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Wednesday, October 30th 2002

Thomas A. Scully
The Centers for Medicare & Medicaid Services
200 Independence Avenue, S.W., Room 443-G
Hubert H. Humphrey Building
Washington, DC 20201

Dear Mr. Scully,

The American Hospital Association (AHA), on behalf of our nearly 5,000 hospital, health system, network, and other provider members, strongly urges you not to delay the January 1 implementation of the 2003 Medicare outpatient hospital payment rates, or to make any changes that would dilute the improvements contained in the proposed rule.  These improvements include enhanced payments for basic clinic and emergency department visits and increased funding for rural hospitals.

Although some of the proposed payment rates for 2003 are significantly different from those for the same items and services in 2002, we believe that the 2003 rates and the data on which they are based are more accurate and reliable.  Not only are the 2003 rates based, for the first time, on actual outpatient hospital prospective payment system (OPPS) claims data from 2001, but they also incorporate double the number of hospital claims used to calculate the 2002 rates. 

In fact, the 2002 outpatient hospital payment rates are an aberration.  Last fall, the AHA repeatedly expressed its concern that the Centers for Medicare & Medicaid Services (CMS) did not have the data necessary to appropriately “fold-in” 75 percent of pass-through costs for new technologies to their corresponding ambulatory payment classifications (APC).  CMS has conceded that the 2002 rates were very difficult to determine because of the “75 percent fold-in” of transitional pass-through payments into the base APC rates.  In the preamble of the proposed rule, CMS states:

“The outpatient pass-through provisions of the BBRA [Balanced Budget Refinement Act] and BIPA [Benefits Improvement and Protection Act] have been exceptionally difficult to implement, arguably the most complex and difficult in the history of the Medicare program.  In CY 2002, the pass-through payments, and the APC rates were calculated on the best information available.  This was often manufacturer list prices, which may not reflect actual prices paid by hospitals ….We believe that the payment rates for the device related procedures for 2002 may in some cases have been higher than they would have been had actual hospital acquisition cost data been available for us to use …We assumed that a device would be provided with a related procedure and packaged 75 percent of these manufacturer estimated costs for the devices into the APCs for the procedures.  The costs that we packaged in for some devices may have been higher than actual hospital acquisition cost.”  (August 9, 2002 Federal Register p. 52093-52094)

The costs associated with items on the pass-through list were calculated using manufacturer list price or average wholesale price (AWP) – data that fails to appropriately reflect actual hospital acquisition cost.  Although this information may have been the best available at the time, manufacturer list price overstates the actual price paid by hospitals, and AWP, despite its name, is neither an average nor a price that wholesalers charge.  Hospital payments should be based on hospital data, and we strongly caution CMS not to arbitrarily use confidential, external data sources to supplement hospital payment rates.

Because the 2002 rates were erroneous, creating a “corridor approach” to limit the proposed 2003 changes in outpatient payment for drugs and devices is not the right answer.  It adds yet another layer of complexity to an already complicated and burdensome system and locks into place erroneous payments for certain services.  If CMS moves forward with yet another special payment provision for the treatment of drugs or devices under OPPS, we strongly urge that the corridors be set around the 2001 payment rates, rather than the erroneous 2002 rates. 

Finally, we strongly oppose any delay in implementation of the 2003 outpatient hospital payment rates.  Such a delay would postpone the 3.5 percent annual update for hospitals set for January 1, 2003, and would result in yet another real cut in hospitals’ payments, cause additional administrative and coding burdens, and inhibit the implementation of a number of other important provisions in the rule. 

As the proposed rule is currently written, over 95 percent of all outpatient visits would experience an increase in payment in 2003.  Given that the payment system is budget neutral, any protections offered for certain drugs and devices will come at the expense of payments for all other outpatient services.  In 2002, rural hospitals were projected to see a decline in per case payment of 3.5 percent due to the 75 percent fold-in, and were estimated to experience an overall decrease in per case payments even after a 2.3 percent increase in the update factor. 

We strongly support the use and coverage of quality-enhancing drugs and devices.  However, re-working the payment system to better pay for drugs and devices at the expense of payments for other outpatient services is irrational.  All Medicare outpatient hospital care, not just drugs and devices, is underfunded – Medicare today pays 17 percent less than the cost of care.  We urge you to remember that physicians and hospitals make decisions about patient care based on what is best for the patient, not on what payment Medicare may provide for specific drugs and devices.


Rick Pollack
Executive Vice President


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