additional $8-12 
million in administrative costs for the government. Even though the 
system would remain in test mode it would have to be maintained and 
updated during the delay (4-6 updates), which would require staff 
support and programming. Maintaining multiple outpatient reimbursement 
systems would impose an administrative burden on TRICARE and its MCSCs.
    A delay would also be extremely challenging from a public relations 
standpoint, since the MCSCs have already gone out to their network 
hospitals and renegotiated contracts. Approximately 97 percent of all 
network agreements have been renegotiated to accommodate implementation 
of the TRICARE OPPS. As a result, providers are anticipating conversion 
to OPPS within the near future (i.e., they are reconfiguring their 
charge masters to accommodate TRICARE OPPS billing).
    OPPS will ensure consistency of hospital outpatient payments 
throughout the United States, thus reducing the denial and return of 
claims to providers for coding errors. Providers will have access to 
OCE/Pricer software that will facilitate the filing and payment of 
outpatient claims with their TRICARE claims processors. A 12-month 
delay would reduce overall administrative cost savings for both 
providers and TRICARE contractors. These administrative efficiencies/
cost-savings will not be lost through IFR making.
    The general public and other interested parties (e.g., consulting 
groups and medical associations) are also anticipating implementation 
of OPPS in the near future. A significant delay in implementation will 
cause frustration and confusion. The education efforts will have to be 
doubled to accommodate a significant delay in implementation of OPPS.
    There is urgency for TRICARE implementation of the Medicare OPPS 
given the fact that the Medicare OPPS has been in place since August 1, 
2000. The initial delay, which was reflected in the previous Sub-Acute 
Care Program interim and final rules (67 FR 40597, June 13, 2002, and 
70 FR 61377), was due in part to the Agency's desire to avoid the 
transitioning provisions that were in effect under the Medicare program 
from its implementation though CY 2005. The remaining time was 
necessary to accommodate the revised programming necessary to 
accommodate TRICARE's unique population and benefit structure. The OPPS 
workgroup (both TMA and contractor staff) has worked over the past 
three years to ensure expeditious implementation of this 
Congressionally mandated outpatient reimbursement system.

II. Overview

    The OPPS evolved out of Congressional mandates for replacement of 
Medicare's cost-based payment methodology with a prospective payment 
system (PPS). Medicare implemented OPPS for services furnished on or 
after August 1, 2000, with temporary transitional provisions to buffer 
the financial impact of the new prospective payment system (e.g., 
incorporating transitional pass-through adjustments and proportional 
reductions in beneficiary cost-sharing to lessen potential payment 
reductions experienced under the new OPPS).
    Congress likewise established enabling legislation under section 
707 of the National Defense Authorization Act of Fiscal Year 2002 
(NDAA-02), Pub. L. 107-107 (December 28, 2001) changing the statutory 
authorization [in 10 U.S.C. 1079(j)(2)] that TRICARE payment methods 
for institutional care be determined, to the extent practicable, in 
accordance with the same reimbursement rules used by Medicare. 
Similarly, under 10 U.S.C. 1079(h), the amount to be paid to health 
care professional and other non-institutional health care providers 
``shall be equal to an amount determined to be appropriate, to the 
extent practicable, in accordance with the same reimbursement rules 
used by Medicare''. Based on these statutory provisions, TRICARE is 
adopting Medicare's prospective payment system for reimbursement of 
hospital outpatient services currently in effect for the Medicare 
program as required under the Balanced Budget Act of 1997 (BBA 1997), 
(Pub. L 105-33) which added section 1833(t) of the Social Security Act 
providing comprehensive provisions for establishment of a hospital 
OPPS. The Act required development of a classification system for 
covered outpatient services that consisted of groups arranged so that 
the services within each group were comparable clinically and with 
respect to the use of resources. The Act also described the method for 
determining the Medicare payment amount and beneficiary coinsurance 
amount for services covered under the outpatient PPS. This included the 
formula for calculating the conversion factor and data requirements for 
establishing relative payment weights.
    Centers for Medicare and Medicaid Services (CMS) published a 
proposed rule in the Federal Register on September 8, 1998 (63 FR 
47552) setting forth the proposed PPS for hospital outpatient services. 
On June 30, 1999, a correction notice was published (64 FR 35258) to 
correct a number of technical and typographical errors contained in the 
September 8, 1998 proposed rule.
    Subsequent to publication of the proposed rule, the Medicare, 
Medicaid, and State Child Health Insurance Program (SCHIP) Balanced 
Budget Refinement Act of 1999 (BBRA 1999) (Pub. L. 106-133) enacted on 
November 29, 1999, made major changes that affected the proposed 
outpatient PPS. The following BBRA 1999 provisions were implemented in 
a final rule (65 FR 18434) published on April 7, 2000.
     Made adjustments for covered services whose costs exceed a 
given threshold (i.e., an outlier payment).
     Established transitional pass-through payments for certain 
medical devices, drugs, and biologicals.
     Placed limitations on judicial review for determining 
outlier payments and the determination of additional payments for 
certain medical devices, drugs, and biologicals.
     Included as covered outpatient services implantable 
prosthetics and durable medical equipment and diagnostic x-ray, 
laboratory, and other tests associated with those implantable items.

[[Page 45361]]

     Limited the variation of costs of services within each 
payment classification group.
     Required at least annual review of the groups, relative 
payment weights, and the wage and other adjustments to take into 
account changes in medical practice, the addition of new services, new 
cost data, and other relevant information or factors.
     Established transitional corridors that would limit 
payment reductions under the hospital outpatient PPS.
     Established hold harmless provisions for rural and cancer 
hospitals.
     Provided that the coinsurance amount for a procedure 
performed in a year could not exceed the hospital inpatient deductible 
for the year.
    Section 1833(t) of the Social Security Act was subsequently amended 
by the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act (BIPA) of 2000 (Pub. L. 106-554) and the Medicare 
Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 
(Pub. L. 108-173), making additional changes in the OPPS.
    As a prelude to implementation of the OPPS, Congress enacted the 
Omnibus Budget Reconciliation Act of 1986 (OBRA) (Pub. L. 99-509) which 
paved the way for development of a PPS for hospital outpatient services 
by prohibiting payment for nonphysician services furnished to hospital 
patients (inpatients and outpatients), unless the services were 
furnished either directly or under arrangement with the hospital, 
except for services of physician assistants, nurse practitioners and 
clinical nurse specialists. Exceptions were also made for clinical 
diagnostic procedures, the payment of which may only be made to the 
person or entity that performed, or supervised the performance of, the 
test; and for exceptionally intensive hospital outpatient services 
provided to skilled nursing facility (SNF) residents that lie well 
beyond the scope of the care that SNFs would ordinarily furnish, and 
thus beyond the ordinary scope of the SNF care plan. Consolidated 
billing facilitated the payment of services included within the scope 
of each ambulatory payment classification (APC). The OBRA also mandated 
hospitals to report claims for services under the Healthcare Common 
Procedure Coding System (HCPCS) which enabled the identification of 
specific procedures and services used in the development of outpatient 
PPS rates.
    Ongoing changes and refinement to the OPPS have been accomplished 
through annual proposed and final rulemaking, along with interim 
transmittals and program memoranda taking into consideration changes in 
medical practice, addition of new services, new cost data, and other 
relevant information and factors. TRICARE will recognize to the extent 
practicable all applicable statutory requirements and changes arising 
from Medicare's continuing experience with this prospective payment 
system, including changes to the amounts and factors used to determine 
the payment rates for hospital outpatient services paid under the 
prospective payment system [e.g., annual recalibration (updating) of 
group weights and conversion factors and adjustments for area wage 
differences (wage index updates)].
    While TRICARE intends to remain as true as possible to Medicare's 
basic OPPS methodology (i.e., adoption and updating of the Medicare 
data elements used to calculate the prospective payment amounts), there 
will be some deviations required to accommodate the uniqueness of the 
TRICARE program. These deviations have been designed to accommodate 
existing TRICARE benefit structure and claims processing procedures/
systems implemented under the TRICARE Next Generation Contracts (T-
NEX), while at the same time eliminating any undue financial burden to 
TRICARE Prime, Extra, and Standard beneficiary populations. Following 
is a brief discussion of each of these deviations:
     Outpatient Code Editor (OCE)--The Medicare Outpatient Code 
Editor with APC program edits data to help identify possible errors in 
coding and assigns Ambulatory Payment Classification numbers based on 
HCPCS codes for payment under the OPPS. The OPPS is an outpatient 
equivalent of the inpatient, Diagnosis Related Group (DRG)-based PPS. 
Like the inpatient system based on DRGs, each APC has a pre-established 
prospective payment amount associated with it. However, unlike the 
inpatient system that assigns a patient to a single DRG, multiple APCs 
can be assigned to one outpatient claim. If a patient has multiple 
outpatient services during a single visit, the total payment for the 
visit is computed as the sum of the individual payments for each 
service. Medicare provides updated versions of the OCE, along with 
installation and user manuals, to its fiscal intermediaries on a 
quarterly basis. The updated OCE reflects all new coding and editing 
changes during that quarter.
    It was found upon initial testing of the OCE that it could not be 
used in its present form given the fact that the extensive editing 
embedded in its software program was specific to Medicare's benefit 
structure and internal claims processing requirements. As a result, the 
Agency has developed a TRICARE-specific OCE which will better 
accommodate the benefit structure and claims processing systems 
currently in place under the T-NEX contracts. This modified software 
package will edit claims data for errors and indicate actions to be 
taken and reasons why the actions are necessary. This expanded 
functionality will facilitate the linkage between the action being 
taken, the reasons for the action, and the information on the claim 
that caused the action. The edits will be specific for TRICARE, 
ensuring compliance with current claims processing criteria. The OCE 
will also assign an APC number for each service covered under the OPPS 
and return information to be used as input to the TRICARE PRICER 
program.
    Like Medicare's OCE, the TRICARE-specific OCE will be updated on a 
quarterly basis incorporating, to the extent practicable, all Medicare 
changes/updates (i.e., those changes initiated through rulemaking and 
transmittals/program memoranda). Periodic updating of the TRICARE-
specific OCE will ensure consistency and accuracy of claims processing 
and payment under the OPPS.
     Deductible and Cost-Sharing--Medicare's OPPS coinsurance 
was initially frozen at 20 percent of the national median charge for 
the services within each APC (wage adjusted for the provider's 
geographic area) or 20 percent of the APC payment rate, whichever was 
greater (i.e., the coinsurance for an APC could not fall below 20 
percent of the APC payment rate). This was designed so that, as the 
total payment to the provider increased each year based on market 
basket updates, the present or frozen coinsurance amount would become a 
smaller portion of the total payment until the coinsurance represented 
20 percent of the total. Once the coinsurance became 20 percent of the 
payment amount, annual updates would be applied to the coinsurance so 
that it would continue to account for 20 percent of the total charge. 
Wage adjusted coinsurance amounts were further limited by the Medicare 
inpatient deductible. Subsequent legislation has accelerated the 
reduction of beneficiary copayment amounts by imposing prescribed 
percentage limitations off of the APC payment rate. For example, for 
all services paid under the OPPS in CY 2005, the national unadjusted 
copayment amount cannot

