The purpose of this article is to give a brief history of Medicare reimbursement and how outpatient services are currently reimbursed.? The article then gives an overview of the 2003 APC regulations focusing on radiology. Finally, the article talks about what corrections need to take place to stay financially viable under the current outpatient reimbursement system.


Medicare has gone through many changes since the inception of the Medicare program in 1965 in regard to how hospitals are reimbursed. From 1965 to 1983, hospitals have been paid on a reasonable cost basis for provider services. Under the Medicare system, cost reimbursement is the best payment and fee schedule reimbursement is the worst. The reason why fee schedule reimbursement is poor is the fact that a hospital is getting paid for services without any consideration for the cost of the services provided. Because hospitals were paid reasonable cost for providing services, there was no incentive to control costs. For example, if Hospital A’s management controlled costs and Hospital B’s management did not, both hospitals would get reimbursed the same amount for the same service provided. The government recognized this disparity and the fact that Medicare expenditures were increasing every year. In 1983 Medicare developed an inpatient payment system called Diagnosis Related Groups (DRGs). The DRG system works to control costs by paying for inpatient services on a prospective basis (fee schedule) for a limited range of services. The Medicare program realized savings from the prospective payment system by setting a fixed payment schedule for services, as opposed to paying providers’ cost or charges and bundling together services, such as medical supplies and drugs, that are associated with a procedure or medical treatment.

In 1984, Medicare started reimbursing outpatient laboratory services based on a fee schedule. This was the first time that hospitals experienced a prospective payment in the outpatient arena. In 1987, outpatient surgical procedures were paid under a group payment system. In 1988, radiology procedures were paid based on Health Care Financing Administration common procedural codes (HCPCS) and cost. In other words it blended cost and fee schedule. Finally, in 1991, all other diagnostic services required HCPCS coding and were subject to a blended amount of cost and fee schedule.

In the 1990s, hospitals were reimbursed for outpatient services under many different reimbursement methodologies. For example, laboratory services and durable medical equipment were paid under a fixed fee schedule, while composite rate payments were used for end-stage renal disease patients, and finally outpatient surgery, radiology, and other diagnostic procedures were paid under different blended rates of cost and fee schedule.

Two major problems stymied government efforts in the ’80s to control costs with DRGs:

  1. Hospital could increase outpatient charges to offset inpatient losses.
  2. Outpatient costs are more difficult to monitor than inpatient costs.

With lengthening life spans continuing to increase the number of Medicare beneficiaries in addition to the problems explained above, the government had to put a new system in place to reduce Medicare expenditures that were increasing at an alarming rate.

Under the Balanced Budget Act of 1997, the Health Care Financing Administration (HCFA) had to implement an Outpatient Prospective Payment System (OPPS). On August 1, 2000, HCFA initiated the new reimbursement system called the Ambulatory Payment Classifications (APCs).


Unlike DRGs, the APC system affects all hospital departments and requires that many individuals be aware of new billing and coding rules. The new requirement under the APCs that identifies all services, supplies, and pharmaceuticals with HCPCS codes significantly raises the level of complexity for billing outpatient services.

APCs are composed of groups of procedures that are comparable clinically and by resource costs. Each APC group is reimbursed at a fixed rate. Payment rates are based on HCPCS codes defined in each group. For example, APC group 0260 contains 89 diagnostic x-ray examinations that are reimbursed at $39.92. A hospital would be reimbursed $39.92 no matter if a single view chest x-ray (HCPCS code 71010) or a two-view chest x-ray (HCPCS code 71020) was performed. APCs apply to services provided in hospital outpatient departments, including: radiology, chemotherapy, surgical procedures, clinic visits, emergency department visits, diagnostic services, partial hospitalization, and surgical pathology. Services not covered under the APCs are those already paid under a prospective payment system (fee schedule) such as laboratory, outpatient therapies, ambulance services, and physician services.

A major difference between DRGs and APCs is that in the DRG system a patient is assigned a single DRG for payment, but under APCs every service provided needs to be coded, because each code could trigger an APC payment. Also, hospitals can receive multiple payments for the same APC and separate payments are made for certain new drugs and devices. Instead of paying for services based on the actual individual cost of treating a particular patient, this new prospective payment reimbursement is based on national median cost data adjusted for inflation. This median is then multiplied by a geographic conversion factor to arrive at the APC payment.?

