TRICARE; Outpatient Hospital Prospective Payment System (OPPS), 17271-17289 [E8-6514]

Agencies

• Office of the Secretary
• DEPARTMENT OF DEFENSE

[Federal Register Volume 73, Number 63 (Tuesday, April 1, 2008)]
[Proposed Rules]
[Pages 17271-17289]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-6514]



[[Page 17271]]

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DEPARTMENT OF DEFENSE

Office of the Secretary

[DOD-2007-HA-0048; RIN 0720-AB19]

32 CFR Part 199


TRICARE; Outpatient Hospital Prospective Payment System (OPPS)

AGENCY: Office of the Secretary, DoD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule implements a prospective payment system for 
hospital outpatient services similar to that furnished to Medicare 
beneficiaries, as set forth in section 1833(t) of the Social Security 
Act. The rule also recognizes applicable statutory requirements and 
changes arising from Medicare's continuing experience with this system 
including certain related provisions of the Medicare Prescription Drug, 
Improvement, and Modernization Act of 2003. The Department is 
publishing this rule to implement an existing statutory requirement for 
adoption of Medicare payment methods for institutional care which will 
ultimately provide incentives for hospitals to furnish outpatient 
services in an efficient and effective manner.

DATES: Written comments received at the address indicated below by June 
2, 2008 will be accepted.

ADDRESSES: You may submit comments, identified by docket number and or 
Regulatory Information Number (RIN) number and title, by either of the 
following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Federal Docket Management System Office, 1160 
Defense Pentagon, Washington, DC 20301-1160.
    Instructions: All submissions received must include the agency name 
and docket number or RIN for this Federal Register document. The 
general policy for comments and other submissions from members of the 
public is to make these submissions available for public viewing on the 
Internet at https://regulations.gov as they are received without change, 
including any personal identifiers or contact information.

FOR FURTHER INFORMATION CONTACT: David E. Bennett, TRICARE Management 
Activity, Medical Benefits, and Reimbursement Systems, telephone (303) 
676-3494.

SUPPLEMENTARY INFORMATION: 

I. Introduction and Background

    The OPPS evolved out of Congressional mandates for replacement of 
Medicare's cost-based payment methodology with a prospective payment 
system (PPS). Medicare implemented OPPS for services furnished on or 
after August 1, 2000, with temporary transitional provisions to buffer 
the financial impact of the new prospective payment system (e.g., 
incorporating transitional pass-through adjustments and proportional 
reductions in beneficiary cost-sharing to lessen potential payment 
reductions experienced under the new OPPS).
    Congress likewise established enabling legislation under section 
707 of the National Defense Authorization Act of Fiscal Year 2002 
(NDAA-02), Public Law 107-107 (December 28, 2001) changing the 
statutory authorization [in 10 U.S.C. 1079(j)(2)] that TRICARE payment 
methods for institutional care shall be determined, to the extent 
practicable, in accordance with the same reimbursement rules used by 
Medicare. Similarly, under 10 U.S.C. 1079(h), the amount to be paid to 
health care professional and other non-institutional health care 
providers ``shall be equal to an amount determined to be appropriate, 
to the extent practicable, in accordance with the same reimbursement 
rules used by Medicare''. Based on these statutory mandates, TRICARE is 
adopting Medicare's prospective payment system for reimbursement of 
hospital outpatient services currently in effect for the Medicare 
program as required under the Balanced Budget Act of 1997 (BBA 1997), 
(Pub. L. 105-33) which added section 1833(t) of the Social Security Act 
providing comprehensive provisions for establishment of a Medicare 
hospital OPPS. The Act required development of a classification system 
for covered outpatient services that consisted of groups arranged so 
that the services within each group were comparable clinically and with 
respect to the use of resources. The Act also described the method for 
determining the Medicare payment amount and beneficiary coinsurance 
amount for services covered under the outpatient PPS. This included the 
formula for calculating the conversion factor and data requirements for 
establishing relative payment weights.
    Centers for Medicare & Medicaid Services (CMS) published a proposed 
rule in the Federal Register on September 8, 1998 (63 FR 47552) setting 
forth the proposed PPS for hospital outpatient services. On June 30, 
1999, a correction notice was published (64 FR 35258) to correct a 
number of technical and typographical errors contained in the September 
8, 1998 proposed rule.
    Subsequent to publication of the proposed rule, the Medicare, 
Medicaid, and State Child Health Insurance Program (SCHIP) Balanced 
Budget Refinement Act of 1999 (BBRA 1999) (Pub. L. 106-133) enacted on 
November 29, 1999, made major changes that affected the proposed 
Medicare OPPS. The following BBRA 1999 provisions were implemented in a 
final rule (65 FR 18434) published on April 7, 2000.
     Made adjustments for covered services whose costs exceed a 
given threshold (i.e., an outlier payment).
     Established transitional pass-through payments for certain 
medical devices, drugs, and biologicals.
     Placed limitations on judicial review for determining 
outlier payments and the determination of additional payments for 
certain medical devices, drugs, and biologicals.
     Included as covered outpatient services implantable 
prosthetics and durable medical equipment and diagnostic x-ray, 
laboratory, and other tests associated with those implantable items.
     Limited the variation of costs of services within each 
payment classification group.
     Required at least annual review of the groups, relative 
payment weights, and the wage and other adjustments to take into 
account changes in medical practice, the addition of new services, new 
cost data, and other relevant information or factors.
     Established transitional corridors that would limit 
payment reductions under the hospital outpatient PPS.
     Established hold harmless provisions for rural and cancer 
hospitals.
     Provided that the coinsurance amount for a procedure 
performed in a year could not exceed the hospital inpatient deductible 
for the year.
    Section 1833(t) of the Social Security Act was subsequently amended 
by the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act (BIPA) of 2000 (Pub. L. 106-554) and the Medicare 
Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 
(Pub. L. 108-173) making additional changes in the OPPS.
    As a prelude to implementation of the OPPS, Congress enacted the 
Omnibus Budget Reconciliation Act of 1986 (OBRA) (Pub. L. 99-509) which 
paved the way for development of a PPS for hospital outpatient services 
by prohibiting payment for non-physician services furnished to hospital 
patients (inpatients and outpatients), unless the services were 
furnished either directly or under arrangement with the hospital, 
except for services of physician