[[Page 45362]]

exceed 45 percent of the APC rate. Accelerated reductions were imposed 
specifically for those APC groups for which coinsurance represented a 
relatively high proportion of the total payment.
    A program payment percentage is calculated for each APC by 
subtracting the unadjusted national coinsurance amount for the APC from 
the unadjusted payment rate and dividing the result by the unadjusted 
payment rate. The payment rate for each APC group is the basis for 
determining the total payment (subject to wage-index adjustment) that a 
hospital will receive from the beneficiary and the Medicare program.
    Since imposition of Medicare's unadjusted national coinsurance 
amounts would have an adverse financial impact on TRICARE beneficiaries 
(i.e., imposition of significantly higher cost-sharing for Primary 
beneficiaries), the Agency has opted to use the following hospital 
outpatient deductible and cost-sharing/copayments currently being 
applied in Tables 1 and 2 below for Prime, Extra, and Standard TRICARE 
programs for hospital outpatient services:

                                    Table 1.--Hospital Outpatient Deductibles
----------------------------------------------------------------------------------------------------------------
                                                 Active duty family members
         TRICARE  programs          ----------------------------------------------------  Retirees, their family
                                               E1-E4                 E5 and above         members  and survivors
----------------------------------------------------------------------------------------------------------------
Prime..............................  None....................  None....................  None.
Extra..............................  $50 per Individual......  $150 per Individual.....  $150 per Individual.
                                     $100 Maximum per family.  $300 Maximum per family.  $300 Maximum per
                                                                                          family.
Standard...........................  $50 per Individual......  $150 per Individual.....  $150 per Individual.
                                     $100 Maximum per family.  $300 Maximum per family.  $300 Maximum per
                                                                                          family.
----------------------------------------------------------------------------------------------------------------


                              Table 2.--Hospital Outpatient Copayments/Cost-Sharing
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                       TRICARE prime program
-------------------------------------------------------------------
           Active duty family members              Retirees, their  TRICARE extra program     TRICARE standard
-------------------------------------------------  family members                                 program
             E1-E4                E5 and above      and survivors
----------------------------------------------------------------------------------------------------------------
$0 copayment per visit........  $0 copayment per  $12 copayment     Active Duty Family     Active Duty Family
                                 visit.            per visit.        Members: Cost-share--  Members: Cost-share--
                                                                     15% of fee             20% of the allowable
                                                                     negotiated by          charge.
                                                                     contractor.           Retirees, Their
                                                                    Retirees, Their         Family Members &
                                                                     Family Members and     Survivors: Cost-
                                                                     Survivors: Cost-       share--25% of the
                                                                     share--20% of the      allowable charge.
                                                                     fee negotiated by
                                                                     the contractor.
----------------------------------------------------------------------------------------------------------------

     Hold-Harmless Protection--Since the inception of the 
Medicare OPPS, providers have been eligible to receive additional 
transitional outpatient payments (TOPs) if the payments they received 
under the OPPS were less than the payments they could have received for 
the same services under the payment system in effect before the OPPS. 
Prior to January 1, 2004, most hospitals that realized lower payments 
under OPPS received transitional corridor payments based on a percent 
of the decreased payments, with the exception of cancer hospitals, 
children's hospitals and rural hospitals having 100 or fewer beds which 
were held harmless under this provision and paid the full amount of the 
decrease in payment under the OPPS. Since transitional corridor 
payments were intended to be temporary payments to ease the provider's 
transition from a prior cost-based payment system to a prospective 
payments system, they were terminated as of January 1, 2004, with the 
exception of cancer and children's hospitals who were held harmless 
permanently under transitional corridor provisions of the statute 
(section 1833(t)(7) of the Social Security Act). The authority for 
making transitional corridor payments under section 1833(t)(7)(D)(i) of 
the Act, as amended by section 411 Pub. L. 108-173, expired for rural 
hospitals having 100 or fewer beds, and sole community hospitals (SCHs) 
located in rural areas as of December 31, 2005. However, subsequent 
legislation (Section 5105 of Pub. L. 109-171) reinstituted the hold-
harmless transitional outpatient payments (TOPs) for covered OPD 
services furnished on or after January 1, 2006, and before January 1, 
2009, for rural hospitals having 100 or fewer beds that are not SCHs. 
This provision provided an increased payment for such hospitals for 
outpatient services if the OPPS payment they received was less than the 
pre-BBA payment amount (i.e., the amount that was received prior to 
implementation of OPPS) that they would have received for the same 
covered service. When the OPPS payment is less than the payment the 
provider would have received prior to OPPS implementation, the amount 
of payment is increased by 90 percent of the amount of that difference 
for CY 2007, and by 85 percent of the amount of the difference for CY 
2008. The amount of payment under Section 1833(t)(13)(B) of the Act, as 
amended by section 411 of Pub. L. 108-73, also provided a payment 
increase for rural SCHs of 7.1 percent for all services and procedures 
paid under the OPPS, excluding drugs, biologicals, brachytherapy seeds 
and services paid under pass-through payments effective January 1, 
2006, if justified by a study of the difference in costs for rural 
SCHs.
    While the Agency adopted the hold-harmless TOPs for rural hospitals 
having 100 or fewer beds and SCHs, it opted to totally exempt cancer 
and children's hospitals from the OPPS in lieu of imposing the hold-
harmless provision, given the administrative complexity of capturing 
the data required for payment of monthly interim TOP amounts. TOPs 
would require a comparison of what would have been paid [i.e., billed 
charges and CHAMPUS Maximum Allowable Charge (CMAC) amounts] prior to 
implementation of the OPPS for hospital outpatient services to those 
amounts actually paid under the OPPS for the same services. A TOP would 
be allowed in addition to the OPPS amount if payment to a cancer or 
children's hospital was lower than the amount that

[[Page 45363]]

would have been paid prior to implementation of the OPPS. Since 
transitional corridor payments were specifically designed to supplement 
the losses experienced under the OPPS (i.e., to pay for services at the 
full amount that would have been allowed prior to implementation of the 
OPPS), and most, if not all, outpatient services paid at a billed or 
CMAC would exceed the OPPS amount, the program cannot justify the 
administrative burden/expense of maintaining the hold-harmless 
provisions for cancer and children's hospitals. As a result, TRICARE 
will continue to reimburse cancer and children's hospitals on a fee-
for-services basis using billed charges and CMAC rates; i.e., they will 
be excluded altogether from the OPPS.
    Adoption of the Medicare OPPS has also highlighted other policy 
considerations which must be addressed in order to accommodate 
preexisting authorization criteria and reimbursement systems. Following 
are these identified policy considerations and prescribed resolutions:
     Partial Hospitalization Programs (PHP)--Currently, TRICARE 
coverage extends to both full- and half-day psychiatric partial 
hospitalization services furnished by TRICARE-authorized partial 
psychiatric hospitalization programs and authorized mental health 
providers for the active treatment of a mental disorder. Each 
psychiatric partial hospitalization program must be either a distinct 
part of an otherwise authorized institutional provider or a 
freestanding program certified pursuant to TRICARE certification 
standards; i.e., the facility must be accredited by the Joint 
Commission on Accreditation of Healthcare Organizations (JCAHO) under 
the current edition of the Accreditation Manual for Mental Health, 
Chemical Dependency, and Mental Retardation/Developmental Disabilities 
Services and meet all other requirements as prescribed under 32 CFR 
199.6(b)(4)(xii)(A) through (D). These authorized and participating 
partial hospitalization programs are paid a percentage off of the 
average inpatient per diem amount per case to both high- and low-volume 
psychiatric hospitals. Full-day partial hospitalization programs 
(minimum of 6 hours) receive 40 percent of the average inpatient per 
diem, while partial hospitalization programs with less than 6 hours 
(with a minimum of three hours) will be paid a per diem of 75 percent 
of the rate for full-day partial hospitalization programs.
    Although the prescribed payment methodology for PHP under OPPS is 
similar to that currently being used (i.e., payment under a per diem 
recognizing the provider's overhead costs and support staff), there are 
subtle differences in that OPPS' all-inclusive per diems represent 
actual median costs of furnishing a day of partial hospitalization 
while per diems under the existing TRICARE system as prescribed under 
32 CFR 199.14(a)(2)(ix) are extrapolated from inpatient costs based on 
the intensity of the program (i.e., dependent on whether it is 
classified as a full- or half-day program). Another notable difference 
between the two programs is the continuation of reimbursement of half-
day PHPs (>= to 3 hrs. but < 6 hrs.) under TRICARE which are currently 
not recognized for payment under the Medicare OPPS (i.e., Medicare has 
not established a separate APC for half-day PHPs which can be used for 
reimbursement under the TRICARE OPPS). This deviation from the Medicare 
PHP required the establishment of an additional APC, the per diem of 
which was set at 75 percent of the unadjusted full-day PHP APC amount 
(i.e., 75 percent of the APC 0033 amount of $234.73, equaling $176.05 
for CY 2007). This will ensure continued coverage of a well established 
mental health treatment modality (half-day PHP) which has been in place 
under TRICARE for over a decade. The above-established per diems 
reflect the structure and scheduling of PHPs, and the composition of 
the PHP APC consists of the cost of all services provided each day. 
Although there is a requirement that each PHP day include a 
psychotherapy service, there is no specification regarding the specific 
mix of other services furnished within the day.
    The TRICARE criteria under which PHP services may be rendered are 
different than Medicare's--both with regard to the need for PHP 
services and facility requirements. Currently, Medicare OPPS partial 
hospitalization services may be provided to patients in lieu of 
inpatient psychiatric care in hospital outpatient departments or 
Medicare-certified community mental health centers (CMHCs). The Agency 
has opted to retain the existing mental health review criteria under 32 
CFR 199.4(b)(10) in order to ensure the continued level and quality of 
mental health care afforded under the basic program. Following are the 
TRICARE review criteria for determining the medical necessity of 
psychiatric partial hospitalization services:
     The patient is suffering significant impairment from a 
mental disorder (as defined in Sec.  199.2) which interferes with age 
appropriate functioning.
     The patient is unable to maintain himself or herself in 
the community, with appropriate support, at a sufficient level of 
functioning to permit an adequate course of therapy exclusively on an 
outpatient basis (but is able, with appropriate support, to maintain a 
basic level of functioning to permit partial hospitalization services 
and presents no substantial imminent risk of harm to self or others).
     The patient is in need of crisis stabilization, treatment 
of partially stabilized mental health disorders, or services as a 
transition from an inpatient program.
     The admission into the partial hospitalization program is 
based on the development of an individualized diagnosis and treatment 
plan expected to be effective for the patient and permit treatment at a 
less intensive level.
    Based on existing mental health review criteria under 32 CFR 
199.4(b)(10) and certification requirements prescribed under 32 CFR 
1996(b)(4)(xii)(A), including accreditation by the JCAHO, under the 
current edition of the Accreditation Manual for Mental Health, Chemical 
Dependency, and Mental Retardation/Developmental Disabilities Services, 
not all hospital-based PHPs will be assured of receiving payment under 
the OPPS unless they meet the above prescribed certification 
requirements and enter into a participation agreement with TRICARE. 
CMHC PHPs have been excluded from payment under the TRICARE OPPS since 
CMHCs are not recognized as authorized providers under the TRICARE 
program.
    While the authorization standards under 32 CFR 199.6(b)(4)(xii)(A) 
through (D) will be retained/applied for both hospital-based and 
freestanding PHPs currently recognized under the Program, including the 
requirement for a written participation agreement with TRICARE, 
freestanding PHPs will be exempt from OPPS and will continue to be 
reimbursed under the old TRICARE PHP per diem system as prescribed 
under 32 CFR 199.14(a)(2)(ix), subject to their own unique mental 
health copayment/cost-sharing provisions.
     Ambulatory Surgery Procedures--Currently, ambulatory 
surgery procedures provided in both freestanding ambulatory surgery 
centers (ASCs) and hospital outpatient departments or emergency rooms 
are paid using prospectively determined rates established on a cost 
basis and divided into eleven groups as prescribed under 32 CFR 
199.14(d). These payment groups are further adjusted for area