In addition to receiving an APC group payment for a service provided, a hospital can also receive supplemental payments. The supplemental payments come in two forms:

  1. Outlier payments: Special payments provision that compensates hospitals for cases that are especially costly compared to the average cost of the same type cases. In 2003, an outlier payment will be made if the cost of providing a service exceeds 2.75 times the APC payment for the service, and the amount of the outlier payment will be 45% of the amount by which the provider’s cost exceeds 2.75 times the APC payment.
  2. Transitional corridor payments: Special payment provision in effect through 2003, designed to limit the decline in hospital payments under APCs. Additional payments depend on the difference between the hospital’s payments under APCs and the hospital’s Medicare payments in 1996. It is important to note that beginning in 2004 this provision will no longer exist.

APCs are effective because they control costs using the following three methods:

  1. Bundling of related procedures or incidental services. For example, when HCPCS code 73615 (radiologic examination, ankle, arthrography) is performed, HCPCS code 27648 (injection procedure for ankle arthrography) is also performed. Both HCPCS codes are billed but only HCPCS 73615 is reimbursed. HCPCS code 27648 is a related procedure and is bundled into the reimbursement of HCPCS 73615.
  2. Ancillary packaging. For example, the cost of drugs, pharmaceuticals, biologicals, and supplies is packaged into the APC payment rate for the primary procedure or treatment. Additional payment will be made for expensive drugs and supplies when appropriate.
  3. Discounting. This is a Medicare policy of paying a reduced amount for multiple surgical services conducted during the same operative session or when a procedure is terminated prior to completion. Currently, there are more than 3,000 services subject to discounting.

The methods used above are powerful tools in controlling costs under APCs.


In order to develop a correct APC- weighted payment for a procedure, the cost must be calculated for the hospital to perform a certain procedure; this includes the cost of drugs, medical devices, and biologicals that may be used in the respective procedures. There was concern that the data used to create the APC groups did not include sufficient hospital cost data to determine the appropriate cost for certain drugs and devices. Before the implementation of APCs in 2000, additional payments would be provided for certain drugs, biologicals, and devices. These temporary additional payments are called transitional pass-through payments.

  • Transitional pass-through payments for devices are based on categories of devices. The additional payment for devices is the difference between the amount attributed to the device in the APC payment rate for the procedure and the hospital’s cost for the device.
  • Transitional pass-through payments for drugs are paid for each qualifying drug separately. The additional payment for drugs is the difference between the estimated acquisition price for the drug and 95% of the average wholesale price of the drug.

The items specified by law are the following:

  • Current orphan drugs
  • Current drugs, biologic agents, and brachytherapy devices used for the treatment of cancer
  • Current radiopharmaceutical drugs and biological products
  • New medical devices, drugs, and biologic agents

The term “current” refers to items for which Medicare was paying hospital-based outpatient departments at the time the prospective payment system was implemented. “New” items are those that were first paid for after the start of the system. The Center for Medicare & Medicaid Services (CMS) accepts applications for transitional pass-through status for new items on a quarterly basis. To qualify, an item must be new, make a substantial medical improvement, and have costs that are “not insignificant” compared with payments that would otherwise be made.

Specific items qualify for transitional pass-through for only a limited period of time. By law, items may receive pass-through payments for between 2 and 3 years. Once an item no longer qualifies for pass-through payments, CMS incorporates the payment for that item into the APC payment for the procedure for which it is associated.


By law the APC regulations and reimbursement change every year. The 2003 rates will be based on approximately 50 million claims for services paid under the OPPS and provided from January 1, 2001, through December 31, 2001. This year will be the first time that CMS will use claims submitted after the implementation of the OPPS to revise rates. Overall in 2002, total estimated Hospital Outpatient Prospective Payment System (HOPPS) expenditures were $17.7 billion. Estimated expenditures for 2003 are expected to be more than $18.7 billion. Overall payments will increase by 3.7% in 2003. For 2003, there will be 569 APC groups in the OPPS.