[[Page 17272]]

assistants, nurse practitioners and clinical nurse specialists. 
Exceptions were also made for clinical diagnostic procedures, the 
payment of which may only be made to the person or entity that 
performed, or supervised the performance of, the test; and for 
exceptionally intensive hospital outpatient services provided to 
Skilled Nursing Facility (SNF) residents that lie well beyond the scope 
of the care that SNFs would ordinarily furnish, and thus beyond the 
ordinary scope of the SNF care plan. Consolidated billing facilitated 
the payment of services included within the scope of each ambulatory 
payment classification (APC). The OBRA also mandated hospitals to 
report claims for services under the Healthcare Common Procedure Coding 
System (HCPCS) which enabled the identification of specific procedures 
and services used in the development of outpatient PPS rates.
    Ongoing changes and refinement to the OPPS have been accomplished 
through annual proposed and final rulemaking, along with interim 
transmittals and program memoranda taking into consideration changes in 
medical practice, addition of new services, new cost data, and other 
relevant information and factors. TRICARE will recognize to the extent 
practicable all applicable statutory requirements and changes arising 
from Medicare's continuing experience with this prospective payment 
system, including changes to the amounts and factors used to determine 
the payment rates for hospital outpatient services paid under the 
prospective payment system [e.g., annual recalibration (updating) of 
group weights and conversion factors and adjustments for area wage 
differences (wage index updates)]. The agency will adopt all of 
Medicare's CY 2008 OPPS changes published in the Federal Register on 
November 27, 2007, (72 FR 66580); e.g., extending the current packaging 
to include guidance services, image processing services, intraoperative 
services, imaging supervision and interpretation services, diagnostic 
radiopharmaceuticals, contrast agents, and observation services; and 
reduction of payments in cases where a hospital receives a substantial 
partial credit from the manufacturer toward the cost of a replacement 
device implanted in a procedure.
    While TRICARE intends to remain as true as possible to Medicare's 
basic OPPS methodology (i.e., adoption and updating of the Medicare 
data elements used to calculate the prospective payment amounts), there 
will be some deviations required to accommodate the uniqueness of the 
TRICARE program. These deviations have been designed to accommodate 
existing TRICARE benefit structure and claims processing procedures/
systems implemented under the TRICARE Next Generation Contracts (T-
NEX), while at the same time eliminating any undue financial burden to 
TRICARE Prime, Extra, and Standard beneficiary populations. Following 
is a brief discussion of each of these deviations:
    [cir] Outpatient Code Editor (OCE)--The Medicare Outpatient Code 
Editor with APC program edits data to help identify possible errors in 
coding and assigns Ambulatory Payment Classification numbers based on 
HCPCS codes for payment under the OPPS. The OPPS APC is an outpatient 
equivalent of the inpatient Diagnosis Related Group (DRG)-based PPS. 
Like the inpatient system based on DRGs, each APC has a pre-established 
prospective payment amount associated with it. However, unlike the 
inpatient system that assigns a patient to a single DRG, multiple APCs 
can be assigned to one outpatient claim. If a patient has multiple 
outpatient services during a single visit, the total payment for the 
visit is computed as the sum of the individual payments for each 
service. Medicare provides updated versions of the OCE, along with 
installation and user manuals, to its fiscal intermediaries on a 
quarterly basis. The updated OCE reflects all new coding and editing 
changes during that quarter.
    It was found upon initial testing of the OCE that it could not be 
used in its present form given the fact that the extensive editing 
embedded in its software program was specific to Medicare's benefit 
structure and internal claims processing requirements. As a result, the 
Agency has developed a TRICARE-specific OCE which will better 
accommodate the benefit structure and claims processing systems 
currently in place under the T-NEX contracts. This modified software 
package will edit claims data for errors and indicate actions to be 
taken and reasons why the actions are necessary. This expanded 
functionality will facilitate the linkage between the action being 
taken, the reasons for the action, and the information on the claim 
that caused the action. The edits will be specific for TRICARE, 
ensuring compliance with current claims processing criteria. The OCE 
will also assign an APC number for each service covered under the OPPS 
and return information to be used as input to the TRICARE PRICER 
program.
    Like Medicare's OCE, the TRICARE-specific OCE will be updated on a 
quarterly basis incorporating, to the extent practicable, all Medicare 
changes/updates (i.e., those changes initiated through rulemaking and 
transmittals/program memoranda). Periodic updating of the TRICARE-
specific OCE will ensure consistency and accuracy of claims processing 
and payment under the OPPS.
    [cir] Deductible and Cost-Sharing--Medicare's OPPS coinsurance was 
initially frozen at 20 percent of the national median charge for the 
services within each APC (wage adjusted for the provider's geographic 
area) or 20 percent of the APC payment rate, whichever was greater 
(i.e., the coinsurance for an APC could not fall below 20 percent of 
the APC payment rate). This was designed so that, as the total payment 
to the provider increased each year based on market basket updates, the 
present or frozen coinsurance amount would become a smaller portion of 
the total payment until the coinsurance represented 20 percent of the 
total. Once the coinsurance became 20 percent of the payment amount, 
annual updates would be applied to the coinsurance so that it would 
continue to account for 20 percent of the total charge. Wage adjusted 
coinsurance amounts were further limited by the Medicare inpatient 
deductible. Subsequent legislation has accelerated the reduction of 
beneficiary copayment amounts by imposing prescribed percentage 
limitations off of the APC payment rate. For example, for all services 
paid under the OPPS in CY 2005, the national unadjusted copayment 
amount cannot exceed 45 percent of the APC rate. Accelerated reductions 
were imposed specifically for those APC groups for which coinsurance 
represented a relatively high proportion of the total payment.
    A program payment percentage is calculated for each APC by 
subtracting the unadjusted national coinsurance amount for the APC from 
the unadjusted payment rate and dividing the result by the unadjusted 
payment rate. The payment rate for each APC group is the basis for 
determining the total payment (subject to wage-index adjustment) that a 
hospital will receive from the beneficiary and the Medicare program.
    Since imposition of Medicare's unadjusted national coinsurance 
amounts would have an adverse financial impact on TRICARE beneficiaries 
(i.e., imposition of significantly higher cost-sharing for Prime 
beneficiaries), the Agency has opted to use the following hospital

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outpatient deductible and cost-sharing/copayments currently being 
applied in Tables 1 and 2 below for Prime, Extra, and Standard TRICARE 
programs for hospital outpatient services:

                                    Table 1.--Hospital Outpatient Deductibles
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                                                Active duty family members
         TRICARE programs          ----------------------------------------------------  Retirees, their family
                                              E1-E4                  E5 & above           members  & survivors
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Prime.............................  None....................  None....................  None.
Extra.............................  $50 per Individual......  $150 per Individual.....  $150 per Individual.
                                    $100 Maximum per family.  $300 Maximum per family.  $300 Maximum per family.
Standard..........................  $50 per Individual......  $150 per Individual.....  $150 per Individual.
                                    $100 Maximum per family.  $300 Maximum per family.  $300 Maximum per family.
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                                                  Table 2.--Hospital Outpatient Copayments/Cost-Sharing
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                                                             TRICARE prime program
                                   ------------------------------------------------------------------------
          Type of service                      Active duty family member                                    TRICARE extra program     TRICARE standard
                                   ------------------------------------------------ Retirees, their family                                program
                                             E1-E4                E5 & above          members & survivors
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Hospital Outpatient Departments:    $0 copayment per        $0 copayment per        $12 copayment per       Active Duty Family     Active Duty Family
 Clinic visits; therapy visits;      visit.                  visit.                  visit.                  Members: Cost-share--  Members: Cost-share--
 treatment rooms, etc.              ......................  ......................  ......................   15% of fee             20% of the allowable
                                    ......................  ......................  ......................   negotiated by          charge.
Emergency Services: Emergency and   ......................  ......................  ......................   contractor            Retirees, Their
 urgently needed care obtained in   $0 copayment per        $0 copayment per        $30 copayment per       Retirees, Their         Family Members &
 hospital emergency room.            visit.                  visit.                  emergency room visit.   Family Members &       Survivors: Cost-
                                                                                                             Survivors: Cost-       share--25% of the
                                                                                                             share--20% of the      allowable charge.
                                                                                                             fee negotiated by
                                                                                                             the contractor
Ambulatory Surgery (same day):      $0 copayment per        $0 copayment per        $25 copayment           ADFMs: Cost-share--    ADFMs: Cost-share--
 Hospital-based ambulatory           visit.                  visit.                 No separate copayment/   $25                    $25.
 surgical center.                   ......................  ......................   cost-share for         Retirees, Their        Retirees, Their
                                    ......................  ......................   separately billed       Family Members &       Family Members &
                                    ......................  ......................   professional            Survivors: Cost-       Survivors: Lesser of
                                    ......................  ......................   charges.                share--20% of the      25% of group rate or
                                    ......................  ......................  ......................   institutional fee      25% of billed
Birthing Centers Prenatal care,     ......................  ......................  ......................   negotiated by the      charge.
 outpatient delivery, and           $0 copayment per        $0 copayment per        $25 copayment            contractor.
 postnatal care provided in          visit.                  visit.
 hospital-based birthing center.
Partial Hospitalization Programs    $0 copayment per        $0 copayment per        40 per diem charge      ADFMs: $20 per diem    ADFMs: $20 per diem
 (PHPs): Mental health services      visit.                  visit.                 No separate copayment/   charge                 charge.
 provided in authorized hospital-                                                    cost-share for         Retirees, Their        Retirees, Their
 based PHP.                                                                          separately billed       Family Members &       Family Members &
                                                                                     professional charges    Survivors: Cost-       Survivors: Cost-
                                                                                                             share--20% of the      share--25% of the
                                                                                                             TRICARE allowed        TRICARE allowed
                                                                                                             amount                 amount.
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    [cir] Hold-Harmless Protection--Since the inception of the Medicare 
OPPS, providers have been eligible to receive additional transitional 
outpatient payments (TOPs) if the payments they received under the OPPS 
were less than the payments they could have received for the same 
services under the payment system in effect before the OPPS. Prior to 
January 1, 2004, most hospitals that realized lower payments under OPPS 
received transitional corridor payments based on a percent of the 
decreased payments, with the exception of cancer hospitals, children's 
hospitals and rural hospitals having 100 or fewer beds which were held 
harmless under this provision and paid the full amount of the decrease 
in payment under the OPPS. Since transitional corridor payments were 
intended to be temporary payments to ease the provider's transition 
from a prior cost-based payment system to a prospective payments 
system, they were terminated as of January 1, 2004, with the exception 
of cancer and children's hospitals which were held harmless permanently 
under transitional corridor provisions of the statute (section 
1833(t)(7) of the Social Security Act). The authority for making 
transitional corridor payments under section 1833(t)(7)(D)(i) of the 
Act, as amended by section 411 Public Law 108-173, expired for rural 
hospitals having 100 or fewer beds, and sole community hospitals (SCHs) 
located in rural areas as of December 31, 2005. However, subsequent 
legislation (Section 5105 of Pub. L. 109-171) reinstituted the hold-
harmless transitional outpatient payments (TOPs)