[[Page 45364]]

labor costs based on Metropolitan Statistical Areas (MSAs). The payment 
rates established under this system apply only to facility charges for 
ambulatory surgery (e.g., standard overhead amounts that include, but 
are not limited to, nursing and technician services, use of the 
facility and supplies and equipment directly related to the surgical 
procedure) and do not include such items as physician's fees, 
laboratory, X-rays or diagnostic procedures (other than those directly 
related to the performance of the surgical procedure), prosthetics and 
durable medical equipment for use in the patient's home. Ambulatory 
surgery procedures (both provided in hospital-based and freestanding 
ambulatory surgery centers) are subject to their own unique copayment/
cost-sharing provisions under the current TRICARE ambulatory surgery 
benefit.
    With implementation of the OPPS, hospital-based ambulatory surgery 
procedures will no longer be reimbursed under the original eleven tier 
payment system, but will instead be paid on a rate-per-service basis 
that varies according to the APC group to which the surgical procedure 
is assigned. The relative weight of the APC group will represent the 
median hospital cost of the services included in the APC relative to 
the median cost of services included in APC 0606, Level 3 Clinic Visit. 
The prospective payment rate for each APC will be calculated by 
multiplying the APC's relative weight by a nationally established 
conversion factor and adjusting it for geographic wage differences. The 
APC payment will be subject to the deductible and cost-sharing/
copayment amounts currently being applied under Prime, Extra, and 
Standard TRICARE programs for hospital outpatient services. Denial of 
Medicare inpatient procedures will also be adhered to under the OPPS 
(i.e., denial of inpatient surgical procedures performed in a hospital 
outpatient setting) except for those inpatient procedures, which upon 
medical review, could be safely and efficaciously rendered in an 
outpatient setting due to TRICARE's younger, healthier beneficiary 
population. TRICARE-specific APCs will be developed for these 
designated inpatient procedures based on median costs off of the most 
recent 12 months of claims history. OPPS reimbursement will also be 
extended for an inpatient procedure performed to resuscitate or 
stabilize a patient with an emergent, life-threatening condition who 
dies before being admitted as a patient, which in this case, will be 
paid under a new technology APC.
    Freestanding ASCs will be exempt from OPPS and will continue to be 
paid under the existing eleven tier payment system. ASC procedures will 
be placed into one of ten groups by their median per procedure cost, 
starting with $0 to $299 for Group 1, and ending with $1,000 to $1,299 
for Group 9 and $1,300 and above for Group 10, subject to their own 
unique copayment/cost-sharing provisions under the TRICARE freestanding 
ambulatory surgery benefit. The eleventh payment tier/group was added 
to the ASC reimbursement system as of November 1, 1998, for 
extracorporeal shock wave lithotripsy, with a rate established off of 
the inpatient Diagnostic Related Group (DRG) 323 which is currently 
$3,289.
     Birthing Centers--As described in 32 CFR 
199.6(b)(4)(xi)(3), a birthing center is a freestanding or institution-
affiliated outpatient maternity care program which principally provides 
a planned course of outpatient prenatal care and outpatient childbirth 
services limited to low-risk pregnancies. These all-inclusive maternity 
and childbirth services are currently being reimbursed in accordance 
with 32 CFR 199.14(e) at the lower of the TRICARE established all-
inclusive rate or the billed charge. The all-inclusive rate includes 
laboratory studies, prenatal management, labor management, delivery, 
post-partum management, newborn care, birth assistant, certified nurse-
midwife professional services, physician professional services, and the 
use of the facility to the extent that they are usually associated with 
a normal pregnancy and childbirth. Since institutional-affiliated 
maternity centers will continue to be reimbursed under the TRICARE 
maximum allowable birthing center all-inclusive rate methodology as 
prescribed under 32 CFR 199.14(e), payment will be equal to the sum of 
the Class 3 CMAC for total obstetrical care for a normal pregnancy and 
delivery (CPT code 59400) and the TMA supplied non-professional 
component amount, which includes both the technical and professional 
components of tests usually associated with a normal pregnancy and 
childbirth. As a result, hospital-based birthing centers will continue 
to be reimbursed the same as freestanding birthing centers except that 
updating of the hospital-based all inclusive rate, consisting of the 
CMAC for procedure code 59400 (Birthing Center, all-inclusive charge, 
complete) and the state specific non-professional component, will lag 
two months behind the freestanding birthing center all-inclusive 
update; i.e., the freestanding birthing center all-inclusive rate 
components will usually be updated on February 1 of each year to 
coincide with the annual CMAC file update, followed by the hospital-
based birthing center all-inclusive rate component updates on April 1 
of the same year. There will also be differences in cost-sharing based 
on the particular outpatient setting, since the cost-share amount for 
freestanding birthing center claims will continue to be calculated 
using the ambulatory surgery formula while cost-share for hospital-
based claims will be calculated under the regular outpatient cost-
sharing provisions.
     Observation Stays--Observation Services are those services 
furnished on a hospital's premises, including the use of a bed and 
periodic monitoring by a hospital's staff, which are reasonable and 
necessary to evaluate an outpatient's condition or to determine the 
need for a possible admission to the hospital as an inpatient. Under 
Medicare, a hospital may receive separate APC payments for observation 
services for patients having diagnoses of chest pain, asthma, or 
congestive heart failure, when billed in conjunction with an evaluation 
and management visit for a minimum of 8 hours. Since these qualifying 
diagnoses would greatly restrict separate payment of observation stays 
currently being reimbursed based solely on medical necessity, they are 
being expanded to accommodate the special needs of unique TRICARE 
beneficiary populations (e.g., separate payment for maternity 
observations stays). Separate payment of maternity observation stays 
required the modification of the existing conditional criteria for 
separate payment of observation stays associated with pain, asthma or 
congestive heart failure. Under the TRICARE OPPS, additional hospital 
services (e.g., separate emergency room visit or clinic visit) will not 
be required on a claim with a maternity diagnosis in order to receive 
separate payment for an observation stay. The minimum time requirements 
have also been reduced from 8 to 4 hours to ensure maximum coverage of 
medically necessary maternity observation stays.
     End-State Renal Disease (ESRD) Dialysis Services--In 
accordance with sections 1881(b) (2) and (b)(7) of the Social Security 
Act, a facility that furnishes dialysis services to Medicare patients 
with ESRD is paid a prospectively determined rate for each dialysis 
treatment furnished. The rate is a composite that includes all costs 
associated with furnishing dialysis services except for the costs of

[[Page 45365]]

physician services and certain laboratory tests and drugs that are 
billed separately. CMS has exercised the authority granted under 
section 1833(t)(1)(B)(i) to exclude from the outpatient PPS those 
services for patients with ESRD that are paid under the ESRD composite 
rate. Since TRICARE does not have a comparable composite rate in effect 
for payment of ESRD services, they will be reimbursed under TRICARE's 
OPPS.

III. Treatment Settings Subject to Outpatient Prospective Payment 
System

    The outpatient prospective payment system is applicable to any 
hospital participating in the Medicare program except for Critical 
Access Hospitals (CAHs), Indian Health Service hospitals, certain 
hospitals in Maryland that qualify for payment under the state's cost 
containment waiver, and hospitals located outside one of the 50 states, 
the District of Columbia and Puerto Rico and specialty care providers 
which include: (1) Cancer and children's hospitals; (2) freestanding 
ASCs; (3) freestanding partial hospitalization programs (PHPs); (4) 
freestanding psychiatric and substance use disorder rehabilitation 
facilities (SUDRFs); (5) comprehensive outpatient rehabilitation 
facilities (CORFs); (6) home health agencies (HHAs); (7) hospice 
programs; (8) other corporate services providers (e.g., freestanding 
cardiac catheterization centers, freestanding sleep diagnostic centers, 
and freestanding hyperbaric oxygen treatment centers); (9) freestanding 
birthing centers; (10) VA hospitals; and (11) freestanding ESRD 
centers. Due to their inability to meet the more stringent requirements 
imposed for hospital-based and freestanding PHPs under the Program. 
CMHCs have also been excluded from payment under OPPS for partial 
hospitalization program (PHP) services since they are not recognized as 
authorized providers under the TRICARE program.
    An outpatient department, remote location hospital, satellite 
facility, or other provider-based entity must also be either created 
by, or acquired by, a main provider (hospital qualifying for payment 
under OPPS) for the purpose of furnishing health care services of the 
same type as those furnished by the main provider under the name, 
ownership, and financial administrative control of the main provider, 
in accordance with the following requirements under 42 CFR Sec.  413.65 
(Medicare Regulation) in order to qualify for payment under the OPPS:
     Licensure--The outpatient department, remote location 
hospital, or the satellite facility and the main hospital are operated 
under the same license, except in areas where the State requires a 
separate license for the department of the provider.
     Clinical Integration--Professional staff of the outpatient 
department, remote location hospital or satellite facility are 
monitored by, and have clinical privileges at the main hospital. The 
medical director of the outpatient facility must also maintain a 
reporting relationship with the chief medical officer at the main 
hospital that has the same frequency, intensity and level of 
accountability that exists in the relationship between other 
departmental medical directors and the chief medical officer of the 
main hospital. Medical records for patients treated in the facility or 
organization must be integrated into a unified retrieval system (or 
cross reference) of the main hospital and there must be full access to 
all services provided at the main hospital for patients treated in the 
outpatient facility requiring further care.
     Financial integration. The financial operation of the 
outpatient facility must be fully integrated within the financial 
system of the main hospital, as evidenced by shared income and expenses 
between the main hospital and outpatient facility.
     Public awareness. The outpatient department, remote 
location hospital, or a satellite facility is held out to the public 
and other payers as part of the main provider. When patients enter the 
outpatient facility they are aware that they are entering the main 
provider and are billed accordingly.

Having clear criteria for provider-based status is important because 
this designation can result in additional TRICARE payments for services 
at the provider-based facility (i.e., the incorporation of additional 
facility costs for covered outpatient services/procedures). TRICARE 
will accept CMS' provider-based status evaluations/determinations for 
all hospital outpatient facilities seeking reimbursement under the 
TRICARE OPPS.