One of the biggest changes for 2003 is the expiration of pass-through payments for drugs and medical devices; 95 of 97 device categories will be removed from pass-through status in 2003. CMS is not granting any grace period on the 89 pass-through item C-codes (C1713-C2631) that will be deleted January 1, 2003. If these items are billed, the claim will be returned unpaid. The costs for devices will be packaged into the APCs for which they are used. Approximately 233 drugs and biologicals that received transitional pass-through payments in 2001 and 2002 are losing eligibility for pass-through payments in 2003. The break-down is as follows:

  • 118 of these products will be rolled into the APC payment for the procedures in which they are used.
  • 115 drugs that have costs greater than $150 per encounter will be paid in separate APCs.

All expiring pass-through drugs, multi-indication orphan drugs, and single source drugs that are not new will be included in one of these two categories for 2003.

Here are some of the highlights for 2003 for radiology:

  • It is necessary to bill HCPCS code G0236 (digital film converted to digital images for diagnostic mammography) when standard film images are converted to digital images. CMS has expanded the code’s definition to include both standard film and digital film. Also HCPCS code 76085 (digitization of film radiographic images with computer analysis for lesion detection) needs to be billed in conjunction with HCPCS code G0236 even though HCPCS 76085 is not separately payable.
  • CMS will start returning claims if add-on procedures and radiologic guidance procedures are billed without the HCPCS code associated with the procedure. An example would be a claim for ultrasound guidance for a biopsy without the code for the biopsy procedure.
  • HCPCS codes 76930 through 76965 (ultrasound guidance procedures) were reimbursed in 2001. In 2002, CMS packaged these codes and they were no longer reimbursed. For 2003, these 10 codes are back and will be reimbursed under APC group 268.
  • Reimbursement increase will take place on five intravascular and intracardiac echocardiography codes. The codes are 37250, 37251, 92978, 92979, and 93662.
  • Another increase takes place for codes 76101 (complex motion [ie, hypercyclodial] body section [eg, mastoid polytomography], other than with urography, unilateral), 70390 (sialography), and 71060 (bronchography, bilateral). They move from APC group 0267 ($82.46) to APC group 0264 ($147.05).
  • HCPCS code 75774 (angiography, selective, each additional vessel) moves from APC group 0279 ($395.52) to new APC group 668 ($538.68). This represents an increase of more than 36%. HCPCS code 75978 (transluminal balloon angioplasty, venous) moves from APC group 0280 ($693.82) to new APC group 668 ($538.68); this is a decrease of almost 29%.
  • Additional decreases in reimbursement for 2003 will be the following:
    1. HCPCS code 75980 (percutaneous transhepatic biliary drainage with contrast) decreases by 52% as it move from APC group 0297 ($361.93) to APC group 0296 ($173.58).
    2. HCPCS code 75984 (change of percutaneous tube or drainage catheter) drops more than $26 in reimbursement as it moves from APC group 0296 ($173.58) to APC group 0264 ($147.05).
    3. Reimbursement falls for echocardiography codes 76827, 76825, and 93320, as they move from APC group 0269 ($197) to new APC group 0671($123.30).
    4. Intracranial study code 93880 will be paid $83.38 (APC group 0266), less than the 2002 reimbursement of $119.12 (APC group 0267).
  • Nuclear medicine HCPCS codes (78000-78999) went through a major overhaul; more than 120 codes got reshuffled into APC groups 0290 through 0292. Reimbursement for all three groups are increased? for 2003.
  • Finally HCPCS code 75954 (endovascular repair of iliac artery aneurysm) is an inpatient-only procedure for 2003; this code joins HCPCS codes 75900, 75952, and 75953 and are not payable under OPPS.

Also for January 1, 2003, low osmolar contrast material (LOCM) HCPCS codes A4644, A4645, and A4646 are no longer billable codes. LOCM is considered a packaged service under the HOPPS and payment for LOCM is included in the APC for the respective diagnostic procedure(s).


We are now entering into our third full year of APCs. Hospitals across the country are still experiencing problems dealing with this new payment system. One of the biggest reasons for this difficulty is the fact that prior to APCs, outpatient reimbursement was driven by charges. In other words, if a hospital did not provide all of the necessary HCPCS codes for the services performed, a reduction in reimbursement usually did not occur because the charges billed were substantive for the services performed. Now, under APCs all services provided must be billed. If a facility does not bill for every service performed, then a reduction in reimbursement will result.