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for covered OPD services furnished on or after January 1, 2006, and 
before January 1, 2009, for rural hospitals having 100 or fewer beds 
that are not SCHs. This provision provided an increased payment for 
such hospitals for outpatient services if the OPPS payment they 
received was less than the pre-BBA payment amount (i.e., the amount 
that was received prior to implementation of OPPS) that they would have 
received for the same covered service. When the OPPS payment is less 
than the payment the provider would have received prior to OPPS 
implementation, the amount of payment is increased by 90 percent of the 
amount of that difference for CY 2007, and by 85 percent of the amount 
of the difference for CY 2008. The amount of payment under section 
1833(t)(13)(B) of the Act, as amended by section 411 of Public Law 108-
73, also provided a payment increase for rural SCHs of 7.1 percent for 
all services and procedures paid under the OPPS, excluding drugs, 
biologicals, brachytherapy seeds and services paid under pass-through 
payments effective January 1, 2006, if justified by a study of the 
difference in costs for rural SCHs, which include Medicare essential 
access community hospitals or EACHs.
    While the Agency adopted the hold-harmless TOPs for rural hospitals 
having 100 or fewer beds and SCHs, it opted to totally exempt cancer 
and children's hospitals from the OPPS in lieu of imposing the hold-
harmless provision, given the administrative complexity of capturing 
the data required for payment of monthly interim TOP amounts. TOPs 
would require a comparison of what would have been paid [i.e., billed 
charges and CHAMPUS Maximum Allowable Charge (CMAC) amounts] prior to 
implementation of the OPPS for hospital outpatient services to those 
amounts actually paid under the OPPS for the same services. A TOP would 
be allowed in addition to the OPPS amount if payment to a cancer or 
children's hospital was lower than the amount that would have been paid 
prior to implementation of the OPPS. Since transitional corridor 
payments were specifically designed to supplement the losses 
experienced under the OPPS (i.e., to pay for services at the full 
amount that would have been allowed prior to implementation of the 
OPPS), and most, if not all, outpatient services paid at a billed or 
CMAC would exceed the OPPS amount, the program cannot justify the 
administrative burden/expense of maintaining the hold-harmless 
provisions for cancer and children's hospitals. As a result, TRICARE 
will continue to reimburse cancer and children's hospitals on a fee-
for-services basis using billed charges and CMAC rates; i.e., they will 
be excluded altogether from the OPPS.
    Adoption of the Medicare OPPS has also highlighted other policy 
considerations which must be addressed in order to accommodate 
preexisting authorization criteria and reimbursement systems. Following 
are these identified policy considerations and prescribed resolutions:
    [cir] Partial Hospitalization Programs (PHP)--Currently, TRICARE 
coverage extends to both full- and half-day psychiatric partial 
hospitalization services furnished by TRICARE-authorized partial 
psychiatric hospitalization programs and authorized mental health 
providers for the active treatment of a mental disorder. Each 
psychiatric partial hospitalization program must be either a distinct 
part of an otherwise authorized institutional provider or a 
freestanding program certified pursuant to TRICARE certification 
standards; i.e., the facility must be accredited by the Joint 
Commission on Accreditation of Healthcare Organizations (JCAHO) under 
the current edition of the Accreditation Manual for Mental Health, 
Chemical Dependency, and Mental Retardation/Developmental Disabilities 
Services and meet all other requirements as prescribed under 32 CFR 
199.6(b)(4)(xii)(A) through (D). These authorized and participating 
partial hospitalization programs are paid a percentage off of the 
average inpatient per diem amount per case to both high- and low-volume 
psychiatric hospitals. Full-day partial hospitalization programs 
(minimum of 6 hours) receive 40 percent of the average inpatient per 
diem, while partial hospitalization programs with less than 6 hours 
(with a minimum of three hours) will be paid a per diem of 75 percent 
of the rate for full-day partial hospitalization programs.
    Although the prescribed payment methodology for PHP under OPPS is 
similar to that currently being used (i.e., payment under a per diem 
recognizing the provider's overhead costs and support staff), there are 
subtle differences in that OPPS' all-inclusive per diems represent 
actual median costs of furnishing a day of partial hospitalization 
while per diems under the existing TRICARE system as prescribed under 
32 CFR 199.14(a)(2)(ix) are extrapolated from inpatient costs based on 
the intensity of the program (i.e., dependent on whether it is 
classified as a full- or half-day program). Another notable difference 
between the two programs is the continuation of reimbursement of half-
day PHPs (>= to 3 hrs. but < 6 hrs.) under TRICARE which are currently 
not recognized for payment under the Medicare OPPS (i.e., Medicare has 
not established a separate APC for half-day PHPs which can be used for 
reimbursement under the TRICARE OPPS). This deviation from the Medicare 
PHP required the establishment of an additional APC, the per diem of 
which was set at 75 percent of the unadjusted full-day PHP APC amount 
(i.e., 75 percent of the APC 0033 amount of $234.73, equaling $176.05 
for CY 2007). This will ensure continued coverage of a well established 
mental health treatment modality (half-day PHP) which has been in place 
under TRICARE for over a decade. The above-established per diems 
reflect the structure and scheduling of PHPs, and the composition of 
the PHP APC consists of the cost of all services provided each day. 
Although there is a requirement that each PHP day include a 
psychotherapy service, there is no specification regarding the specific 
mix of other services furnished within the day.
    The TRICARE criteria under which PHP services may be rendered are 
different than Medicare's--both with regard to the need for PHP 
services and facility requirements. Currently, Medicare OPPS partial 
hospitalization services may be provided to patients in lieu of 
inpatient psychiatric care in hospital outpatient departments or 
Medicare-certified community mental health centers (CMHCs). The Agency 
has opted to retain the existing mental health review criteria under 32 
CFR 199.4(b)(10) in order to ensure the continued level and quality of 
mental health care afforded under the basic program. Following are the 
TRICARE review criteria for determining the medical necessity of 
psychiatric partial hospitalization services:
     The patient is suffering significant impairment from a 
mental disorder (as defined in Sec.  199.2) which interferes with age 
appropriate functioning.
     The patient is unable to maintain himself or herself in 
the community, with appropriate support, at a sufficient level of 
functioning to permit an adequate course of therapy exclusively on an 
outpatient basis (but is able, with appropriate support, to maintain a 
basic level of functioning to permit partial hospitalization services 
and presents no substantial imminent risk of harm to self or others).
     The patient is in need of crisis stabilization, treatment 
of partially stabilized mental health disorders, or

[[Page 17275]]

