On November 2, 2001, the Centers of Medicare and Medical Services ("CMS") issued a final rule announcing the method by which it would be implementing a pro rata reduction of the transitional pass-through payments under the Hospital Outpatient Prospective Payment System ("OPPS"). Under the OPPS statute, "transitional pass-through payments" are available for certain innovative medical devices, drugs and biologicals. These payments are mandated for orphan drugs; drugs, biologicals and brachytherapy devices used for the treatment of cancer; and radiopharmaceutical drugs and biologicals. Additional payments are authorized for new medical devices, drugs or biologicals that were not being paid as a hospital outpatient service as of December 31, 1996 and whose cost is not "insignificant" in relation to the APC payment for a procedure. Under the statute, transitional pass-through payments for any given device, drug or biological are to be made for two, but not more than three years.

In addition, the structure of the OPPS statute mandates that the aggregate transitional pass through payments made in a given year cannot be projected to be more than 2.5 percent of all OPPS payments for any year before 2004 and 2 percent for any year after that point. For fiscal year 2002, CMS has estimated that total transitional pass through payments would be $2.26 billion, of which about $1.89 billion is attributable to devices and about $37 billion is attributable to drugs and radiopharmaceuticals. Thus, the estimated pass through payments would be approximately 13 percent of the baseline projection of $17.5 billion in total OPPS payments for that year. Based on that estimate, a pro rata reduction of 80.7 percent would be required by statute.

To deal with this dramatic situation, CMS plans to take a number of steps, some of which may be accomplished by regulation and others would require legislation. First, it plans to roll approximately 75 percent of the costs of these pass-through drugs and devices back into the APCs this year, thus removing that set of expenses from the 2.5 percent cap. Thus, the remaining 25 percent of expenditures would be subject to the cap. In addition, CMS is seeking from Congress permission to combine the transitional pass-through and the "outlier" payment pools together to try to expand the pool of funds available to pay for pass through drugs and devices. Currently, 2.0 percent of OPPS funds are set aside for outlier payments. Clearly, this request will create tensions between hospitals that are more dependent upon transitional pass-through payments against those that are likely to receive outlier payments. In addition, as part of its legislative proposal, CMS plans on reserving .5 percent of the aggregated 4.5 percent pool to maintain payment levels for certain preventive and primary care services.

Although the rule is issued in final form, it does not establish specific rates for any particular payment or specify how the changes will occur. Further, because CMS needs congressional authorization to accomplish its objectives, it will not know until very late in the year as to whether and how it can proceed.

From a hospital's perspective, this lack of uncertainty creates a number of problems. First, hospitals will now know what payments they will be receiving for certain high cost services, thus inhibiting their ability to do appropriate financial and strategic planning. Second, the changes contemplated by this rule will require substantial reworking of both fiscal intermediary and hospital claims processing systems. Because changes in reimbursement affect beneficiary co-pays, there is no specific guidance in terms of what amounts that hospitals should be collecting from beneficiaries. Further, based on information provided by the agency, hospitals may not find out what the payment rates are or what their patients' co-payment obligations should be until March or April of 2002. CMS has not provided any guidance in terms of whether providers after January 1 should withhold claims, collect certain co-payments from beneficiaries but expect reconciliation at the end of the year, or implement another process. Industry representatives predict that the lack of clarity will create significant operational and financial challenges for hospitals in the coming year.