Another fact is that hospitals are not reporting all billable charges. One frequent question from clients is whether it is necessary to bill for items that are packaged or incidental to the procedure. This is a very good question because the reasoning behind it is in the interest of conserving the time and effort it takes to bill for items that do not receive an APC group payment. The answer to this question is a resounding Yes! The importance of every charge submitted is significant because it affects the following outcomes:

  • Total charges submitted by hospitals for each service will be used to set future APC payment rates. As discussed above, by law, CMS has to review prior year data to make adjustments to APC rates. That is why at the beginning of every year we see major changes to the OPPS system in the way of rate increases, decreases, added APC groups, and APC group adjustments. Whether we like it or not, all hospitals are in this together.
  • If hospitals do not submit all covered charges for their outpatient services, it could affect whether they receive an outlier payment.
  • Lastly, the transitional corridor payments can be affected if all charges are not submitted. Note this benefit expires at the end of 2003.


What do we do now? To survive under APCs, the whole hospital has to be involved to assure that all services are being billed and paid properly. The following action plan can be useful in surviving APCs

  1. Education
  2. Charge master review
  3. Modifiers
  4. Medical necessity
  5. Auditing
  6. Cost review


The first step in the action plan is to make sure that all departments of the hospital are aware of what APCs are and the impact of this new reimbursement system. Continually educating the appropriate hospital staff about APCs is a must for hospitals to survive. Education needs to be offered to each department of the hospital and this is usually done best by offering small group interactive sessions. The training offered should be as understandable as possible, the simpler the better. If possible, separate training and education should be offered to physicians so that they understand the complexity of APCs and the financial consequences that APCs can have on a hospital. To be successful under APCs, it is important that everyone has at least a basic understanding of APCs and that the managers of the departments have detailed understanding. Training should occur on an annual basis to coincide with annual APC updates and smaller, more-detailed training sessions should be offered to billing and coding personnel on a regular basis.


A charge master is a price list of all services, supplies, devices, and medications charged for inpatient or outpatient services by a hospital. The primary function of a charge master is to assist a hospital to accurately and efficiently bill for services rendered to the patient. Charge masters can include more than 25,000 or more line items depending on the type of facility.

It is critical that the charge master is reviewed at least on an annual basis, but a quarterly review is preferred. Questions to ask to determine if the charge master has been updated and if a process exists to maintain the charge master include:

  • Is the charge master current? Simple question, but based on my experience this is not always true in most facilities.
  • Have HCPCS codes been reviewed and updated when codes are added, revised, and deleted? HCPCS coding changes are made multiple times throughout the year by CMS.
  • Are clinical department staff and management aware of the specific codes appended to the services or charges they generate? It is critical that clinical personnel are involved in the charge master review process. They bring the expertise on what and how the services are performed in their departments.
  • Are all billable services being captured and maintained on the charge master? It is common to find that a facility may be performing a service that does not exist on the charge master.
  • Are unused charge items housed and maintained unnecessarily in the charge master? It is important to remove charge items that are no longer used by the facility. By maintaining unnecessary items, they can be billed by mistake.

A 100% line-by-line charge master should be reviewed, and the review should examine the following:

  • Identify whether HCPCS codes comply with third-party payor regulations.
  • Identify services provided but not billed.
  • Identify appropriate revenue codes (UB-92).
  • Identify appropriate modifiers.
  • Review all charge tickets for accuracy
  • Identify correct HCPCS code description.
  • Identify services provided that require additional HCPCS codes for billing.
  • Identify invalid and unused services.
  • Identify nonbillable HCPCS codes under the Medicare Prospective Payment System/Ambulatory Payment Classifications.

A good approach to reviewing the charge master internally is to assemble a cross-functional team made up of the chief financial officer (CFO), finance department, billing department, a management representative from each ancillary department, medical records department, information systems, and compliance officer. This is not an all-inclusive list, as others can be added or subtracted as warranted. It is important to have the CFO or similar officer introduce the project across the institution to gain cooperation and support. This will also set the tone for the project and its importance, from both a revenue integrity and compliance perspective.