services as a transition from an inpatient program.
     The admission into the partial hospitalization program is 
based on the development of an individualized diagnosis and treatment 
plan expected to be effective for the patient and permit treatment at a 
less intensive level.
    Based on existing mental health review criteria under 32 CFR 
199.4(b)(10) and certification requirements prescribed under 32 CFR 
199.6(b)(4)(xii)(A), including accreditation by the JCAHO, under the 
current edition of the Accreditation Manual for Mental Health, Chemical 
Dependency, and Mental Retardation/Developmental Disabilities Services, 
not all hospital-based PHPs will be assured of receiving payment under 
the OPPS unless they meet the above prescribed certification 
requirements and enter into a participation agreement with TRICARE. 
CMHC PHPs have been excluded from payment under the TRICARE OPPS since 
CMHCs are not recognized as authorized providers under the TRICARE 
program.
    While the authorization standards under 32 CFR 199.6(b)(4)(xii)(A) 
through (D) will be retained/applied for both hospital-based and 
freestanding PHPs currently recognized under the Program, including the 
requirement for a written participation agreement with TRICARE, 
freestanding PHPs will be exempt from OPPS and will continue to be 
reimbursed under the old TRICARE PHP per diem system as prescribed 
under 32 CFR 199.14(a)(2)(ix), subject to their own unique mental 
health copayment/cost-sharing provisions.
    [cir] Ambulatory Surgery Procedures--Currently, ambulatory surgery 
procedures provided in both freestanding ambulatory surgery centers 
(ASCs) and hospital outpatient departments or emergency rooms are paid 
using prospectively determined rates established on a cost basis and 
divided into eleven groups as prescribed under 32 CFR 199.14(d). These 
payment groups are further adjusted for area labor costs based on 
Metropolitan Statistical Areas (MSAs). The payment rates established 
under this system apply only to facility charges for ambulatory surgery 
(e.g., standard overhead amounts that include, but are not limited to, 
nursing and technician services, use of the facility and supplies and 
equipment directly related to the surgical procedure) and do not 
include such items as physician's fees, laboratory, X-rays or 
diagnostic procedures (other than those directly related to the 
performance of the surgical procedure), prosthetics and durable medical 
equipment for use in the patient's home. Ambulatory surgery procedures 
(both provided in hospital-based and freestanding ambulatory surgery 
centers) are subject to their own unique copayment/cost-sharing 
provisions under the current TRICARE ambulatory surgery benefit.
    With implementation of the OPPS, hospital-based ambulatory surgery 
procedures will no longer be reimbursed under the original eleven tier 
payment system, but will instead be paid on a rate-per-service basis 
that varies according to the APC group to which the surgical procedure 
is assigned. The relative weight of the APC group will represent the 
median hospital cost of the services included in the APC relative to 
the median cost of services included in APC 0606, Level 3 Clinic Visit. 
The prospective payment rate for each APC will be calculated by 
multiplying the APC's relative weight by a nationally established 
conversion factor and adjusting it for geographic wage differences. The 
APC payment will be subject to the deductible and cost-sharing/
copayment amounts currently being applied under Prime, Extra, and 
Standard TRICARE programs for hospital outpatient services. Denial of 
Medicare inpatient procedures will also be adhered to under the OPPS 
(i.e., denial of inpatient surgical procedures performed in a hospital 
outpatient setting) except for those inpatient procedures, which upon 
medical review, could be safely and efficaciously rendered in an 
outpatient setting due to TRICARE's younger, healthier beneficiary 
population. Exceptions to Medicare's inpatient surgical procedure 
listing were based in major part to standardized utilization management 
review criteria, (i.e., Interqual and Milliman), used by TRICARE 
Managed Care Support Contractors' medical review staff. TRICARE-
specific APCs will be developed for these designated inpatient 
procedures based on median costs from the most recent 12 months of 
claims history. OPPS reimbursement will also be extended for an 
inpatient procedure performed to resuscitate or stabilize a patient 
with an emergent, life-threatening condition who dies before being 
admitted as a patient, which in this case, will be paid under a new 
technology APC.
    Freestanding ASCs will be exempt from OPPS and will continue to be 
paid under the existing eleven tier payment system. ASC procedures will 
be placed into one of ten groups by their median per procedure cost, 
starting with $0 to $299 for Group 1, and ending with $1,000 to $1,299 
for Group 9 and $1,300 and above for Group 10, subject to their own 
unique copayment/cost-sharing provisions under the TRICARE freestanding 
ambulatory surgery benefit. The eleventh payment tier/group was added 
to the ASC reimbursement system as of November 1, 1998, for 
extracorporeal shock wave lithotripsy, with a rate established off of 
the inpatient Diagnostic Related Group (DRG) 323 which is currently 
$3,289.
    [cir] Birthing Centers--As described in 32 CFR 199.6(b)(4)(xi), a 
birthing center is a freestanding or institution-affiliated outpatient 
maternity care program which principally provides a planned course of 
outpatient prenatal care and outpatient childbirth services limited to 
low-risk pregnancies. These all-inclusive maternity and childbirth 
services are currently being reimbursed in accordance with 32 CFR 
199.14(e) at the lower of the TRICARE established all-inclusive rate or 
the billed charge. The all-inclusive rate includes laboratory studies, 
prenatal management, labor management, delivery, post-partum 
management, newborn care, birth assistant, certified nurse-midwife 
professional services, physician professional services, and the use of 
the facility to the extent that they are usually associated with a 
normal pregnancy and childbirth. Since institutional-affiliated 
maternity centers will continue to be reimbursed under the TRICARE 
maximum allowable birthing center all-inclusive rate methodology as 
prescribed under 32 CFR 199.14(e), payment will be equal to the sum of 
the Class 3 CMAC for total obstetrical care for a normal pregnancy and 
delivery (CPT code 59400) and the TMA supplied non-professional 
component amount, which includes both the technical and professional 
components of tests usually associated with a normal pregnancy and 
childbirth. As a result, hospital-based birthing centers will continue 
to be reimbursed the same as freestanding birthing centers except that 
updating of the hospital-based all inclusive rate, consisting of the 
CMAC for procedure code 59400 (Birthing Center, all-inclusive charge, 
complete) and the state specific non-professional component, will lag 
two months behind the freestanding birthing center all-inclusive 
update; i.e., the freestanding birthing center all-inclusive rate 
components will usually be updated on February 1 of each year to 
coincide with the annual CMAC file update, followed by the hospital-
based birthing center all-inclusive rate component updates on April 1 
of the same year.
    [cir] Observation Stays--Observation Services are those services 
furnished on a hospital's premises, including the use of a bed and 
periodic monitoring by a

[[Page 17276]]

hospital's staff, which are reasonable and necessary to evaluate an 
outpatient's condition or to determine the need for a possible 
admission to the hospital as an inpatient. Under Medicare, prior to CY 
2008, a hospital may receive separate APC payments for observation 
services for patients having diagnoses of chest pain, asthma, or 
congestive heart failure, when billed in conjunction with an evaluation 
and management visit for a minimum of 8 hours. Since these qualifying 
diagnoses would greatly restrict separate payment of observation stays 
currently being reimbursed based solely on medical necessity, they are 
being expanded to accommodate the special needs of unique TRICARE 
beneficiary populations (e.g., separate payment for maternity 
observations stays). Separate payment of maternity observation stays 
required the modification of the existing conditional criteria for 
separate payment of observation stays associated with pain, asthma or 
congestive heart failure. Under the TRICARE OPPS, additional hospital 
services (e.g., separate emergency room visit or clinic visit) will not 
be required on a claim with a maternity diagnosis in order to receive 
separate payment for an observation stay. The minimum time requirements 
have also been reduced from 8 to 4 hours to ensure maximum coverage of 
medically necessary maternity observation stays.
    [cir] End-State Renal Disease (ESRD) Dialysis Services--In 
accordance with sections 1881(b)(2) and (b)(7) of the Social Security 
Act, a facility that furnishes dialysis services to Medicare patients 
with ESRD is paid a prospectively determined rate for each dialysis 
treatment furnished. The rate is a composite that includes all costs 
associated with furnishing dialysis services except for the costs of 
physician services and certain laboratory tests and drugs that are 
billed separately. CMS has exercised the authority granted under 
section 1833(t)(1)(B)(i) to exclude from the outpatient PPS those 
services for patients with ESRD that are paid under the ESRD composite 
rate. Since TRICARE does not have a comparable composite rate in effect 
for payment of ESRD services, they will be reimbursed under TRICARE's 
OPPS.

