Medicaid and Outpatient Hospital Services

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On September 28, 2007, a proposed Medicaid rule was published that would (1) change the
definition of outpatient hospital and rural health clinic services and (2) change the methods states
must use to demonstrate compliance with the federal upper payment limit on outpatient hospital
services provided in private outpatient facilities. A number of groups have expressed concern that
this rule will have a significant negative impact on coverage of certain services, which may harm
Medicaid beneficiaries. On November 7, 2008, the Centers for Medicare and Medicaid Services
(CMS) issued a final Medicaid rule on outpatient hospital services that excluded the proposed
regulatory language delineating methods for demonstrating compliance with the upper payment
limit on outpatient hospital services provided in private outpatient facilities. Currently, there is no
congressional moratorium on this final rule. A provision in the American Recovery and
Reinvestment Bill of 2009 that was approved by the House Energy and Commerce Committee on
January 22, 2009, includes such a moratorium. That moratorium would prohibit the Secretary of
Health and Human Services from taking any action until June 30, 2009 (through regulation,
regulatory guidance, use of federal payment audit procedures, or other administrative action,
policy, or practice, including a Medical Assistance Manual transmittal or state Medicaid director
letter), to implement the final regulation covering outpatient hospital facility services.

Outpatient Hospital Services.....................................................................................................1
The Proposed Rule on Outpatient Hospital Services Under Medicaid.....................................2
Justification for the Proposed Rule...........................................................................................3
Opposition to the Proposed Rule...............................................................................................3
The Final Rule on Outpatient Hospital Services Under Medicaid............................................5
Latest Congressional Action.....................................................................................................5
Author Contact Information............................................................................................................6

Hospitals provide a range of outpatient health care services in different settings (such as
outpatient departments, clinics, and ambulatory surgery centers) under various organizational and
ownership arrangements. These outpatient facilities may be located on or off the hospital campus
or in satellite facilities. A range of different health care professionals and practitioners treat
patients in these settings. Simply, the way that the various health care services are categorized,
covered, and reimbursed will vary by payor.
Under the Medicaid program, outpatient hospital (OPH) services are a mandatory benefit for most ¹
beneficiaries. In FY2006, expenditures for outpatient hospital services totaled roughly $11.5 ²
billion, or 3.9% of total Medicaid spending (about $299.0 billion). Current Medicaid regulations
broadly define hospital outpatient services to include preventive, diagnostic, therapeutic,
rehabilitative, or palliative services provided under the direction of a physician or a dentist in the
hospital. States use a number of different reimbursement methods for different types of services
provided in outpatient hospital departments and clinics. For example, some states pay a flat per-
visit rate for a clinic visit, use a fee schedule for surgery, and pay on a cost-basis for certain
specialized services. In 2002, about half of the states based their OPH reimbursement largely on
hospital-specific costs (e.g., actual costs or prospective rates based on historic costs with a limit ³
on annual increases, or paid a fixed percentage of actual costs). In addition, more recent 2006
data indicate that 11 states used Medicare groupings and/or methodologies for determining ⁴
reimbursement rates for some OPH services.
Finally, in general, Medicaid payments for institutional services (e.g., hospitals and nursing
homes) cannot, in the aggregate, and within three provider categories (state government, non-⁵
state government, and private), exceed a reasonable estimate of what Medicare would pay for the
same services. This is called the Medicaid upper payment limit (UPL) rule. This UPL rule is
applied separately to inpatient and outpatient care.
Under the Medicare program, hospitals are paid for certain services provided to outpatients
through Medicare’s outpatient prospective payment system (OPPS), which uses a fixed payment
rate that reflects expected resource use for specific ambulatory patient classifications or APCs
(which groups sets of hospital outpatient diagnoses and procedure codes into broader categories,
which are reimbursed by specified Medicare payment amounts). Generally, the OPPS payments
cover the facility costs associated with a procedure performed in an outpatient department. Other
services are provided by hospitals in outpatient settings that are not paid under OPPS. These
include professional services provided by physicians and health practitioners (e.g., psychologists,

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social workers, physical therapists) paid under the physician fee schedule, as well as clinical
diagnostic services, ambulance services, dialysis services, and most durable medical equipment, ⁶
all paid using different methods. Off-campus or satellite outpatient facilities that meet certain
provider-based requirements are treated as part of a hospital, not freestanding, independent ⁷
entities, and are paid under alternative payment methods. These determinations affect Medicare
(and Medicaid) payment amounts, the scope of benefits available to a beneficiary (in or at the
facility), and/or beneficiary out-of-pocket liability.
The proposed rule (72 Federal Register 55158, September 28, 2007) would limit the definition
and scope of Medicaid outpatient services in a hospital clinic, hospital facility, or rural health
clinic. Federally reimbursable Medicaid outpatient services would include only those facility
services (1) that Medicare would pay for under its OPPS or recognized by Medicare as an OPH
service under an alternate payment methodology; (2) provided by an outpatient hospital facility,
including only those entities that meet standards for provider-based status as a department of an
outpatient hospital as defined in Medicare rules; and (3) not covered under the scope of any other
Medicaid benefit category.
Under the proposed rule, the UPL for privately operated outpatient hospital facilities would
remain tied to a reasonable estimate of what Medicare would pay for the same services. However,
the calculations used to demonstrate compliance with this UPL would be required to include only
services that (1) may be covered under the new Medicaid outpatient services definition and (2)
are reimbursable under Medicare (i.e., appear on outpatient-specific Medicare cost report
worksheets). With respect to the second criterion, states would be required to base this UPL
calculation on the hospital-specific ratios (cost-to-charge or payment-to-charge) as reported in the
most recently filed Medicare hospital cost report, or an equivalent state cost report.
A different UPL calculation would apply to privately operated clinics that are not part of a
hospital. For these entities, states would choose one of two UPL methods: (1) a defined
percentage, not to exceed 100% of what Medicare pays under the non-facility fee schedule, or (2)
a comparison by individual procedure code of Medicare payment amounts for equivalent
Medicaid services when Medicaid reimbursements are based on a specific fee schedule or
encounter rate. For this second method, the calculation may be conducted in the aggregate for
clinic type or by specific facilities (for end stage renal disease, ambulatory surgical centers, etc.).
Services for which the Medicaid statute defines a separate UPL (e.g., clinical diagnostic ⁸
laboratory services) must be excluded from this clinic UPL. Finally, for dentists providing
services in such clinics, the UPL calculation may include payment amounts that Medicaid would
otherwise pay outside the facility.
CMS stated that it cannot determine the fiscal impact of this proposed rule because of a lack of
available data. However, CMS believes this rule would not significantly alter current practices in