IV. Application of Ambulatory Payment Classification (APC) Model

    Payment for services under the OPPS is based on grouping outpatient 
services into APC groups in accordance with provisions outlined in 
section 1833(t) of the Social Security Act and its implementing 
regulation 42 CFR part 419. This grouping is accommodated through the 
reporting of HCPCS codes and descriptors that are used to group 
homogenous services (both clinically and in terms of resource 
consumption) into their respective APC groups.
    During the development of the hospital OPPS it was recognized that 
certain hospital outpatient services were being paid based on fee 
schedules or other prospectively determined rates that were being 
applied across other ambulatory care settings. As a result, the 
following services were excluded from the OPPS in order to achieve 
consistency of payment across different service delivery sites: (1) 
Physician services; (2) nurse practitioner and clinical nurse 
specialist services; (3) physician assistant services; (4) certified 
nurse-midwife services; (5) services of a qualified psychologist; (6) 
clinical social worker services, except under half- and full-day 
partial hospitalization programs in which the services are included 
within the per diem payment amount; (7) services of an anesthetist; (8) 
screening and diagnostic mammographies; (9) clinical diagnostic 
services; (10) non-implantable DME, orthotics, prosthetics, and 
prosthetic devices and supplies; (11) hospital outpatient services 
furnished to SNF inpatients as part of their comprehensive care plan; 
(12) ambulance services; (13) physical therapy; (14) speech-language 
pathology; (15) occupational therapy; (16) influenza and pneumococcal 
pneumonia vaccines; (17) take-home surgical dressings; (18) services 
and procedures designated as requiring inpatient care; and (19) 
ambulance services. These services will continue to be reimbursed under 
the current CMAC fee schedule or other TRICARE-recognized allowable 
charge methodology (e.g., statewide prevailings).
    The remaining outpatient procedures which were not being paid under 
current fee schedules or other prospectively determined rates were 
grouped under an APC as set forth in section 1833(t)(2)(B) of the 
Social Security Act and under 42 CFR Sec.  419.31 based on the 
following criteria:
     Resource Homogeneity--The amount and type of facility 
resources (for example, operating room, medical supplies, and 
equipment) that are used to furnish or perform the individual 
procedures or services within each APC group should be homogeneous. 
That is, the resources used are relatively constant across all 
procedures or services even though resources used may vary somewhat 
among individual patients.
     Clinical Homogeneity--The definition of each APC should be 
``clinically meaningful.'' That is, the procedures or services included 
within

[[Page 45366]]

the APC group relate generally to a common organ system or etiology, 
have the same degree of extensiveness, and utilize the same method of 
treatment.
     Provider Concentration--The degree of provider 
concentration associated with the individual services that comprise the 
APC is considered. If a particular service is offered only in a limited 
number of hospitals, then the impact of payment for the services is 
concentrated in a subset of hospitals. Therefore, it is important to 
have an accurate payment level for services with a high degree of 
provider concentration. Conversely, the accuracy of payment levels for 
services that are routinely offered by most hospitals does not bias the 
payment system against any subset of hospitals.
     Frequency of Service--Unless there is a high degree of 
provider concentration, creating separate APC groups for services that 
are infrequently performed is avoided. Since it is difficult to 
establish reliable payment rates for low-volume groups, HCPCS codes are 
assigned to an APC that is most similar in terms of resource use and 
clinical coherence.
     Minimal Opportunities for Upcoding and Code 
Fragmentation--The APC system is intended to discourage using a code in 
a higher paying group to define the care. That is, putting two related 
codes such as the codes, for excising a lesion for 1.1 cm and one of 
1.0 cm, in different APC groups may create an incentive to exaggerate 
the size of the lesions in order to justify the incrementally higher 
payment. APC groups based on subtle distinctions would be susceptible 
to this kind of coding. Therefore, APC groups were kept as broad and 
inclusive as possible without sacrificing resource or clinical 
homogeneity.

These procedures, along with their specific HCPCS coding and 
descriptors, were used to identify and group services within each 
established APC group. They included: (1) Surgical procedures 
(including hospital-based ASC procedures currently being paid under the 
eleven tier ASC payment methodology); (2) radiology, including 
radiation therapy; (3) clinic visits; (4) emergency department visits; 
(5) diagnostic services and other diagnostic tests; (6) partial 
hospitalization for the mentally ill; (7) surgical pathology; (8) 
cancer therapy; (9) implantable medical items (e.g., prosthetic 
implants, implantable DME and implantable items used in performing 
diagnostic x-rays and laboratory tests); (10) specific hospital 
outpatient services furnished to a beneficiary who is admitted to a 
SNF, but in which case the services are beyond the scope of SNF 
comprehensive care plans; (11) certain preventive services, such as 
colorectal cancer screening; (12) acute dialysis (e.g., dialysis for 
poisoning); and (13) ESRD services. These hospital outpatient 
procedures will be paid on a rate-per-service basis that varies 
according to the APC group to which they are assigned.
    In accordance with section 1833(t)(2) of the Social Security Act, 
services and items within an APC group cannot be considered comparable 
with respect to the use of resources in the APC group if the highest 
median cost is more than 2 times the lowest median cost for an item or 
service within the same group (referred to a the ``2 times rule''). 
Exceptions may be granted in unusual cases, such as low-volume items 
and services, but cannot be extended in cases of a drug or biological 
that has been designated as an orphan drug under section 526 of the 
Federal Food, Drug and Cosmetic Act.

V. Packaging and Special Payment Provisions Under OPPS

    The prospective payment system establishes a national payment rate, 
standardized for geographic wage differences, that includes operating 
and capital-related costs that are directly related and integral to 
performing a procedure or furnishing a service on an outpatient basis, 
which has ultimately resulted in the establishment of distinct groups 
of surgical, diagnostic, and partial hospitalization services, as well 
as medical visits. No separate payment is made for packaged services, 
because the cost of these items is included in the APC payment for the 
service of which they are an integral part. These costs include, but 
are not limited to: (1) Use of operating suite; (2) use of procedure 
room or treatment room; (3) use of recovery room or area; (4) use of an 
observation bed; (5) anesthesia, along with supplies and equipment for 
administering and monitoring anesthesia or sedation; (6) certain drugs, 
biologicals, and other pharmaceuticals; (7) medical and surgical 
supplies; (8) surgical dressings; (9) devices used for external 
reduction of fractures and dislocations; (10) intraocular lenses 
(IOLs); (11) capital related costs; (12) costs incurred to procure 
donor tissue other than corneal tissue; (13) incidental services such 
as venipuncture; (14) implantable items used in connection with 
diagnostic laboratory tests, and other diagnostics; and (15) 
implantable prosthetic devices (other than dental) which replace all or 
part of an internal body organ (including colostomy bags and supplies 
directly related to colostomy care), including replacement of these 
devices.
    Payments for packaged services under the OPPS are bundled into the 
payment providers receive for separately payable services provided on 
the same day and are identified by the status indicator (SI) ``N''. 
Hospitals include charges for packaged services on their claims, and 
the costs associated with these packaged services are bundled into the 
costs for separately payable procedures in calculating their payment 
rates. The following criteria are used in determining whether 
procedures should be packaged: (1) Whether the service is normally 
provided separately or in conjunction with other services; (2) how 
likely it is for the costs of the packaged code to be appropriately 
mapped to the separately payable codes with which it was performed; (3) 
whether the APC payment to which the services were packaged will offset 
the hospital's actual costs; and (4) whether the expected cost of the 
service is relatively low.
    Special logic has also been programmed into the OCE which will have 
the OPPS PRICER automatically assign payment for a special packaged 
service reported on a claim if there were no other services separately 
payable under the OPPS claim for the same date. A new status indicator 
``Q'' will be assigned to these special packaged codes to indicate that 
they are usually packaged, except for special circumstances when they 
are separately payable.
    Based on the above packaging criteria, is was felt that certain 
other expensive items and services which were otherwise considered an 
integral part of another procedure should not be packaged within that 
procedure's APC payment rate, since the resulting payment would not 
offset the costs of those items and services. This could have a 
potentially negative impact, thereby jeopardizing access to these items 
and services in a hospital outpatient setting. As a result, the costs 
associated with these items and services were not packaged within the 
APC of the primary procedure with which they were normally associated. 
Instead, separate APCs were developed for payment of these items and 
services under the following payment provisions:
     Transitional Pass-Through for Additional Costs of Drugs, 
Biologicals, and Radiopharmaceuticals. Although the costs of drugs, 
biologicals and pharmaceuticals are generally packaged into the APC 
payment rate for the primary procedure or treatment with which the 
drugs are usually furnished,

[[Page 45367]]