II. Treatment Settings Subject to Outpatient Prospective Payment System

    The outpatient prospective payment system is applicable to any 
hospital participating in the Medicare program except for Critical 
Access Hospitals (CAHs), Indian Health Service hospitals, certain 
hospitals in Maryland that qualify for payment under the state's cost 
containment waiver, and hospitals located outside one of the 50 states, 
the District of Columbia and Puerto Rico and specialty care providers 
which include: (1) Cancer and children's hospitals; (2) freestanding 
ASCs; (3) freestanding Partial Hospitalization Programs (PHPs); (4) 
freestanding psychiatric and Substance Use Disorder Rehabilitation 
Facilities (SUDRFs); (5) Comprehensive Outpatient Rehabilitation 
Facilities (CORFs); (6) Home Health Agencies (HHAs); (7) hospice 
programs; (8) other corporate services providers (e.g., freestanding 
cardiac catheterization centers, freestanding sleep diagnostic centers, 
and freestanding hyperbaric oxygen treatment centers); (9) freestanding 
birthing centers; (10) VA hospitals; and (11) freestanding ESRD 
centers. Due to their inability to meet the more stringent requirements 
imposed for hospital-based and freestanding PHPs under the Program, 
CMHCs have also been excluded from payment under OPPS for partial 
hospitalization program (PHP) services since they are not recognized as 
authorized providers under the TRICARE program.
    An outpatient department, remote location hospital, satellite 
facility, or other provider-based entity must also be either created 
by, or acquired by, a main provider (hospital qualifying for payment 
under OPPS) for the purpose of furnishing health care services of the 
same type as those furnished by the main provider under the name, 
ownership, and financial administrative control of the main provider, 
in accordance with the following requirements under 42 CFR Sec.  413.65 
(Medicare Regulation) in order to qualify for payment under the OPPS:
     Licensure--The outpatient department, remote location 
hospital, or the satellite facility and the main hospital are operated 
under the same license, except in areas where the State requires a 
separate license for the department of the provider.
     Clinical integration--Professional staff of the outpatient 
department, remote location hospital or satellite facility are 
monitored by, and have clinical privileges at the main hospital. The 
medical director of the outpatient facility must also maintain a 
reporting relationship with the chief medical officer at the main 
hospital that has the same frequency, intensity and level of 
accountability that exists in the relationship between other 
departmental medical directors and the chief medical officer of the 
main hospital. Medical records for patients treated in the facility or 
organization must be integrated into a unified retrieval system (or 
cross reference) of the main hospital and there must be full access to 
all services provided at the main hospital for patients treated in the 
outpatient facility requiring further care.
     Financial integration. The financial operation of the 
outpatient facility must be fully integrated within the financial 
system of the main hospital, as evidenced by shared income and expenses 
between the main hospital and outpatient facility.
     Public awareness. The outpatient department, remote 
location hospital, or a satellite facility is held out to the public 
and other payers as part of the main provider. When patients enter the 
outpatient facility they are aware that they are entering the main 
provider and are billed accordingly.
    Having clear criteria for provider-based status is important 
because this designation can result in additional TRICARE payments for 
services at the provider-based facility (i.e., the incorporation of 
additional facility costs for covered outpatient services/procedures). 
TRICARE will accept the providers' determination on whether they meet 
the regulatory criteria for provider-based status for purposes of 
seeking reimbursement under the TRICARE OPPS.

III. Application of Ambulatory Payment Classification (APC) Model

    Payment for services under the OPPS is based on grouping outpatient 
services into APC groups in accordance with provisions outlined in 
section 1833(t) of the Social Security Act and its implementing 
regulation 42 CFR Part 419. This grouping is accommodated through the 
reporting of HCPCS codes and descriptors that are used to group 
homogenous services (both clinically and in terms of resource 
consumption) into their respective APC groups.
    During the development of the hospital OPPS it was recognized that 
certain hospital outpatient services were being paid based on fee 
schedules or other prospectively determined rates that were being 
applied across other ambulatory care settings. As a result, the 
following services were excluded from the OPPS in order to achieve 
consistency of payment across different service delivery sites: (1) 
Physician services; (2) nurse practitioner and clinical nurse 
specialist services; (3) physician assistant services; (4) certified 
nurse-midwife services; (5) services of a qualified psychologist; (6) 
clinical social worker services, except under half- and full-day 
partial hospitalization programs in which the services are included 
within the per diem payment amount;

[[Page 17277]]

(7) services of an anesthetist; (8) screening and diagnostic 
mammographies; (9) clinical diagnostic services; (10) non-implantable 
DME, orthotics, prosthetics, and prosthetic devices and supplies; (11) 
hospital outpatient services furnished to SNF inpatients as part of 
their comprehensive care plan; (12) physical therapy; (13) speech-
language pathology; (14) occupational therapy; (15) influenza and 
pneumococcal pneumonia vaccines; (16) take-home surgical dressings; 
(17) services and procedures designated as requiring inpatient care; 
and (18) ambulance services. These services will continue to be 
reimbursed under the current CMAC fee schedule or other TRICARE-
recognized allowable charge methodology (e.g., statewide prevailings).
    The remaining outpatient procedures which were not being paid under 
current fee schedules or other prospectively determined rates were 
grouped under an APC based on the following criteria:
     Resource Homogeneity--The amount and type of facility 
resources (for example, operating room, medical supplies, and 
equipment) that are used to furnish or perform the individual 
procedures or services within each APC group should be homogeneous. 
That is, the resources used are relatively constant across all 
procedures or services even though resources used may vary somewhat 
among individual patients.
     Clinical Homogeneity--The definition of each APC should be 
``clinically meaningful.'' That is, the procedures or services included 
within the APC group relate generally to a common organ system or 
etiology, have the same degree of extensiveness, and utilize the same 
method of treatment.
     Provider Concentration--The degree of provider 
concentration associated with the individual services that comprise the 
APC is considered. If a particular service is offered only in a limited 
number of hospitals, then the impact of payment for the services is 
concentrated in a subset of hospitals. Therefore, it is important to 
have an accurate payment level for services with a high degree of 
provider concentration. Conversely, the accuracy of payment levels for 
services that are routinely offered by most hospitals does not bias the 
payment system against any subset of hospitals.
     Frequency of Service--Unless there is a high degree of 
provider concentration, creating separate APC groups for services that 
are infrequently performed is avoided. Since it is difficult to 
establish reliable payment rates for low-volume groups, HCPCS codes are 
assigned to an APC that is most similar in terms of resource use and 
clinical coherence.
     Minimal Opportunities for Upcoding and Code 
Fragmentation--The APC system is intended to discourage using a code in 
a higher paying group to define the care. That is, putting two related 
codes such as the codes for excising a lesion for 1.1 cm and one of 1.0 
cm, in different APC groups may create an incentive to exaggerate the 
size of the lesions in order to justify the incrementally higher 
payment. APC groups based on subtle distinctions would be susceptible 
to this kind of coding. Therefore, APC groups were kept as broad and 
inclusive as possible without sacrificing resource or clinical 
homogeneity.
    These procedures, along with their specific HCPCS coding and 
descriptors, were used to identify and group services within each 
established APC group. They included: (1) Surgical procedures 
(including hospital-based ASC procedures currently being paid under the 
eleven tier ASC payment methodology); (2) radiology, including 
radiation therapy; (3) clinic visits; (4) emergency department visits; 
(5) diagnostic services and other diagnostic tests; (6) partial 
hospitalization for the mentally ill; (7) surgical pathology; (8) 
cancer therapy; (9) implantable medical items (e.g., prosthetic 
implants, implantable DME and implantable items used in performing 
diagnostic x-rays and laboratory tests); (10) specific hospital 
outpatient services furnished to a beneficiary who is admitted to a 
SNF, but in which case the services are beyond the scope of SNF 
comprehensive care plans; (11) certain preventive services, such as 
colorectal cancer screening; (12) acute dialysis (e.g., dialysis for 
poisoning); and (13) ESRD services. These hospital outpatient 
procedures will be paid on a rate-per-service basis that varies 
according to the APC group to which they are assigned.
    In accordance with section 1833(t)(2) of the Social Security Act, 
services and items within an APC group cannot be considered comparable 
with respect to the use of resources in the APC group if the highest 
median cost is more than 2 times the lowest median cost for an item or 
service within the same group (referred to a the ``2 times rule''). 
Exceptions may be granted in unusual cases, such as low-volume items 
and services.

