Community hospitals stand to gain the most from the recently passed Medicare reform bill. The legislation is a mixed bag for ASCs, a possible death sentence for speciality hospitals and short-term relief for physicians, who are guaranteed at least a 1.5 percent professional fee increase in 2004 and 2005. Here's a rundown.

Good news for HOPDs
The bill extends by two years CMS' recent revisions of drug reimbursements in the 2004 hospital outpatient prospective payment system (HOPPS). There will be separate ambulatory payment classifications (APCs) for all drugs that have a daily median facility cost of $50 or higher. For example, generic drugs will be paid at 46 percent of the Average Wholesale Price (AWP) in 2004.

Hospital outpatient departments retain their full cost-of-living adjustment (CMS set a 4.5 increase in 2004). The adjustment is calculated at the consumer price index (CPI).

The bill increases Medicare payments to rural and small urban hospitals by lowering to 62 percent the labor-related share of reimbursements for hospitals located in areas where the wage index is below the national average. All other hospitals are "held harmless," meaning that it will not negatively impact reimbursements.

Brachytherapy will be paid on a facility-cost basis for three years, while the GAO studies the issue and makes an overall payment recommendation.

Medicare low DSH (disproportionate share) caps for rural hospitals and urban hospitals with under 100 beds are increased from 5.25 percent to 12 percent. Medicaid DSH allotments to states to reimburse both inpatient and outpatient services will increase 16 percent in 2004, with cost-of-living adjustments thereafter.

One provision community hospital lobbyists sought but did not attain was a federal mandate to fix "broken" ambulatory payment classifications and lessen the impact of the annual rate volatility.

A new payment system for ASCs?
ASCs lose their cost-of-living adjustments. The adjustment will be the CPI minus 3 percent for the period of April 1, 2004 through Sept. 30, 2004. Thereafter, ASCs will have no rate adjustments through Sept. 30, 2009.

The legislation deletes the requirement for CMS to base future ASC rates on a cost survey. In lieu of surveying facilities, the bill calls for a U.S. General Accounting Office (GAO) study of ASC costs, comparing them to services furnished in hospitals. The bill asks GAO to recommend to Congress by Jan. 1, 2005, whether the HOPPS is appropriate for determining ASC rates.

CMS must implement a new ASC payment system by Jan. 1, 2008, based at least in part on the GAO's recommendations. The new payment system must be budget neutral (meaning that CMS can't squeeze cost savings out of the program when implementing the new system).

On the balance, ASCs are happiest about what the legislation does not include. Congress ignored most of the ASC payment recommendations issued by MedPAC and the Office of Inspector General (OIG) issue earlier in 2003. The most notable omission is MedPAC's recommendation to cap ASCs at HOPD levels and reduce nearly 300 rates accordingly.

The wider impact of the bill is still years away. The new law sets the wheels in motion for CMS to create a new system for setting ASC rates, replacing the much-criticized cost surveys with an as-yet-undetermined alternative.

"We're relieved to avoid MedPAC and OIG's recommendations, but how can we expect facilities to cope with rising costs when Congress cuts and then freezes our payments?" says Kathy Bryant, the executive director of FASA. "It's ludicrous that Congress says they want to save money, yet they try to push Medicare cases to the most expensive care setting [the HOPD]."

"The [loss of] CPI updates over the next six years has a painful impact. This bitter pill is counter-balanced by avoiding more draconian reductions. We've scored a clear victory in establishing new authority for CMS to move away from cost surveys and to develop a new system for rebasing ASC payments," adds AAASC Executive Director Craig Jeffries.

Of the new payment system, Ms. Bryant says: "Clearly, cost surveys benefit neither CMS nor ambulatory surgery centers, but it remains to be seen if an HOPD tie-in is beneficial."

For now, Ms. Bryant says facilities may have to concentrate on further boosting their non-Medicare case volumes to offset less-than-favorable Medicare reimbursements.

Specialty hospitals in limbo
The legislation sets an 18-month moratorium on new specialty-hospital construction, retroactive to Nov. 18, 2003.

It defines a specialty hospital as one that is "primarily or exclusively" engaged in surgery, cardiac or orthopedic services. There is also a mechanism to add categories such as women's hospitals to the definition.

It grandfathers all specialty hospitals in operation before Nov. 18 or "under development" as of that date. You must meet these criteria for "under development" exemption: whether architectural plans have been completed, funding has been received, zoning requirements have been met and necessary approvals from state agencies have been received. The bill also allows the Secretary to weigh "any other evidence" that would substantiate an under development claim for exemption.

Existing facilities may expand on the "main campus of the hospital." The legislation caps the expansion at either half the beds in the hospital as of Nov. 18, or five new beds, whichever is greater. Grandfathered facilities may not add new service categories during the moratorium.

"We're very disappointed," says American Surgical Hospital Association President Mike Lipomi. "[The law] restricts fair competition with community hospitals even before MedPAC studies whether such a step is warranted."

The American Hospital Association, which lobbied hard for the moratorium, applauds the restrictions. "It protects vital community services by placing restrictions on the development of specialty providers," says AHA Executive Vice President Rick Pollack.

Counters Mr. Lipomi: "We're prepared to fight the battle long term. Surgical hospitals are not going away."