By taking this step, it will be easier to maintain the charge master going forward. It will also give the hospital an opportunity to clean up the charge master and remove any items that are no longer used or appropriate.

For the project to be successful, it is important to have one person manage the process. This person would be charge master coordinator. This person will be responsible for the following:

  • Schedule interviews with ancillary departments.
  • Provide project updates to all team members.
  • Coordinate the implementation of the charge master changes.

After the project is complete, the charge master coordinator would have the following responsibilities:

  • On-site resource for coding and charging issues as they relate to the charge master.
  • A liaison between departments to further communications and solve problems.
  • Responsible for revenue-capture process review.
  • Responsible for ongoing updates to the charge master.
  • Performing APC audits and reviews.

The first step in billing appropriately for APCs is to have a charge master that is up-to-date and contains accurate coding information for services, supplies, and drugs.


Billing for modifiers in radiology has been a major problem for hospitals to handle. A modifier provides a means by which the hospital can indicate that a service or procedure that has been performed has been altered by some specific circumstance but not changed in its definition or code. Modifiers may be used to indicate the following:

  • A service or procedure has been increased or reduced.
  • Only part of a service was performed.
  • An adjunctive service was performed.
  • A bilateral procedure was performed.
  • A service or procedure was provided more than once.
  • Unusual events occurred.

The root of the confusion with radiology modifiers is the fact that hospitals generally have a noncoder checking off on a charge ticket or entering an order into a charge entry system using some internal hospital code. The noncoder usually does not see the actual HCPCS code that is being assigned. Listed below are four methods for handling radiology modifiers:

1. Adding line items in charge master for modifiers. For example, additional line items would have to be entered into the charge master for all radiology procedures that can be performed bilaterally with a modifier50. The advantage of this method is that no manual intervention has to be made since a charge code is already established for all bilateral procedures. The disadvantage of this method is that it works only with certain modifiers. Adding all possible modifiers would increase the charge master tenfold.

2. Adding dedicated coders to append modifiers based on what radiology service is performed. The advantage of this is that the dedicated coder would have a good technical knowledge of the radiology procedures performed. The disadvantage is the cost of having dedicated coders performing this service.

3. Customized software. Some information technology savvy hospitals have built logic into their charge entry or order entry software that would query the user as to whether a modifier was required after entering certain radiology codes. Computer prompts would guide the technician as to whether certain modifiers should be used. The advantage of this is that the radiology technologists are physically located at the point-of-service, they know what tests were rendered, and they are closer to the actual event. The technologists are queried about modifiers almost immediately after the procedure or test was performed. This process is almost real-time, less intensive, and almost fully automated. The disadvantage is that the radiology manager believes that the additional modifier coding duties take the radiology technologist’s time away from patient care services. Another disadvantage is cost.

4. Retrospective modifier assignment. A radiology report is downloaded each night with all of the radiology transactions charged during the day that are likely to require a modifier. The next day the reports are reviewed and modifiers are appended as needed. The advantage of this method is that clinical staff patient care duties are not disrupted, and yet there is someone responsible for working those transactions the next day. In addition, there is still some automated logic built into the system to identify transactions where it is likely that a modifier would be needed. The disadvantages of this method are cost and time.

The misuse of radiology modifiers can cause a delay in reimbursement, denied claims, and a loss of revenue.


Medicare does not cover items and services that are not reasonable and necessary for the diagnosis or treatment of an illness or injury or to improve the functioning of a malformed body member. Currently, medical necessity relates primarily to laboratory, radiology, and other ancillary services. Even though the number of denied claims relating to laboratory tests may be higher than those relating to radiology tests, the radiology department’s revenue loss is greater because its tests are paid at a much higher rate. Based on my experience, some hospital radiology departments are losing on average $20,000 to $80,000 per month because of medical necessity denial.