there are special temporary additional payments or ``transitional pass-
through payments'' available under section 1833(t)(6) of the Social 
Security Act for at least two years, but not more than three years for 
the following drugs and biologicals: (1) Current orphan drugs, as 
designated under section 526 of the Federal Food, Drugs, and Cosmetic 
Act; (2) current drugs and biological agents used for treatment of 
cancer; (3) current radiopharmaceutical drugs and biological products; 
and (4) new drugs and biologic agents in instances where the item was 
not being paid as a hospital outpatient service as of December 31, 
1996, and where the cost of the item is ``not insignificant'' in 
relation to the hospital OPPS payment amount.
    Section 1833(t)(6)(D)(i) of Social Security Act sets the payment 
rate for pass-through eligible drugs as amounts determined under 
section 1842(o) of the Act. Section 1847A of the Act establishes the 
use of average sales price (ASP) methodology (i.e., the rate equivalent 
to the payment that would be received in a physician office setting) as 
the basis for payment for drugs and biologicals described in section 
1842(o)(1)(C) of the Act. Section 1883(t)(6)(D)(i) also states if a 
drug or biological is covered under a competitive acquisition contract 
under section 1847B of the Act, the payment rate is equal to the 
average price for the drug or biologicals for all competitive 
acquisition areas. Thus, drugs and biologicals with pass-through status 
in CY 2007 will receive payment consistent with the provision of 
section 1842(o) of the Act, at a rate that is equivalent to the payment 
they would receive in a physician office setting (ASP) or the rate that 
would be paid under the competitive acquisitions program, while pass-
through radiopharmaceuticals will be paid the hospital's charge for the 
radiopharmaceutical adjusted to the cost using the hospital's overall 
cost-to-charge ratio (CCR).
     Packaging and Payment for Drugs, Biologicals and 
Radiopharmaceuticals Without Pass-Through Status. Drugs, biologicals 
and radiopharmaceuticals that do not have pass-through status are paid 
in one of two ways: Either packaged into the APC payment rate for the 
procedure or treatment with which the products are usually furnished, 
or separately based on a packaging threshold which has been set at $55 
for CY 2007. Therefore, for CY 2007 and beyond, drugs, biologicals and 
radiopharmaceuticals that are not new and do not have pass-through 
status will be packaged if their calculated per-day cost is equal to or 
more than $55 for CY 2007 or equal to or more than the updated 
threshold (i.e., the packaging threshold inflated annually by the 
Producer Price Index (PPI) for prescription drugs), with the exception 
of 5HT3 antiemetics which will continue to be paid separately 
regardless of their calculated per-day cost.
    Section 1833(t)(14) of the Act requires special classification of 
certain separately payable drugs, biologicals and radiopharmaceuticals 
and mandates payment under section 1833(t)(14)(A)(iii) of the Act for 
specified covered outpatient drugs in CY 2006 and subsequent years to 
be equal to the average acquisition cost for the drug subject to any 
adjustment for overhead costs, which for CY 2007 is a combined rate of 
ASP + 6 percent. Separately payable drugs and biologicals without ASP-
based data will be paid at their mean cost calculated from Medicare CY 
2005 hospital claims data. The preadmission-related services associated 
with intravenous immune globulin (IVIG) will continue to be paid under 
a New Technology APC with a rate of $75. Also, payment for blood 
clotting factors in the outpatient setting will be set at ASP + 6 
percent, plus the updated furnishing fee of $0.15. The temporary policy 
of paying radiopharmaceuticals at charges reduced to costs is also 
being extended for one additional year since it is still considered the 
best proxy for radiopharmaceutical acquisition and overhead costs. 
However, separate payment will only apply to those radiopharmaceuticals 
with per-day costs greater than $55.
     Payment for Nonpass-Through Drugs, Biologicals, and 
Radiopharmaceuticals With HCPC Codes, But Without OPPS Claims Data. For 
CY 2007, hospitals will receive payment for nonpass-through 
radiopharmaceuticals without hospital claims data that have been 
assigned HCPCS codes as of January 1, 2007, at the hospital's charge 
for the radiopharmaceutical adjusted to cost using the hospital's 
overall cost-to-charge ratio, which will be the same methodology used 
in the payment for pass-through radiopharmaceuticals. For new drugs 
without pass-through status or hospitals claims data, payment will be 
made at the lesser of the ASP or competitive acquisition contract price 
(Part B CAP). In rare instances where a drug does not have a Part B 
drug CAP rate or data available for use for ASP methodology, payment 
will be made at 95 percent of the product's most recent AWP. 
Established drugs without hospital claims data that have been 
classified as separately payable in CY 2007 will be paid per the ASP-
based methodology at a rate of ASP+ 6 percent.
    New drugs, biologicals and devices which qualify for separate 
payment under OPPS, but have not yet been assigned to a transitional 
APC (i.e., assigned to a temporary APC for separate payment of an 
expensive drug or device) will be reimbursed under the TRICARE standard 
allowable charge methodology. This allowable charge payment will 
continue until a transitional APC has been assigned (i.e., until CMS 
has had the opportunity to assign the new drug, biological or device to 
a temporary APC for separate payment).
     Drug Administration Coding and Payment. For CY 2007, 
hospitals will be expected to report the full set of CPT drug 
administration codes in a manner consistent with their descriptors, CPT 
instructions and correct coding principles. They will no longer be able 
to report the alphanumeric HCPCS codes (C8950, C8951, C8952, C8954, and 
C8955) that were recognized prior to January 1, 2007. These newly 
recognized CPT codes will be assigned to six new drug administration 
APCs, with payment rates based on median costs for the APCs as 
calculated from Medicare's CY 2005 claims data.
     Payment for Blood and Blood Products. Since Medicare's 
implementation of the OPPS in August 1, 2000, separate payments have 
been made for blood and blood products through APCs rather than 
packaging them into the procedures with which they were administered. 
Hospital payment for the costs of blood and blood products, as well as 
the costs of collecting, processing, and storing blood products, are 
made through the OPPS payments for specific blood product APCs. For CY 
2007, these blood products payments will be based on the unadjusted, 
simulated median costs for blood and blood products that are derived 
from CY 2005 Medicare claims data, with the exception of the seven 
products for which there will be a payment adjustment to smooth their 
transition to full claims-based payment in the future.
     Other Procedures or Services Costs Not Packaged in APC 
Payment. Costs for casting, splinting and strapping services, 
immunosuppressive drugs for patients following organ transplant, and 
certain other high-cost drugs that are infrequently administered are 
not packaged into the costs of the primary procedures with which they 
are normally associated. Instead, new APC

[[Page 45368]]

groups have been created for these items and services, which will allow 
separate payment.
     Corneal Tissue Acquisition Costs. Corneal tissue 
acquisition costs will not be packaged with the APC payment for corneal 
transplant surgical procedures. Instead, separate payment will be made 
based on the hospital's reasonable costs incurred to acquire corneal 
tissue. Corneal acquisition costs must be submitted using HCPCS code 
V2785 (Processing, Preserving and Transporting Corneal Tissue), 
indicating the actual cost of the acquisition rather than the 
hospital's charge on the bill.
     Transitional Pass-Through Payment for Devices. 
Transitional payments will only apply to new and innovative medical 
devices meeting the following criteria: (1) Were not recognized for 
payment as a hospital outpatient service prior to 1997 (i.e., payment 
was not being made as of December 31, 1996) or treated as meeting the 
time constraints under special prescribed conditions; (2) have been 
approved/cleared for use by the Food and Drug Administration (FDA); (3) 
are determined to be reasonable and necessary for the diagnosis or 
treatment of an illness or injury or to improve the functioning of a 
malformed body part; (4) are an integral and subordinated part of the 
procedure performed, are used for one patient only (except for 
reprocessed single-use devices meeting FDA's most recent regulatory 
criteria on single-use devices), are surgically implanted or inserted 
via a natural or surgically created orifice or incision and remain with 
the patient after the patient is released from the hospital outpatient 
department; (5) are not equipment, instruments, apparatus, implements, 
or such items for which depreciation and financing expenses are 
recovered as depreciable assets; (6) are not materials and supplies 
such as sutures, clips or customized surgical kits furnished incidental 
to a service or procedure; (7) are not material such as biologicals or 
synthetics that are used to replace human skin; (8) no existing or 
previously existing device category is appropriated for the device; (9) 
associated cost is not insignificant in relation to the APC payment for 
the service in which the innovative medical equipment is packaged; and 
(10) must demonstrate that utilization of the device provides 
substantial clinical improvement for beneficiaries compared with 
currently available treatments, including procedures utilizing devices 
in existing or previously existing device categories.
    The duration of transitional pass-through payments for devices is 
for at least two, but not more than three years. This period begins 
with the first date on which a transitional pass-through payment is 
made for any medical device that is described by the new medical 
category. The costs of the devices will be packaged into the costs of 
the procedures with which they are normally billed once they are no 
longer eligible for pass-through payment.
    Device pass-through payments (those procedures designated with a SI 
``H'') are calculated by applying the statewide cost-to-charge ratio 
(CCR), which is based on the geographical CBSA (2 digit = rural, 5 
digit = urban), to the hospital's charges on the claims and subtracting 
any appropriate pass-through offset. The offset adjustment only applies 
when a pass-through device is billed in addition to the primary 
procedure with which it is normally associated.
    Provisions are also in place in accordance with 1833(t)(6)(D)(ii) 
of the Social Security Act for reducing transitional pass-through 
payments by the estimated portion of each APC payment rate that could 
reasonably be attributed to the cost of the associated devices that are 
eligible for pass-through payments. Offsets are calculated by comparing 
the median APC cost without device packaging to the Median APC cost 
(including device packaging), developed from claims with device codes, 
to determine the percentage of median APC costs attributable to the 
associated pass-through device. These percentages are then applied to 
the APC payment amounts in order to determine the applicable amounts to 
be deducted from the pass-through payments, known as the ``offset'' 
amounts. Offset amounts are only applied when it can be determined that 
an APC contained cost is actually associated with the device. 
Currently, there is only one transitional pass-through payment offset 
in effect for device category C1820 (generator, neurostimulator 
(implantable), with rechargeable battery and charging system) with an 
amount of $8,668.94, which represents 77.65 percent of the CY 2007 
payment rate for APC 0222.
    Two new device categories have been established for pass-through 
payment starting in 2007: (1) L8690--auditory osseointegrated device, 
external sound processor, replacement; and (2) C1821--interspinous 
process distraction device (implantable). The offset amounts for both 
of these new device categories were set to $0 for CY 2007, since there 
were not identifiable device-related costs associated with their 
procedure APCs (i.e., APC 0256 for L8690 and APC 0050 for C1821).
     Payment When Devices Are Replaced Without Cost or Where 
Credit for a Replacement Device Is Furnished to the Hospital. Payments 
will be reduced for selected APCs in cases in which an implanted device 
is replaced without cost to the hospital or with full credit for the 
removed device in accordance with 42 CFR 419.45. The amount of the 
reduction to the APC rate will be calculated in the same manner as the 
offset amount that would be applied if the implanted device assigned to 
the APC had pass-through status as defined under 42 CFR 419.66. The 
adjustment would be made under the authority of section 1833(t)(2)(E) 
of the Social Security Act, which permits equitable adjustments to the 
OPPS payments contingent on meeting all of the following criteria: (1) 
All procedures assigned to the selected APCs must require implantable 
devices that would be reported if device replacement procedures were 
performed; (2) the required devices must be surgically inserted or 
implanted devices that remain in the patient's body after the 
conclusion of the procedures, at least temporarily; and (3) the offset 
percent for the APC (i.e., the median cost of the APC without device 
costs divided by the median cost of the APC with device costs) must be 
significant--significant offset percent is defined as exceeding 40 
percent.
    The presence of the modifier ``FB'' [``Item Provided Without Cost 
to Provider, Supplier, or Practitioner or Credit Received for 
Replacement (examples include, but are not limited to: covered under 
warranty, replaced due to defect, free sample)''] would trigger the 
adjustment in payment if the procedure code to which modifier ``FB'' 
was amended appeared in Table 3 and was also assigned to one of the 
APCs listed in Table 4 below.

  Table 3.--Devices for Which the FB Modifier Must Be Reported With the
      Procedure When Furnished Without Cost or at Full Credit for a
                           Replacement Device
------------------------------------------------------------------------
                 Device                            Description
------------------------------------------------------------------------
C1721..................................  AICD, dual chamber.
C1722..................................  AICD, single chamber.
C1764..................................  Event recorder, cardiac.
C1767..................................  Generator, neurostim, imp.
C1771..................................  Rep dev, urinary, w/sling.
C1772..................................  Infusion pump, programmable.
C1776..................................  Joint device (implantable).
C1777..................................  Lead, AICD, endo single coil.
C1778..................................  Lead, neurostimulator.
C1779..................................  Lead, pmkr, transvenous VDD.
C1785..................................  Pmkr, dual, rate-resp.
C1786..................................  Pmkr, single, rate-resp.
C1813..................................  Prostheses, penile, inflatab.
C1815..................................  Pros, urinary sph, imp.