IV. Packaging and Special Payment Provisions Under OPPS

    The prospective payment system establishes a national payment rate, 
standardized for geographic wage differences, that includes operating 
and capital-related costs that are directly related and integral to 
performing a procedure or furnishing a service on an outpatient basis, 
which has ultimately resulted in the establishment of distinct groups 
of surgical, diagnostic, and partial hospitalization services, as well 
as medical visits. No separate payment is made for packaged services, 
because the cost of these items is included in the APC payment for the 
service of which they are an integral part. These costs include, but 
are not limited to: (1) Use of operating suite; (2) use of procedure 
room or treatment room; (3) use of recovery room or area; (4) use of an 
observation bed; (5) anesthesia, along with supplies and equipment for 
administering and monitoring anesthesia or sedation; (6) certain drugs, 
biologicals, and other pharmaceuticals; (7) medical and surgical 
supplies; (8) surgical dressings; (9) devices used for external 
reduction of fractures and dislocations; (10) intraocular lenses 
(IOLs); (11) capital related costs; (12) costs incurred to procure 
donor tissue other than corneal tissue; (13) incidental services such 
as venipuncture; (14) implantable items used in connection with 
diagnostic laboratory tests, and other diagnostics; and (15) 
implantable prosthetic devices (other than dental) which replace all or 
part of an internal body organ (including colostomy bags and supplies 
directly related to colostomy care), including replacement of these 
devices.
    Payments for packaged services under the OPPS are bundled into the 
payment providers receive for separately payable services provided on 
the same day and are identified by the status indicator (SI) ``N'' 
(unconditionally packaged) or SI ``Q'' (conditionally packaged). 
Hospitals include charges for packaged services on their claims, and 
the costs associated with these packaged services are bundled into the 
costs for separately payable procedures in calculating their payment 
rates. The following criteria are used in determining whether 
procedures should be packaged: (1) Whether the service is normally 
provided separately or in conjunction with other services; (2) how 
likely it is for the costs of the packaged code to be appropriately 
mapped to the separately payable codes with which it was performed; (3) 
whether the APC payment to which the services were packaged will offset 
the hospital's actual

[[Page 17278]]