Medicare uses local medical review policies (LMRP) to determine medical necessity. LMRPs are an objective listing of HCPCS codes paired with ICD-9-CM diagnosis codes. The listing states that for certain ICD-9-CM diagnosis codes, specific HCPCS procedures are not medically necessary. LMRPs can differ by location. For example, a LMRP for a chest radiograph in Pennsylvania could be different from an LMRP in California. To find more information specific to your state concerning LMRPs, use the following web site:

The only way a hospital can bill a Medicare beneficiary for a service that is not medically necessary is to obtain an advance beneficiary notice (ABN). An ABN is a document that informs the patient that he or she must assume responsibility for paying the ordered test or procedure because it is not likely to be covered by Medicare. ABNs must contain the following:

  • Must clearly identify the service.
  • Must state that the provider believes Medicare is likely to deny payment.
  • Must give the basis for that provider belief.
  • Must tell the beneficiary why there is a predication of denial.

In a worst case scenario, noncompliance could cause a potential violation of the civil monetary penalties law. This law prohibits providers from offering inducements, which are services where no payment is required to Medicare beneficiaries if the hospital or provider knows or should know that it will influence the patient to order other items or services from that provider. In other words, hospitals cannot induce Medicare patients to use their facilities. Examples of an appropriate ABN form can be obtained on the following web site: Two forms are available: form CMS-R-131G is for general use such as radiology, and form CMS-R-131L for laboratory use.

Hospitals need to conduct an audit to determine where problems exist as they relate to medical necessity. Identifying patterns relating to claims denials will help the hospital develop strategies for improvement. Physicians are the key to resolving this problem. The audit should focus on physicians that are high-end users; the results of this audit will determine which physicians are ignoring the medical necessity process. The next step is to provide medical necessity training and education to the physicians. To determine if the process is improving, use a 3-month period where patients will be given the tests regardless of the ICD-9-CM code. Use the results for medical necessity training. After 3 months, notify the physicians that patients who present at the hospital for outpatient tests without qualifying codes will be told:

  • The physician ordered a medically unnecessary test.
  • The patient will have to sign an ABN.

Another useful tool is to provide patients with an ABN brochure. The brochure should address the following questions:

  • What is an ABN?
  • Why do you want me to sign the ABN?
  • Why do you not think Medicare will pay for the service?
  • If Medicare says the service is not medically necessary, then why perform it?
  • Must I sign the ABN?
  • Will I be billed automatically?
  • Is Medicare more or less likely to pay if I sign?
  • How much must I pay for the service?
  • Will supplemental insurance pay for the service if Medicare does not?
  • Must I sign an ABN every time a new service is done?
  • I have never had to pay for a radiology service before, is this something new?
  • I have never been asked to sign an ABN before. Why must I sign one today?

The advantage of using an ABN brochure is that it can soothe the patient’s fears, cuts refusals to sign, and saves staff time.

Meeting Medicare’s medical necessity requirements is very difficult, but hospitals that are proactive in managing medical necessity requirements will cut denials and increase their bottom line.


The best way to determine if a hospital is receiving correct payments is to conduct an outpatient audit. After your charge master has been updated, it is time to conduct an audit to determine billing accuracy and payment. For the radiology department, the hospital should pick 50 random outpatient radiology claims. For each claim you will need the following information:

  • UB-92 billing claim form. This form is used to bill Medicare beneficiaries and contains all of the patient’s demographic data as well as the billing data (eg, HCPCS codes, modifiers, charges)
  • Doctor’s orders. This is important because you need to compare what was ordered to what was performed and billed.
  • Test results. Test results show what actually was performed.
  • Remittance advice (RA). The RA shows what Medicare pays for the services that you provided. It also identifies any rejected services.

The reviewer should compare what tests the physician ordered to be performed to what was actually billed on the UB-92 claim form. The final step is to review the RA to determine if we received the correct APC payment for the services billed and if any services were denied. The audit will help you identify the following:

  • What tests were ordered and performed. Performing an audit will identify if services were performed or items used but not billed, such as medical devices or drugs.
  • Are we using the appropriate modifiers?
  • Are we billing for the correct units of services?
  • What is the nature of the claim denials?
  • Does the HCPCS code from the charge master match up with what was billed?

An audit will answer these questions and also give you an idea of what is being done properly in regard to billing and what kind of correct action is needed. These audits should be done on a month-to-month basis.


If hospitals follow all of the guidelines set forth under OPPS, and bill for all covered services, and collect every dime that is due, they could still lose money under APCs. Remember hospitals are no longer getting paid for direct patient costs associated with the services that are provided.