[[Page 45369]]


C1820..................................  Generator, neuro, rechg bat
                                          sys.
C1882..................................  AICD, other than sing/dual.
C1891..................................  Infusion pump, non-prog, perm.
C1895..................................  Lead, AICD, endo dual coil.
C1896..................................  Lead, AICD, non sing/dual.
C1897..................................  Lead, neurostim, test kit.
C1898..................................  Lead, pmkr, other than trans.
C1899..................................  Lead, pmkr/ACID combination.
C1900..................................  Lead coronary venous.
C2619..................................  Pmkr, dual, non rate-resp.
C2620..................................  Pmkr, single, non rate-resp.
C2621..................................  Pmkr, other than sing/dual.
C2622..................................  Prosthesis, penile, non-inf.
C2626..................................  Infusion pump, non-prog, temp.
C2631..................................  Rep dev, urinary, w/o sling
L8614..................................  Cochlear device/system.
------------------------------------------------------------------------


  Table 4.--Adjustments to APCs in Cases of Devices Reported Without Cost or for Which Full Credit Is Received
----------------------------------------------------------------------------------------------------------------
                                                                                                  CY 2007 offset
                 APC                           SI                     APC group title             amt. (percent)
----------------------------------------------------------------------------------------------------------------
0039.................................  S                  Level I Implantation of                          78.85
                                                           Neurostimulator.
0040.................................  S                  Percutaneous Implantation of                     54.06
                                                           Neurostimulator Electrodes, Excluding
                                                           Cranial Nerve.
0061.................................  S                  Laminectomy or Incision for                      60.06
                                                           Implantation of Neurostimulator
                                                           Electrodes, Excluded.
0089.................................  T                  Insertion/Replacement of Permanent               77.11
                                                           Pacemaker and Electrodes.
0090.................................  T                  Insertion/Replacement of Pacemaker               74.74
                                                           Pulse Generator.
0106.................................  T                  Insertion/Replacement/Repair of                  41.88
                                                           Pacemaker and/or Electrodes.
0107.................................  T                  Insertion of Cardioverter-                       90.44
                                                           Defibrillator.
0108.................................  T                  Insertion/Replacement/Repair of                  77.75
                                                           Cardioverter-Defibrillator Leads.
0222.................................  T                  Implantation of Neurological Device...           77.65
0225.................................  S                  Implantation of Neurostimulator                  79.04
                                                           Electrodes, Cranial.
0227.................................  T                  Implantation of Drug Infusion Devices.           80.27
0229.................................  T                  Transcatheter Placement of                       46.17
                                                           Intravascular Shunts.
0259.................................  T                  Level IV ENT Procedures...............           84.61
0315.................................  T                  Level II Implantation of                         76.03
                                                           Neurostimulator.
0385.................................  S                  Level I Prosthetic Urological                    83.19
                                                           Procedures.
0386.................................  S                  Level II Prosthetic Urological                   61.16
                                                           Procedures.
0418.................................  T                  Insertion of Left Ventricular Pacing             87.32
                                                           Elect..
0654.................................  T                  Insertion/Replacement of a Permanent             77.35
                                                           Dual Chamber Pacemaker.
0655.................................  T                  Insertion/Replacement/Conversion of a            76.59
                                                           Permanent Dual Chamber Pacemaker.
0680.................................  S                  Insertion of Patient Activated Event             76.40
                                                           Recorders.
0681.................................  T                  Knee Arthroplasty.....................           73.37
----------------------------------------------------------------------------------------------------------------

If the APC to which the device code (i.e., one of the codes in Table 3 
above) is assigned is on the APCs listed in Table 4 above, the 
unadjusted payment rate for the procedure APC will be reduced by an 
amount equal to the percent in Table 4 times the unadjusted payment 
rate. The actual adjustments can be viewed on the CMS Web site.
    In cases in which the device is being replaced without cost, the 
hospital will report a token device charge. However, if the device is 
being inserted as an upgrade, the hospital will report the difference 
between its usual charge for the device being replaced and the credit 
for the replacement device. Multiple procedure reductions would also 
continue to apply even after the APC payment adjustment to remove 
payment for the device cost, because there would still be the expected 
efficiencies in performing the procedure if it was provided in the same 
operative session as another surgical procedure. Similarly, if the 
procedure was interrupted before administration of anesthesia (i.e., 
there was a modifier 52 or 73 on the same line as the procedure), a 50 
percent reduction would be taken from the adjusted amount.
     Coding and Payment of Emergency Department Visits. The 
following five Type B emergency department G-codes have been 
established for emergency departments meeting the definition of a 
dedicated emergency department (DED) under the Emergency Medical 
Treatment and Labor Act (EMTALA) regulations in 42 CFR Sec.  489.24, 
but which are not Type A emergency departments (i.e., they may meet the 
DED definition but are not available 24 hours a day, 7 days a week).

[[Page 45370]]



     Table 5.--CY 2007 Final HCPCS Codes To Be Used To Report Emergency Department Visits Provided in Type B
                                              Emergency Departments
----------------------------------------------------------------------------------------------------------------
              HCPCS code                   Short descriptor                      Long descriptor
----------------------------------------------------------------------------------------------------------------
G0380................................  Level 1 hosp type B      Level 1 hospital emergency department visit
                                        visit.                   provided in a Type B emergency department. (The
                                                                 ED must meet at least one of the following
                                                                 requirements: (1) It is licensed by the State
                                                                 in which it is located under applicable State
                                                                 law as an emergency room or emergency
                                                                 department; (2) It is held out to the public
                                                                 (by name, posted signs, advertising, or other
                                                                 means) as a place that provides care for
                                                                 emergency medical conditions on an urgent basis
                                                                 without requiring a previously scheduled
                                                                 appointment; or (3) During the calendar year
                                                                 immediately preceding the calendar year in
                                                                 which a determination under this section is
                                                                 being made, based on a representative sample of
                                                                 patient visits that occurred during that
                                                                 calendar year, it provides at least one-third
                                                                 of all of its outpatient visits for the
                                                                 treatment of emergency medical conditions on an
                                                                 urgent basis without requiring a previously
                                                                 scheduled appointment.).
G0381................................  Level 2 hosp type B      Level 2 hospital emergency department visit
                                        visit.                   provided in a Type B emergency department. (The
                                                                 ED must meet at least one of the following
                                                                 requirements: (1) It is licensed by the State
                                                                 in which it is located under applicable State
                                                                 law as an emergency room or emergency
                                                                 department; (2) It is held out to the public
                                                                 (by name, posted signs, advertising, or other
                                                                 means) as a place that provides care for
                                                                 emergency medical conditions on an urgent basis
                                                                 without requiring a previously scheduled
                                                                 appointment; or (3) During the calendar year
                                                                 immediately preceding the calendar year in
                                                                 which a determination under this section is
                                                                 being made, based on a representative sample of
                                                                 patient visits that occurred during that
                                                                 calendar year, it provides at least one-third
                                                                 of all of its outpatient visits for the
                                                                 treatment of emergency medical conditions on an
                                                                 urgent basis without requiring a previously
                                                                 scheduled appointment.).
G0382................................  Level 3 hosp type B      Level 3 hospital emergency department visit
                                        visit.                   provided in a Type B emergency department. (The
                                                                 ED must meet at least one of the following
                                                                 requirements: (1) It is licensed by the State
                                                                 in which it is located under applicable State
                                                                 law as an emergency room or emergency
                                                                 department; (2) It is held out to the public
                                                                 (by name, posted signs, advertising, or other
                                                                 means) as a place that provides care for
                                                                 emergency medical conditions on an urgent basis
                                                                 without requiring a previously scheduled
                                                                 appointment; or (3) During the calendar year
                                                                 immediately preceding the calendar year in
                                                                 which a determination under this section is
                                                                 being made, based on a representative sample of
                                                                 patient visits that occurred during that
                                                                 calendar year, it provides at least one-third
                                                                 of all of its outpatient visits for the
                                                                 treatment of emergency medical conditions on an
                                                                 urgent basis without requiring a previously
                                                                 scheduled appointment.).
G0384................................  Level 4 hosp type B      Level 4 hospital emergency department visit
                                        visit.                   provided in a Type B emergency department. (The
                                                                 ED must meet at least one of the following
                                                                 requirements: (1) It is licensed by the State
                                                                 in which it is located under applicable State
                                                                 law as an emergency room or emergency
                                                                 department; (2) It is held out to the public
                                                                 (by name, posted signs, advertising, or other
                                                                 means) as a place that provides care for
                                                                 emergency medical conditions on an urgent basis
                                                                 without requiring a previously scheduled
                                                                 appointment; or (3) During the calendar year
                                                                 immediately preceding the calendar year in
                                                                 which a determination under this section is
                                                                 being made, based on a representative sample of
                                                                 patient visits that occurred during that
                                                                 calendar year, it provides at least one-third
                                                                 of all of its outpatient visits for the
                                                                 treatment of emergency medical conditions on an
                                                                 urgent basis without requiring a previously
                                                                 scheduled appointment.).
G0385................................  Level 5 hosp type B      Level 5 hospital emergency department visit
                                        visit.                   provided in a Type B emergency department. (The
                                                                 ED must meet at least one of the following
                                                                 requirements: (1) It is licensed by the State
                                                                 in which it is located under applicable State
                                                                 law as an emergency room or emergency
                                                                 department; (2) It is held out to the public
                                                                 (by name, posted signs, advertising, or other
                                                                 means) as a place that provides care for
                                                                 emergency medical conditions on an urgent basis
                                                                 without requiring a previously scheduled
                                                                 appointment; or (3) During the calendar year
                                                                 immediately preceding the calendar year in
                                                                 which a determination under this section is
                                                                 being made, based on a representative sample of
                                                                 patient visits that occurred during that
                                                                 calendar year, it provides at least one-third
                                                                 of all of its outpatient visits for the
                                                                 treatment of emergency medical conditions on an
                                                                 urgent basis without requiring a previously
                                                                 scheduled appointment.).
----------------------------------------------------------------------------------------------------------------

    The use of these G-codes, along with the following redefinition of 
a Type A emergency department, will serve as a vehicle to capture 
median cost and resource differences among visits to Type A emergency 
departments, Type B emergency departments and clinics. A new G-code 
(G0390--Trauma response team activation associated with hospital 
critical care services) was also created (effective January 1, 2007) to 
be used in addition to CPT codes 99291 and 99292 to address the 
meaningful cost difference between critical care when billed with and 
without trauma activation. If critical care is provided without trauma 
activation, the hospital will bill with either CPT 99291 or 99292, 
receiving payment for APC 0617 with a median cost of $402.67. However, 
if trauma activation occurs, the hospital would be allowed to bill one 
unit of G-code (G0390), reported with revenue code 68x on the same date 
of service, thereby receiving $491.66 under APC 0618. Hospitals will 
continue to bill CPT codes for both clinic and Type A Emergency 
department visits until national guidelines have been established.
    The above CPT E/M codes and other HCPCS codes currently assigned to 
the clinic visit APCs have been mapped in Table 6 to eleven new APCs; 
five for clinic visits; five for emergency department visits; and one 
for critical care services, based on median costs and clinical 
consideration.

