Reading Time: 7 minutes
Source: Center analysis and American Hospital Association data, Graphic: Modern Healthcare

Federal officials for more than a decade have let hospitals decide on their own how much to charge Medicare for certain emergency room overhead and staffing costs called “facility” fees — a controversial policy some critics believe invites overcharges.

Now in a major turnabout, the Centers for Medicare and Medicaid Services are seeking tighter controls over the fees as part of a plan to redirect billions of dollars Medicare spends annually on outpatient health care. But this new proposal, though still preliminary, is already drawing fire on its own.

CMS officials want to replace five escalating price codes hospitals can choose from in billing facility fees with one flat rate, starting next year. Whether charged at one rate or five, the mere existence of facility fees is contentious because they come on top of physician bills and hospital charges for tests, medicines and other supplies, and have risen sharply in recent years. Hospitals counter that the fees are needed to help defray the costs of big-ticket medical technology and resources, such as operating rooms.

Still, the draft CMS fee proposal, first released in July, has already drawn sharp critiques from some hospital groups and medical billing experts. Paying emergency room facility fees at just one rate, they argue, will likely overpay hospitals that tend to treat people with relatively minor ailments in the ER, while shortchanging institutions such as trauma centers that care for those who are very ill.

“This could be a windfall for some hospitals, but others could lose,” said Duane Abbey, an Iowa health care billing consultant who called the proposal a “major change.”

‘Upcoding’ prevention

In presenting the changes, CMS appears to be searching for a foolproof way to prevent hospitals from picking higher-level — and more expensive —service codes than they really deserve, an illegal practice known as “upcoding.” Hospitals deny they engage in upcoding.

CMS used claims Medicare paid during 2012 to calculate the proposed new rate and officials said the rate would be re-evaluated annually.

Though the draft rule stops short of accusing hospitals of coding improperly, officials expect to simplify billing and “eliminate any incentive for hospitals to ‘upcode’ patients whose visits do not fall clearly into one category or another,” it says.

Another goal is to “remove any incentives hospitals may have to provide medically unnecessary services or expend additional, unnecessary resources to achieve a higher level of visit payment,” the agency stated.

A tortured history

Choosing the proper code for emergency room visits and evaluating whether the proper code was chosen has always been confusing, because the so-called Evaluation and Management codes being used were designed by the American Medical Association for physician billing, not emergency room services. Doctors pick one of the five-digit codes that best reflect the amount of time and medical decision-making involved in caring for a patient; the higher the code, the more they are paid.

Hospitals have long complained that codes written for physicians don’t translate easily for pricing emergency room resources, but deny that they take advantage of the situation to bill higher codes than justified. CMS has struggled unsuccessfully for years to establish codes that are specific to emergency room services.

Escalating costs

The Center for Public Integrity’s investigative series, “Cracking the Codes,” last year exposed the financial toll rising billing codes have taken on Medicare. The investigation found that thousands of medical professionals billed for more complex and costly health care over the past decade — adding $11 billion or more to their fees — despite little evidence that elderly patients needed more treatment.

Some of the biggest jumps occurred in hospital emergency rooms which layered on more than $1 billion in steadily rising Medicare facility fees over the decade. The investigation also found that the explosive growth of electronic medical records and billing software could be contributing to higher coding for a range of emergency room services by making it easier to “cut and paste” documentation to justify those bills. The New York Times subsequently published a similar report.

In the wake of the news reports, Attorney General Eric Holder and Health and Human Services Secretary Kathleen Sebelius threatened possible criminal prosecution for doctors and hospitals caught “upcoding.” Their September 2012 letter went on to say that CMS “has the authority to address inappropriate increases in coding intensity in its payment rules.”

Varying rates

While many Medicare transactions are subject to dense regulations, hospitals have wide latitude in applying facility fees. Absent rules specific to ER billing, Medicare has since April 2000 relied on about 4,000 hospitals nationwide to set their own guidelines for picking billing codes which most “reasonably relate” to the intensity of emergency room resources used in treating a patient.

The 2013 rates for ER facility fees start at $51.82 for a “level 1” patient visit and move up to $344.71 at the top range. CMS is proposing a new flat rate at $212.90 for emergency room visits regardless of how much medical muscle went into the treatment. Doctor fees aren’t affected. Several of the nation’s major hospital groups declined comment on the proposed rule, saying they are still studying its impact and preparing written responses. The rule was published July 19 in the Federal Register and comments are due by Sept. 16. It is set to take effect Jan. 1, 2014. As of Sept 12, 1,470 comments had been received.

The American Hospital Association, in an August 2 member advisory, called the proposal a “dramatic step” and appeared to be taken aback by it. The group warned of “revenue losses” if the new rate doesn’t take into account that Medicare patients may be more infirm over time and require more complex and costlier services.

The hospital association also said CMS has “consistently stated its belief that hospitals are billing in an appropriate and consistent manner.” CMS didn’t estimate the financial impact of the coding change and declined a written request for any data indicating “upcoding” by hospitals.