To stay financial viable under APCs, hospitals need to develop a process to cost out high-volume procedures to compare to the APC payment weights and rates. There are two key issues that are critical for understanding how a hospital is faring under APCs:

  1. Large individual differences between your hospital and hospital costs nationally should be a reason for concern.
  2. Wide variations between costs and APC reimbursement would signal procedural problems in charging and/or billing. It will also identify areas where costs could be contained internally.

For example, a radiology department could review 20% of its procedures that make up 80% of the total revenue. The radiology department would develop the following chart:

  1. The APC fee amount can be found in the Federal Register, Vol. 67, No. 212, November 1, 2002, Addendum B.
  2. This number is the hospital’s ratio-of-cost-to-charge, which is found on the cost report worksheet D, part V.
  3. The national hospital cost median is the data that CMS uses to develop the APC rates. This data can be obtained at

The Table displays the following information:

  • The national hospital cost median is the data that CMS uses to develop an APC rate.
  • HCPCS code 72100 (lumbar spine, two/three views) shows that the difference in hospital cost compared to the national median cost is ($1.69). In this example the hospital’s cost is ($1.69) below the national median for all hospitals. Also the difference in the hospital cost compared to the APC fee amount is $6.91. The hospital’s cost in this example is below the national median for this procedure, but it is still losing money because its cost is $6.91 above the APC fee amount.
  • HCPCS code 73510 (hip, complete, minimum of two views) shows that the difference in hospital cost compared to the national median cost is ($6.65). In this example the hospital’s cost is ($6.65) below the national median for all hospitals. Also the difference in the hospital cost compared to the APC fee amount is ($4.54). The hospital’s cost in this example is below the national median for this procedure and below the APC fee amount; the hospital is profiting from this procedure.

By creating this chart, the hospital will now have a tool to compare its cost with the national median to determine what procedures it is profiting from and what procedures are being performed at a loss. This tool gives the hospital an opportunity to analyze costs and the opportunity to try to cut costs internally on procedures that are creating a loss.

The table below has a column called internal hospital cost data that is left blank. This column can be used by hospitals that have already performed a cost analysis for certain procedures. The cost data used in this chart come from the hospital’s Medicare cost report and give a snapshot of what the internal cost is for a procedure. The better method would be for the hospital to perform a cost analysis on a procedure-by-procedure basis.

Another way of monitoring reimbursement is to create a case-mix index (CMI). Each APC is assigned a relative weight that reflects the resources used in treating a patient. For example, the relative weight for a two-view chest x-ray (71020) is .7655, and the relative weight for a MRI of the brain without contrast (70551) is 6.5987. The MRI is more resource intensive than the chest x-ray, thus it has a higher relative weight. A case-mix index is computed by averaging the APC weight for all patients. The formula is:

Case-Mix = Sum of all APC weights / The number of cases

Monthly monitoring of the CMI is recommended to track patterns of increases and decreases. A low or declining case-mix may indicate inappropriate APC code assignments that do not reflect the actual resources used to treat a patient. Remember even small increases in case-mix mean substantial gains in payment.


The reality of APCs is that it is a very complex payment system that involves all departments of a facility.

Inpatient and outpatient spending now can be controlled by DRGs and APCs. The government now has the ability to reduce expenditures in both areas, and, if you couple this with the decline in commercial and charge payors, there is no other place for a facility to make up any differences that are lost from treating Medicare beneficiaries. To survive, a facility needs to take the following steps:

  1. Establish budgets based on anticipated reimbursement.
  2. Control costs.
  3. Develop an effective process to deal with the LMRPs and ABN issues.
  4. Thoroughly report all HCPCS codes.
  5. Ensure that documentation supports the coding.
  6. Develop a process for failed claims review.
  7. Establish an effective APC/charge master team.

By following the steps above, a facility will be able to stay financially viable under APCs.

Andrei M. Costantino, Costantino & Assoc, Harrisburg, Pa, has 15 years of experience specializing in third-party reimbursement, compliance issues, APCs, financial feasibility studies, and Medicare and Medicaid fraud defense work, and is recognized nationally for his expertise in the outpatient HCPCS coding arena dealing with reimbursement, coding, compliance, and proactive billing controls, (717) 651-1217, [email protected].