[[Page 45371]]



Table 6.--Assignment of CPT E/M Codes and Other HCPCS Codes to New Visit
                            APCs for CY 2007
------------------------------------------------------------------------
                                CY 2007
      CY 2007 APC title           APC      HCPCS      Short descriptor
------------------------------------------------------------------------
Level 1 Hospital Clinic            0604     92012  Eye exam, established
 Visits.                                    99201   pat.
                                            99211  Office/outpatient
                                            G0101   visit, new (Level
                                            G0245   1).
                                                   Office/outpatient
                                                    visit, est (Level
                                                    1).
                                                   CA screen; pelvic/
                                                    breast exam.
                                                   Initial foot exam pt
                                                    lops.
                               ........     G0241  Office consultation
                                                    (Level 1).
                               ........     G0271  Confirmatory
                                                    consultation (Level
                                                    1).
                               ........     G0264  Assmt otr CHF, CP,
                                                    asthma.
Level 2 Hospital Clinic            0605     92002  Eye exam, new
 Visits.                                    92014   patient.
                                            99202  Eye exam and
                                            99212   treatment.
                                            99213  Office/outpatient
                                                    visit, new (Level
                                                    2).
                                                   Office/outpatient
                                                    visit, est (Level
                                                    2).
                                                   Office/outpatient
                                                    visit, est (Level
                                                    3).
                               ........     99243  Office consultation
                                                    (Level 3).
                               ........     99242  Office consultation
                                                    (Level 2).
                               ........     99273  Confirmatory
                                                    consultation (Level
                                                    3).
                               ........     99272  Confirmatory
                                                    consultation (Level
                                                    2).
                               ........     99431  Initial care, normal
                                                    newborn.
                               ........     G0246  Follow-up eval of
                                                    foot pt lop.
                               ........     G0344  Initial preventive
                                                    exam.
Level 3 Hospital Clinic            0606     92004  Eye exam, new
 Visits.                                    99203   patient.
                                            99214  Office/outpatient
                                            99274   visit, new (Level
                                            99244   3).
                                                   Office/outpatient
                                                    visit, est (Level
                                                    4).
                                                   Confirmatory
                                                    consultation (Level
                                                    4).
                                                   Office consultation
                                                    (Level 4).
Level 4 Hospital Clinic            0607     99204  Confirmatory
 Visits.                                    99215   consultation (Level
                                            99245   1).
                                            99275  Office/outpatient
                                                    visit, est (Level
                                                    5).
                                                   Office consultation
                                                    (Level 5).
                                                   Confirmatory
                                                    consultation (Level
                                                    5).
Level 5 Hospital Clinic            0608     99205  Office/outpatient
 Visits.                                    G0175   visit, new (Level
                                                    5).
                                                   OPPS service, sched
                                                    team conf.
Level 1 Type A Emergency           0609     99281  Emergency department
 Visits.                                            visit.
Level 2 Type A Emergency           0613     99282  Emergency department
 Visits.                                            visit.
Level 3 Type A Emergency           0614     99283  Emergency department
 Visits.                                            visit.
Level 4 Type A Emergency           0615     99284  Emergency department
 Visits.                                            visit.
Level 5 Type A Emergency           0616     99285  Emergency department
 Visits.                                            visit.
Critical Care................      0617     99291  Critical care, first
                                                    hour.
------------------------------------------------------------------------

     Inpatient Only Procedures. The inpatient list on TMA's 
OPPS Web site at http://www.tricare.mil/opps specifies those services 

that are only paid when provided in an inpatient setting because of the 
nature of the procedure, the need for at least 20 hours of 
postoperative recovery time or monitoring before the patient can be 
safely discharged, or the underlying physical condition of the patient. 
The following criteria will be used when reviewing procedures to 
determine whether or not they should be moved from the inpatient list 
and assigned to an APC group for payment under OPPS: (1) Most 
outpatient departments are equipped to provide the services to the 
TRICARE population; (2) the simplest procedure described by the code 
may be performed in most outpatient departments; (3) the procedure is 
related to codes that have already been removed from the inpatient 
list; (4) the procedure is being performed in numerous hospitals on an 
outpatient basis; and (5) the procedure can be appropriately and safely 
performed in an ASC. While it is anticipated that TRICARE will be 
following the Medicare inpatient listing fairly closely, there may be 
occasions where, upon medical review, it is found that a particular 
inpatient procedure can be provided safely in an outpatient setting due 
to TRICARE's younger, healthier beneficiary population. These 
procedures will be removed from the TRICARE inpatient listing and will 
be assigned to either an existing or new APC group based on their 
median costs.
    If a patient was not admitted as an inpatient, and the procedure 
designated as an inpatient-only procedure (by OPPS payment status 
indicator ``C'') was performed to resuscitate or stabilize a patient 
with an emergency, life-threatening condition and the patient dies 
before being admitted as an inpatient, the hospital would bill for 
payment under the OPPS for the services that were furnished on that 
date and included modifier--``CA'' on the line with the HCPCS code for 
the inpatient procedures. Payment for all services other than the 
inpatient procedure designated under OPPS by status indicator ``C'', 
furnished on the same date, would be bundled into a single payment 
under APC 0375 (Ancillary Outpatient Services the Patient Expires) 
whose CY 2007 median cost is $3,539.
     Partial Hospitalization Services. Partial hospitalization 
services are those services furnished by TRICARE-authorized partial 
hospitalization programs and authorized mental health providers for the 
active treatment of a mental disorder. All services must follow a 
medical model and patient care must be under the general direction of a 
licensed psychiatrist employed by the partial hospitalization program 
to ensure medication and physical needs of all the patients are 
considered. The OPPS established per diem payment for both half- and 
full-day partial hospitalization represents the hospital's costs for 
overhead, support staff and the services of clinical social workers 
(CSWs) and occupational therapists (OTs). For SUDRFs, the cost of 
alcohol and additional counselor services would also be included in the 
PHP per diem.

[[Page 45372]]

However, the OPPS does not include the cost of services for physicians, 
clinical psychologists, and psychiatric nurse practitioners (NPs), 
which will continue to be billed separately for covered mental health 
services. In order to receive payment under OPPS, the hospital must use 
specific HCPCS and revenue codes and report partial hospitalization 
services under bill type 13X, along with condition code 41 on the UB-04 
(HCFA 1450 claim form). The claim must also include a mental health 
diagnosis and an authorization on file for each day of service, along 
with a designated H-code (i.e., either H0035 for half-day PHP or H0037 
for full-day PHP) and its accompanying revenue code, prior to assigning 
a half-or full-day partial hospitalization APC. Specific therapy codes 
(e.g., coding for family, group and individual psychotherapy) will be 
reported in addition to the designated partial hospitalization codes 
H0035 and H0037 and will be packaged into a single PHP code for the 
same date of service, with the exception of electroconvulsive therapy 
(ECT). Claims that do not meet the above criteria (e.g., claims filed 
without condition code 41, appropriate H-coding--H0035 or H0037, and/or 
revenue code) will undergo further payment review to ensure that 
outpatient mental health procedures do not exceed the full-day partial 
hospitalization per diem amount; i.e., the sum of the individual mental 
health APC amounts on any particular day does not exceed the full-day 
partial hospitalization per diem amount. The half-day PHP per diem (APC 
T0001) will be priced at 75 percent of the full-day APC (0033) amount 
of $233.37 for CY 2007. Free-standing psychiatric partial 
hospitalization services will continue to be reimbursed the all-
inclusive PHP per diem rates as established under 32 CFR 
199.14(a)(2)(ix), subject to their own unique mental health copayment/
cost-sharing provisions.
     Separate Payment for Observation Stays. Observation care 
is a well-defined set of specific, clinically appropriate services that 
include short-term treatment, assessment and reassessment before a 
decision can be made regarding whether patients will require further 
treatment as hospital inpatients, or if they are able to be discharged 
from the hospital. The determination of whether or not observation 
services are separately payable under APC 0339 (observation) has been 
shifted from the hospital billing department to the OPPS claims 
processing logic using two HCPCS codes (i.e., G0378--Hospital 
observation services per hour, and G0379--Direct admission of patient 
for hospital observation care). These HCPCS codes will be assigned 
status indicator ``Q'' (package service subject to separate payment 
based on criteria) that will trigger the OCE logic during the 
processing of the claim to determine if the observation service or 
direct admission service is packaged with the other separately payable 
hospital services provided, or if a separate APC payment for 
observation services or direct admission to observation is appropriate. 
Following are the criteria that must be met in order to receive 
separate payment under APC 0039: (1) The beneficiary must have one of 
four medical conditions--congestive heart failure, chest pain, asthma, 
or maternity--as documented by specific ICD-9-CM diagnosis codes; (2) 
the number of units reported with HCPCS code G0378 must be equal to or 
exceed 8 hours for observation stays with diagnoses of chest pain, 
asthma or congestive heart failure and a minimum of 4 hours for 
maternity observation services; (3) an emergency department visit, 
clinic visit, critical care visit, or direct admission to observation 
services using HCPCS code G037 must be provided on the same day as, or 
the day before the observation except for maternity observation stays; 
(4) ongoing physician evaluation must be provided. The FY 2007 median 
cost for the observation APC 0339 is $442.81.
    Direct admissions to observation will continue to be paid at a rate 
equal to that of a Level 1 Clinic Visit (APC 0604) with a CY 2007 
median cost of $50.37 when a beneficiary is seen by a physician in the 
community and then is directly admitted into a hospital outpatient 
department for observation care that does not qualify for separate 
payment under APC 0039, or under T00020. In order to receive separate 
payment for a direct admission into observation (APC 0604), the claim 
must show: (1) Both HCPCS codes G0378 (Hourly Observation) and G0379 
(Direct Admit to Observation) with the same date of service; (2) that 
there are no services with status indictor ``T'' or ``V'' (clinic or 
emergency department visit) or critical care (APC 0620) provided on the 
same day of service as HCPCS code G0379; and (3) that the observation 
care does not qualify for separate payment under APC 0339.
    If the period of observation spans more than one calendar day, 
hospitals should include all of the hours for the entire period of 
observation on a single line and enter as the date of service for that 
line the date the patient is admitted to observation. Also, if there 
are multiple maternity observation stays on the same day without 
condition code G0 or 27 to indicate that the visits were distinct and 
independent of each other, the first listed observation stay will be 
paid and the rest will be denied.
     Payment for Brachytherapy Sources. In accordance with 
section 1833(t)(2)(H) of the Social Security Act, brachytherapy sources 
are being paid separately under their own service groups (APCs) 
reflecting the number, isotope, and radioactive intensity of the 
devices of brachytherapy furnished, including separate groups for 
palladium-103 and iodine-125 devices. The payment for devices of 
brachytherapy based on hospitals' charges, adjusted to costs as 
prescribed under section 1833(t)(16)(C) of the Social Security Act, has 
been extended under the Tax Relief and Health Care Act of 2006 to 
January 1, 2008. As a result, brachytherapy sources will continue to be 
assigned to status indicator ``H'' and will not be eligible for outlier 
payments in CY 2007. The codes for the CY 2007 separately paid sources, 
long descriptors and APCs are listed in Table 7 below:

             Table 7.--Separately Paid Brachytherapy Sources With Long Descriptors and Assigned APCs
----------------------------------------------------------------------------------------------------------------
             CPT/ HCPCS                              Long descriptor                         SI           APC
----------------------------------------------------------------------------------------------------------------
A9527..............................  Iodine 1-125, sodium iodide solution,            H                     2632
                                      therapeutic, per millicurie.
C1716..............................  Brachytherapy source, Gold 198, per source.....  H                     1716
C1717..............................  Brachytherapy source, High Dose Rate Iridium     H                     1717
                                      192, per source.
C1718..............................  Brachytherapy source, Iodine 125, per source...  H                     1718
C1719..............................  Brachytherapy source, Non-High Dose Rate         H                     1719
                                      Iridium 192, per source.
C1720..............................  Brachytherapy source, Palladium 103, per source  H                     1720
C2616..............................  Brachytherapy source, Yttrium-90, per source...  H                     2616
C2632..............................  (See note below)...............................  D                .........