Clearly, though, there’s plenty of disagreement as to the appropriateness of recent billing trends and the financial implications of the proposed change in ER billing policy. Steven Meyerson, a senior vice president at AccretivePAS in Chicago, said the proposal might simplify billing, but “it does seem to have the potential of paying hospitals inappropriately.” Some hospitals may “do better” than others financially, he said. While rising billing codes don’t necessarily indicate inflated charges, he said, a single code would obviously prevent that from happening. In that sense, he said, CMS “won.”

Hospital outpatient billing expert Jugna Shah also said CMS officials in recent years haven’t given any indication that they believe some hospitals game Medicare. “It caught me off guard,” she said of the proposed rule, adding CMS could be searching for a “quick fix” to the controversy over alleged ‘upcoding.’

Similarly, the American College of Emergency Physicians advised members that CMS “might be reacting to the media attention and speculation” about “upcoding,” noting the “harsh reprimand” from attorney general Holder and HHS secretary Sebelius.

Medicare officials generally expect hospitals and other medical professionals to bill a range of the five codes because some patients require more effort than others. In an emergency room, for instance, someone arriving with a mild leg sprain would likely necessitate a lower code than someone suffering an apparent heart attack.

But the Center for Public Integrity’s analysis of Medicare billing data showed that emergency department facility coding shot up at many hospitals over the past decade, in some cases faster than other Evaluation and Management billings.

Between 2001 and the end of 2008, use of the two most expensive codes nearly doubled, from 25 percent to 45 percent of all claims. Many of these patients were treated for seemingly minor injuries and complaints and sent home without being admitted to the hospital.

Hospitals argue that they shouldn’t be taken to task for any confusion over how to bill these charges properly. Over the past decade, the industry repeatedly urged CMS to set standards for computing emergency room facility fees. But in 2007, officials wrote that the effort “was proving more challenging than we initially thought.” The proposed new rule states that national guidelines are “not feasible,” hence the decision to give up on them and adopt a flat rate payment.

Other changes

The recent rulemaking contains a number of other proposed changes as well. For instance, CMS also intends to create a flat rate for hospital clinic visits, and make many other billing changes as well.

Clinic facility fees have become a hot button issue as more Medicare patients seek care in hospital clinics, and as hospitals purchase medical offices and rebrand them as an arm of the hospital. That can result in patients seeing the same doctor in the same building, but suddenly being charged more because hospital facility fees are being added on, a practice that has been criticized by the Medicare Payment Advisory Commission and consumer groups.

CMS now allows from $56.77 to $128.48 for clinic visit facility fees and wants to replace that with a flat charge of $88.31.

Dr. Kevin Kavanagh, a retired physician who heads Health Watch USA, a patient advocacy group based in Kentucky, said that CMS should be paying the same rate for a service “regardless of where it is performed.” He said many patients wind up paying twice as much for routine medical care because of a facility fee. “I don’t see any extra value in a hospital campus for the exact same service,” he said.

Hospitals disagree. The hospital association has argued that prohibiting the charges would threaten “patient access to care,” especially for low-income and chronically ill people who depend on networks of hospital-based outpatient clinics.

In its proposal, CMS conceded that since 2002 it has not required hospitals to seek the agency’s approval before considering “off campus” medical buildings as a unit of the hospital that can charge facility fees. But the agency sidestepped the growing controversy over the propriety of these charges, saying it is “considering collecting information” to analyze the situation.

Other price changes in the proposed rule could redistribute billions of dollars in Medicare spending.

CMS is proposing a 1.8 percent adjustment for inflation which is expected to pay hospitals $600 million more in 2014 than this year.

Overall, the billing changes must be “budget neutral,” according to CMS, even though they are expected to add some $4.372 billion in expenditures for 2014. The agency did not specify where it plans to make cuts to accommodate the new costs. Total spending for outpatient services for 2014 was projected at $50.4 billion, a 9.5 percent increase over this year.

CMS also is proposing “bundled” rates for more than two dozen outpatient medical procedures, such as implanting a heart pacemaker, as well as packaging charges for some drugs, biologics and laboratory and diagnostic tests that could raise some charges and lower others. That’s consistent with a government goal to stop paying individually for each service and health care product.

Some of these plans are generating fierce opposition, such as from wound care specialists. Dr. Brent Wallace, chief medical officer of Intermountain Healthcare in Salt Lake City, wrote to CMS on Aug. 6. He argued that the $875 bundled payment would make it impossible to use costly bioengineered skin substitutes for treating diabetic wound care “without incurring a financial loss.”

He predicted that as a result patients would “experience an increase in overall amputation rates.”

Your support is crucial!

Our newsroom needs to raise $121,000 by end of the year so we can hold the power accountable and strengthen our democracy in 2024. Public Integrity doesn’t have paywalls and doesn’t accept advertising. We depend on individuals like you to sustain quality journalism.