The Health Care Financing Administration (HCFA) in September 1998 published a proposed rule that likely will alter vastly payment for and delivery of diagnostic imaging services. HCFA’s proposed rule would replace the way Medicare currently reimburses hospitals for outpatient services, including diagnostic imaging services, provided to Medicare beneficiaries with a prospective payment system (PPS). This article summarizes key aspects of this proposed rule and discusses the potential implications of this proposal for providers of diagnostic imaging services.

Whereas hospital inpatient services provided to Medicare beneficiaries have been paid under a PPS since 1983, payments to hospitals for the outpatient services they provide to Medicare beneficiaries have remained largely retrospective and cost-based throughout the 30-year history of the program. Congress has tinkered with payments for certain services, including radiology services. For example, Medicare pays hospitals for most surgical services, most radiology services, and diagnostic tests provided on an outpatient basis using a blend of the hospital-to-firm costs and the amounts payable for the same services provided in freestanding centers; clinical laboratory tests, prosthetics, orthotics, and durable medical equipment are paid on the basis of a fee schedule.


Through the Balanced Budget Act of 1997 (BBA), Congress now has set the wheels in motion to replace all of these reimbursement schemes with a completely prospective payment system. The legislation required the Secretary of the Department of Health and Human Services to develop and implement by January 1, 1999, a PPS for all outpatient services provided by hospitals (except for services furnished by cancer hospitals, which would not be subject to the new payment system until January 1, 2000). In September 1998, HCFA published its proposed new payment system in the Federal Register, but, for reasons explained below, announced that it would not begin making payments under the new system until sometime in the year 2000.

Like the PPS used by Medicare to reimburse hospitals for inpatient services provided to Medicare beneficiaries, the proposed PPS for outpatient procedures also would classify services into numerous payment groups. However, unlike the diagnosis-related groups (DRGs) used to classify inpatient services-which classifies patients based on their principal diagnosis, comorbidities, complications, and age-the outpatient classification methodology, called ambulatory payment classification (APC) groups, seeks to group procedures based on time, type of service, body system involved, and the costs of performing the procedure. HCFA proposes to classify procedures that may be performed on an outpatient basis into 346 distinct APCs.

For each APC code, HCFA determined and assigned a relative payment weight. Payment weights generally are based on 1996 hospital outpatient claims and the most recent available cost reports, mainly from the period October 1994 through September 1995. The payment due a hospital for performing a given outpatient procedure is determined by multiplying the relative payment weight of the APC to which the procedure is assigned by a conversion factor (which for fiscal year 1999, had the system been implemented then, would have been $50.67), a wage index adjustment, and any other adjustments applicable to the hospital. Actual proposed procedure-by-procedure payment rates are provided in the Federal Register notice. However, the chart below provides a sample of proposed payment rates for several commonly billed diagnostic imaging services.

Click to view chart.


One of the most profound implications of this proposed rule is that hospitals, and freestanding imaging centers for that matter, will for the first time know in advance exactly how much a hospital is paid for an imaging service. It presently is very difficult for hospitals and their competitors to know how much a hospital is paid for an outpatient service because the payment remains to some extent based on the hospital’s costs. As the chart indicates, hospitals would be paid more for imaging services than would freestanding facilities in most instances. However, an important distinction must be drawn between what Medicare pays each service site for these services, and what the beneficiary pays.

Perhaps one of the biggest sleeper issues surrounding the proposed PPS for hospitals involves Medicare beneficiary co-payments for hospital outpatient department services. Presently, Medicare beneficiary co-payments are based on 20% of the hospital’s billed charges. The BBA requires a change such that beneficiary co-payment would be based on Medicare payments rather than hospital charges. In other words, Medicare would pay 80% of the APC payment rate and the beneficiary would be responsible for the remaining 20%. However, it may be many years before this 80/20 cost-sharing arrangement is achieved. Because of the budget implications of this change, the 80/20 cost-sharing ratio would be transitioned in gradually over many years. In the interim, beneficiaries would pay significantly more than 20%, often as much as 40%, of the total hospital payment.

In light of this potential burden on Medicare beneficiaries, the proposed rule offers hospitals the option of electing to reduce co-payment amounts to as low as 20% of the APC rate. Hospitals that voluntarily reduce beneficiary co-payments may advertise these reduced rates. Hospitals in competitive markets likely are going to feel obliged to offer beneficiaries such reductions to compete with other area hospitals and freestanding facilities. In many instances the Medicare payment to a hospital plus the 20% beneficiary co-payment may be less than the Medicare payment plus beneficiary co-payment for a service provided in a freestanding facility. In a competitive market the hospital may accept this lower amount, which could make the hospital setting a more attractive service site to the Medicare beneficiary.


In addition to the reimbursement changes described above, HCFA also is considering changes to the rules that govern whether a freestanding unit may be considered provider-based. The changes proposed by HCFA could jeopardize the provider-based status of hundreds of freestanding units.

HCFA is proposing to limit the availability of provider-based status to prevent freestanding centers from converting to provider-based status to take advantage of higher APCs for some services. Specifically, HCFA is proposing to define the terms: department of a provider; freestanding facility; main provider; provider-based entity; and provider-based status. Without endeavoring to define each of the terms in this article, suffice it to say that HCFA proposes definitions that strive to ensure that entities reimbursed under the APCs are operated under the same license and are financially and physically integrated with the hospital. The agency proposes to set the additional stipulation that a facility cannot be considered provider-based if the entity is owned by two or more providers engaged in a joint venture or operated for the hospital by a management company. This provision may affect a number of diagnostic imaging center companies that also manage diagnostic imaging services for hospitals.

Hospitals that presently bill for services provided in ancillary entities as provider-based services should closely review the proposed regulations and evaluate whether their current arrangements would comply. HCFA proposes penalties for providers that inappropriately bill Medicare for services furnished in a physician office or other facility as if they had been furnished in a hospital outpatient department or provider-based entity, including ceasing all payment to the provider for outpatient services until the provider can demonstrate which payments are proper. Providers also could be subject to false claims charges and their attendant penalties.

As noted earlier, the BBA required HCFA to implement the PPS by January 1, 1999. In its September 1998 notice, however, HCFA announced that it could not and would not implement the new payment system on January 1. HCFA blamed the delay on the need to channel agency resources toward correcting its Year 2000 computer problems. HCFA would commit only to implement the new payment system as soon as possible after January 1, 2000. HCFA officials have since revealed in public speeches that the agency hopes to publish a final rule by December 1999, and implement the new PPS by July 2000.

HCFA has extended several times the comment period for these two rules. At press time, comments were officially due on June 30, 1999.

Of course, the reimbursement changes described above pertain only to the Medicare program. However, it should be remembered that private payors often adopt Medicare payment changes, including Medicare payment rates. As such, the reimbursement changes for imaging services likely will be replicated beyond the Medicare program.

Providers and administrators wishing to learn more about these changes are encouraged to contact legal counsel.


Diane S. Millman, JD, and Eric Zimmerman, JD, are attorneys with McDermott, Will & Emery?s Washington, DC, health law practice. Millman sits on the Decisions in Axis Imaging News editorial advisory board.