[[Page 45373]]


C2633..............................  Brachytherapy source, Cesium-131, per source...  H                     2633
C2634..............................  Brachytherapy source, High Activity, Iodine-     H                     2634
                                      125, greater than 1.01 mCi (NIST), per source.
C2635..............................  Brachytherapy source, High Activity, Palladium-  H                     2635
                                      103, greater than 2.2 mCi (NIST), per source.
C2636..............................  Brachytherapy linear source, Palladium-103, per  H                     2636
                                      1MM.
C2637..............................  Brachytherapy source, Ytterbium-169, per source  H                    2637
----------------------------------------------------------------------------------------------------------------
Note.--C2632 has been deleted and replaced by A9527, effective January 1, 2007.

     APC for Vaginal Hysterectomy. When billing for vaginal 
hysterectomies, hospitals must use procedure 58260, which will be 
assigned to APC 0202.
     New Technology APCs. A process has also been developed 
that will recognize new technologies that do not otherwise meet the 
definition of current orphan drugs, or current cancer therapy drugs and 
biologicals and brachytherapy, or current radiopharmaceutical drugs and 
biological products, and which are considered a covered benefit under 
TRICARE. In contrast to the other APC groups, the new technology APC 
groups do not take into account clinical aspects of the services they 
are to contain, but only their costs. This process, along with 
transitional pass-throughs, will provide additional payment for a 
significant share of new technologies. New items and services will be 
assigned to new technology APCs when it is determined that they cannot 
appropriately be placed into existing APC groups. The new technology 
APC groups have established payment rates based on the midpoint of 
ranges of possible costs providing a mechanism for initiating payment 
at an appropriate level within a relatively short timeframe. The cost 
bands for New Technology APCs range from: $0 to $50, in increments of 
$10; $50 to $100, in increments of $50; $100 to $2,000, in increments 
of $100; and $2,000 to $6,000, in increments of $500. These increments 
which are in two parallel sets of New Technology APCs--one with status 
indictor ``S'' and the other with ``T,''--allow assignment to the same 
APC group procedures that are appropriately subject to a multiple 
procedure payment reduction (T) with those that should not be 
discounted (S).
     Coding Requirement for Reimbursement Under TRICARE OPPS. 
To receive TRICARE reimbursement under OPPS, providers must follow, and 
contractors shall enforce, all Medicare specific coding requirements. 
TRICARE Management Activity (TMA) will develop specific APCs (those 
APCs beginning with a ``T'') for those services that are unique to the 
TRICARE beneficiary population (e.g., those TRICARE specific APCs for 
half-day partial hospitalization program (PHP) services and maternity 
observation stays).

VI. OPPS Reimbursement Methodology

     General Overview. Under the TRICARE OPPS, hospital 
outpatient services are paid on a rate-per-services basis that varies 
according to the APC group to which the service is assigned. The APC 
classification system is composed of groups of services that are 
comparable clinically and with respect to the use of resources. Level 1 
(CPT) and Level II HCPCS codes and descriptors are used to identify and 
group the services within each APC. Costs associated with items or 
services that are directly related and integral to performing a 
procedure or furnishing a service have been packaged into each 
procedure or service within an APC group with the exception of: (1) New 
temporary technology APCs for certain approved services that are 
structured based on cost rather than clinical homogeneity; and (2) 
separate APCs for certain medical devices, drugs, biologicals, 
radiopharmaceuticals and devices of brachytherapy under transitional 
pass-through provisions. TRICARE is adopting Medicare's classification 
system, along with its nationally established APC payment amounts as 
prescribed in section 1833(t) of the Social Security Act and in its 
accompanying Medicare regulation (42 CFR part 419) for reimbursement of 
hospital outpatient services, to the extent practicable, in accordance 
with 10 U.S.C. 1079(j)(2), with the realization that there will be 
subtle differences occurring between the TRICARE and Medicare OPPS 
methodologies based on differences in the age and general health of the 
populations they serve (i.e., it can be assumed that the TRICARE 
population is younger and healthier than the population being served by 
Medicare). For example, TRICARE has already found it necessary to 
develop two new TRICARE specific APCs, one for maternity observation 
stays (T0002) and the other for a half-day partial hospitalization 
program (T001) to accommodate its unique benefit structure and 
beneficiary population. There may also be subtle differences in the 
inpatient only procedure listings being maintained by the two programs 
since some of the Medicare inpatient only procedures may be determined 
by TRICARE, upon medical review, to be safe for administration in an 
outpatient setting due to its younger, healthier population. This may 
require the development of additional APC groups, along with nationally 
established payment amounts based on their median costs from the 
previous year's claims history.
    The payment rate for each APC is calculated by multiplying the 
APC's relative weight by the conversions factor. Weights are derived 
based on median hospital costs for services/procedures assigned to the 
hospital outpatient APC groups. Billed charges for items integral to 
performing the major procedure or visit; which include packaged HCPCS 
codes (i.e., codes with SI = ``N'') and revenue codes appearing on the 
same claim, are converted to costs by multiplying each revenue center 
charge by the appropriate hospital-specific CCR. Centers for Medicare 
and Medicaid Services (CMS) currently use a four-tiered hierarchy of 
cost center CCRs to match a cost center to every possible revenue code 
appearing in the outpatient claims, with the top tier being the most 
common cost center and the lowest tier being the default CCR. If a 
hospital's cost CCR was deleted by trimming, another cost center CCR in 
the revenue hierarchy can be applied. If no other department CCR can be 
applied to the revenue code on the claim, CMS uses the hospital's 
overall CCR for the revenue code.
    The costs of the above services/procedures are then standardized 
for geographic wage variations by dividing the labor-related portion of 
the operating and capital costs (currently estimated at 60 percent on 
the average for each billed item) by the hospital inpatient prospective 
payment system (IPPS) wage index. The standardized labor-related cost 
and the nonlabor-

[[Page 45374]]

related cost component for each billed item are summed to derive the 
total standardized cost for each separately payable HCPCS code. Extreme 
costs outside three standard deviations from the geometric mean will be 
eliminated prior to calculating the median cost for each separately 
payable HCPCS code. The median costs of these procedures will then be 
mapped to their assigned APCs, and the median costs of those assigned 
procedures will be used in establishing the overall APC median cost.
    The relative payment weights are calculated for each APC by 
dividing the median cost of each APC by the median cost for APC 0606 
(Level 3 Clinic Visit), which is $83.88 for CY 2007, as a 
reconfiguration of the visit APCs. APC 0606 was chosen in order to 
maintain consistency in using a median for calculating unscaled weights 
representing the median cost of some of the most frequently provided 
services. The relative payment weights were further adjusted by 
1.364598352 for budget neutrality, based on a comparison of aggregate 
payments using CY 2006 relative weights to aggregate payments using the 
CY 2007 final relative weights.
    The other component used in establishing national APC payment 
amounts is the conversion factor, updated on an annual basis in 
accordance with section 1833(t)(3)(C)(iv) of the Social Security Act, 
which provides for CY 2007 an updated amount equal to the hospital 
inpatient market basket percentage increase applicable to hospital 
discharges under section 1886(b)(3)(B)(iii) of the Act. The market 
basket increase updated factor of 3.4 percent for CY 2007, along with 
the required wage index budget neutrality adjustment of approximately 
0.999331979, the adjustment of 0.04 percent for the difference in the 
pass-through set-aside, and the adjustment for the rural payment 
adjustment for rural SCHs (including EACHs) of 0.999975941, resulted in 
a standard conversion factor for CY 2007 of $61.468.
    The national unadjusted APC payment rates that were calculated by 
multiplying the CY 2007 scaled weight for each APC by the final CY 2007 
conversion factor apply to all the services that are classified within 
the APC group. These national rates (i.e., the unadjusted national 
rates for both APCs and the HCPCS to which OPPS payment was assigned) 
are listed on TMA's OPPS Web site at http://www.tricare.mil/opps.

     Determination of Payment. A payment SI is provided for 
every code in the HCPCS to identify how the service or procedure 
described by the code would be paid under the hospital outpatient 
prospective payment system (OPPS); i.e., it indicates if a service 
represented by a HCPCS code is payable under the OPPS or another 
payment system, and also which particular OPPS payment policies apply. 
One, and only one, SI is assigned to each APC and to each HCPCS code. 
Each HCPCS code that is assigned to an APC has the same SI as the APC 
to which it is assigned. Following are the CY 2007 payment status 
indicators, along with a description of the particular services each 
indicator identifies.

      Table 8.--CY 2007 Payment Status Indicators for Hospital OPPS
------------------------------------------------------------------------
          Indicator                Description       OPPS payment status
------------------------------------------------------------------------
A...........................  Services paid under   Not paid under OPPS.
                               some payment method   Paid by contractors
                               other than OPPS       under a fee
                               (e.g., payment for    schedule or payment
                               non-implantable       system other than
                               prosthetic and        OPPS.
                               orthotic devices,
                               DME, ambulance
                               services, and
                               individual
                               professional
                               services).
B...........................  More appropriate      Not paid under OPPS.
                               code required for
                               TRICARE OPPS.
C...........................  Inpatient procedures  Not paid under OPPS.
                                                     Admit patient. Bill
                                                     as inpatient.
E...........................  Items or services     Not paid under OPPS.
                               not covered by
                               TRICARE.
F...........................  Acquisition of        Not paid under OPPS.
                               corneal tissue,       Paid on allowable
                               certain CRNA          charge basis.
                               services and
                               Hepatitis B
                               vaccines.
G...........................  Pass-through drugs    Paid separate APCs
                               and biologicals.      under OPPS.
H...........................  (1) Pass-through      (1) Separate cost-
                               device categories.    based pass-through
                                                     payment; not
                                                     subject to cost-
                                                     share/co-payment.
                              (2) Brachytherapy     (2) Separate cost-
                               sources.              based non-pass-
                                                     through payment.
                              (3)                   (3) Separate cost-
                               Radiopharmaceutical   based non-pass-
                               agents.               through payment.
K...........................  Non-pass-through      Paid separate APCs
                               drugs and             under OPPS.
                               biologicals and
                               blood and blood
                               products.
N...........................  Packaged incidental   Packaged into the
                               items and services.   primary procedure
                                                     APC payment amount
                                                     to which the
                                                     incidental item or
                                                     service is normally
                                                     associated.
P...........................  Partial               Per diem APC
                               hospitalization.      payments for both
                                                     half-day and full-