costs; and (4) whether the expected cost of the service is relatively 
low.
    Special logic has also been programmed into the OCE which will have 
the OPPS PRICER automatically assign payment for a special packaged 
service reported on a claim if there were no other services separately 
payable under the OPPS claim for the same date. A new status indicator 
``Q'' will be assigned to these special packaged codes to indicate that 
they are usually packaged, except for special circumstances when they 
are separately payable.
    Based on the above packaging criteria, it was determined that 
certain other expensive items and services which were otherwise 
considered an integral part of another procedure should not be packaged 
within that procedure's APC payment rate, since the resulting payment 
would not offset the costs of those items and services. This could have 
a potentially negative impact, thereby jeopardizing access to these 
items and services in a hospital outpatient setting. As a result, the 
costs associated with these items and services were not packaged within 
the APC of the primary procedure with which they were normally 
associated. Instead, separate APCs were developed for payment of these 
items and services under the following payment provisions:
    [cir] Transitional Pass-Through for Additional Costs of Drugs, 
Biologicals, and Radiopharmaceuticals. Although the costs of drugs, 
biologicals and pharmaceuticals are generally packaged into the APC 
payment rate for the primary procedure or treatment with which the 
drugs are usually furnished, there are special temporary additional 
payments or ``transitional pass-through payments'' available under 
section 1833(t)(6) of the Social Security Act for at least two years, 
but not more than three years for the following drugs and biologicals: 
(1) Current orphan drugs, as designated under section 526 of the 
Federal Food, Drugs, and Cosmetics Act; (2) current drugs and 
biological agents used for treatment of cancer; (3) current 
radiopharmaceutical drugs and biological products; and (4) new drugs 
and biologic agents in instances where the item was not being paid as a 
hospital outpatient service as of December 31, 1996, and where the cost 
of the item is ``not insignificant'' in relation to the hospital OPPS 
payment amount.
    Section 1833(t)(6)(D)(i) of the Social Security Act sets the 
payment rate for pass-through eligible drugs as amounts determined 
under section 1842(o) of the Act. Section 1847A of the Act establishes 
the use of average sales price (ASP) methodology (i.e., 106 percent of 
the ASP which is the rate equivalent to the payment that would be 
received in a physician office setting) as the basis for payment for 
drugs and biologicals described in section 1842(o)(1)(C) of the Act. 
Section 1883(t)(6)(D)(i) also states if a drug or biological is covered 
under a competitive acquisition contract under section 1847B of the 
Act, the payment rate is equal to the average price for the drug or 
biologicals for all competitive acquisition areas. Thus, drugs and 
biologicals with pass-through status in CY 2007 will receive payment 
consistent with the provision of section 1842(o) of the Act, at a rate 
that is equivalent to the payment they would receive in a physician 
office setting (106 percent of the ASP) or the rate that would be paid 
under the competitive acquisitions program, while pass-through 
radiopharmaceuticals will be paid the hospital's charge for the 
radiopharmaceutical adjusted to the cost using the hospital's overall 
cost-to-charge ratio (CCR).
    [cir] Packaging and Payment for Drugs, Biologicals and 
Radiopharmaceuticals Without Pass-Through Status. Drugs, biologicals, 
and radiopharmaceuticals that do not have pass-through status are paid 
in one of two ways: either packaged into the APC payment rate for the 
procedure or treatment with which the products are usually furnished, 
or separately based on a packaging threshold which has been set at $55 
for CY 2007. Therefore, for CY 2007 and beyond, drugs, biologicals and 
radiopharmaceuticals that are not new and do not have pass-through 
status will be packaged if their calculated per-day cost is less than 
$55 for CY 2007 or less than the updated threshold (i.e., the packaging 
threshold inflated annually by the Producer Price Index (PPI) for 
prescription drugs), with the exception of 5HT3 antiemetics which will 
continue to be paid separately regardless of their calculated per-day 
cost.
    Section 1833(t)(14) of the Act requires special classification of 
certain separately payable drugs, biologicals and radiopharmaceuticals 
and mandates payment under section 1833(t)(14)(A)(iii) of the Act for 
specified covered outpatient drugs in CY 2006 and subsequent years to 
be equal to the average acquisition cost for the drug subject to any 
adjustment for overhead costs, which for CY 2007 is a combined rate of 
106 percent of the ASP. Separately payable drugs and biologicals 
without ASP-based data will be paid at their mean cost calculated from 
Medicare CY 2005 hospital claims data. The preadmission-related 
services associated with intravenous immune globulin (IVIG) will 
continue to be paid under a New Technology APC with a rate of $75. 
Also, payment for blood clotting factors in the outpatient setting will 
be set at 106 percent of the ASP, plus the updated furnishing fee of 
$0.15. The temporary policy of paying radiopharmaceuticals at charges 
reduced to costs is also being extended for one additional year since 
it is still considered the best proxy for radiopharmaceutical 
acquisition and overhead costs. However, separate payment will only 
apply to those radiopharmaceuticals with per-day costs greater than 
$55.
    [cir] Payment for Nonpass-Through Drugs, Biologicals, and 
Radiopharmaceuticals With HCPCS Codes, But Without OPPS Claims Data. 
For CY 2007, hospitals will receive payment for nonpass-through 
radiopharmaceuticals without hospital claims data that have been 
assigned HCPCS codes as of January 1, 2007, at the hospital's charge 
for the radiopharmaceutical adjusted to cost using the hospital's 
overall cost-to-charge ratio, which will be the same methodology used 
in the payment for pass-through radiopharmaceuticals. For new drugs 
without pass-through status or hospitals claims data, payment will be 
made at the lesser of the ASP or competitive acquisition contract price 
(Part B CAP). In rare instances where a drug does not have a Part B 
drug CAP rate or data available for use for ASP methodology, payment 
will be made at 95 percent of the product's most recent AWP. 
Established drugs without hospital claims data that have been 
classified as separately payable in CY 2007 will be paid per the ASP-
based methodology at a rate of 106 percent of the ASP.
    New drugs, biologicals and devices which qualify for separate 
payment under OPPS, but have not yet been assigned to a transitional 
APC (i.e., assigned to a temporary APC for separate payment of an 
expensive drug or device) will be reimbursed under the TRICARE standard 
allowable charge methodology. This allowable charge payment will 
continue until a transitional APC has been assigned (i.e., until CMS 
has had the opportunity to assign the new drug, biological or device to 
a temporary APC for separate payment).
    [cir] Drug Administration Coding and Payment. For CY 2007, 
hospitals will be expected to report the full set of CPT drug 
administration codes in a manner consistent with their descriptors, CPT 
instructions and correct coding

[[Page 17279]]

principles. They will no longer be able to report the alphanumeric 
HCPCS codes (C8950, C8951, C8952, C8954, and C8955) that were 
recognized prior to January 1, 2007. These newly recognized CPT codes 
will be assigned to six new drug administration APCs, with payment 
rates based on median costs for the APCs as calculated from Medicare's 
CY 2005 claims data.
    [cir] Payment for Blood and Blood Products. Since Medicare's 
implementation of the OPPS in August 1, 2000, separate payments have 
been made for blood and blood products through APCs rather than 
packaging them into the procedures with which they were administered. 
Hospital payment for the costs of blood and blood products, as well as 
the costs of collecting, processing, and storing blood products, are 
made through the OPPS payments for specific blood product APCs. For CY 
2007, these blood product payments will be based on the unadjusted, 
simulated median costs for blood and blood products that are derived 
from CY 2005 Medicare claims data, with the exception of the seven 
products for which there will be a payment adjustment to smooth their 
transition to full claims-based payments in the future.
    [cir] Other Procedure or Service Costs Not Packaged in APC Payment. 
Costs for casting, splinting and strapping services, immunosuppressive 
drugs for patients following organ transplant, and certain other high-
cost drugs that are infrequently administered are not packaged into the 
costs of the primary procedures with which they are normally 
associated. Instead, new APC groups have been created for these items 
and services, which will allow separate payment.
    [cir] Corneal Tissue Acquisition Costs. Corneal tissue acquisition 
costs will not be packaged with the APC payment for corneal transplant 
surgical procedures. Instead, separate payment will be made based on 
the hospital's reasonable costs incurred to acquire corneal tissue. 
Corneal acquisition costs must be submitted using HCPCS code V2785 
(Processing, Preserving and Transporting Corneal Tissue), indicating 
the actual cost of the acquisition rather than the hospital's charge on 
the bill.
    [cir] Transitional Pass-Through Payment for Devices. Transitional 
payments will only apply to new and innovative medical devices meeting 
the following criteria: (1) Were not recognized for payment as a 
hospital outpatient service prior to 1997 (i.e., payment was not being 
made as of December 31, 1996) or treated as meeting the time 
constraints under special prescribed conditions; (2) have been 
approved/cleared for use by the Food and Drug Administration (FDA); (3) 
are determined to be reasonable and necessary for the diagnosis or 
treatment of an illness or injury or to improve the functioning of a 
malformed body part; (4) are an integral and subordinated part of the 
procedure performed; (5) are used for one patient only (except for 
reprocessed single-use devices meeting FDA's most recent regulatory 
criteria on single-use devices); (6) are surgically implanted or 
inserted via a natural or surgically created orifice on incision and 
remain with the patient after the patient is released from the hospital 
outpatient department; (7) are not equipment, instruments, apparatus, 
implements, or such items for which depreciation and financing expenses 
are recovered as depreciable assets; (8) are not materials and supplies 
such as sutures, clips or customized surgical kits furnished incidental 
to a service or procedure; (9) are not material such as biologicals or 
synthetics that are used to replace human skin; (10) no existing or 
previously existing device category is appropriated for the device; 
(11) associated cost is