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most states. In the preamble to this rule, CMS indicated it had approved outpatient hospital
reimbursement methods submitted by 32 states over a four-year period, and only 1 state (not
named) used methods that may be minimally affected by the rule. CBO estimates that this rule ⁹
will reduce federal Medicaid outlays by $0.3 billion over 5 years and $0.7 billion over 10 years.
A recent congressional report indicates that this rule would result in a loss of roughly $2.1 billion ¹⁰
over the next five years in four states that could provide such estimates.
CMS argues that the current definition of outpatient hospital services in regulations overlaps with
other covered Medicaid benefits, so that identical services are sometimes paid a higher amount
under the outpatient hospital benefit than would otherwise be available under other Medicaid
benefit categories. CMS also finds the current definition to be overly broad, including services
over which outpatient hospital departments have no oversight or control, and can include services
outside the normal responsibility of outpatient hospital departments (e.g., non-facility physician
and practitioner services, and non-traditional OPH services such as school-based and
rehabilitation services). CMS noted that some states may need to move services that would no
longer meet the new definition of outpatient hospital services to other appropriate coverage
categories and payment methodologies under the state plan.
CMS noted that a number of states requested that the agency clarify in regulation the
requirements for calculating Medicare comparable UPLs on outpatient and clinic services. In
calculating the UPL for hospital and clinic services in private facilities, CMS argued that the
current regulation does not indicate how this estimate should be made, and it does not address
treatment of services that are not comparable to those provided under Medicare (e.g., dental
services). In addition, CMS indicated that some states have used their own state-specific hospital
cost reports to determine compliance with this UPL and such reports may not represent finalized
data or accurately reflect Medicare payment and/or charge ratios. CMS considers the Medicare
cost reports or equivalent state cost reports to be a more accurate measure of this UPL.
CMS has received a number of comments on this proposed rule.¹¹ Examples of some of those
comments are summarized here. First, under current law, states make certain supplemental
payments to selected providers that treat a large number of low-income and Medicaid patients for
their uncompensated hospital services. Federal statute establishes a ceiling on such
“disproportionate share hospital,” or DSH, allotments for each state. States must identify
hospitals qualifying as DSH hospitals and must specify DSH payment formulas. Opponents argue
that the proposed rule’s new definition of OPH services would exclude many of the costs that

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states now consider in calculating DSH payments, which could in turn limit such payments to
hospitals.
Other arguments highlight the potential negative impact of the proposed rule on Medicaid
children and children’s hospitals. First, one argument notes that while Medicare serves as a
benchmark for this new rule, Medicare covers very few children and would not cover preventive
and screening services provided under “Early and Periodic Screening, Diagnostic, and Treatment
Services” (EPSDT), a mandatory Medicaid benefit for most Medicaid beneficiaries under the age ¹²
of 21. The commenter also concludes that the regulation directly contravenes the Medicaid
EPSDT provision by excluding federal matching dollars for OPH programs that provide required
EPSDT diagnostic and treatment services that may not be covered under Medicare. More
generally, other commenters observed that the OPH services no longer permitted under this rule
may continue to be provided by hospitals in other ways, albeit at a reduced payment rate. Second,
with respect to the rule’s requirement to use Medicare’s cost-to-charge and payment-to-charge
ratios in calculating the UPL for private providers, other opponents of the rule argue that hospitals
with a significantly different patient mix from Medicare, such as children’s hospitals, would not
have their costs appropriately accounted for in the new UPL. Children’s hospitals that submit
low-volume cost reports and other hospitals with nontraditional charge structures may not readily
be able to comply with the new UPL requirements.
Other commenters raise additional concerns that the new definition of OPH services under the
proposed rule will exclude coverage of various services previously offered through this benefit,
which may limit beneficiary access to such services in some states. OPH services are a mandatory
benefit under Medicaid and are likely to include, for example, physical therapy (PT) for
outpatients. While Medicare also covers PT in OPH settings, these services are not reimbursed
under the OPPS and thus would be excluded from the new definition of OPH services for
Medicaid. Outside of EPSDT, PT may be otherwise available under Medicaid, but as an optional ¹³
benefit. Data from 2005 show that eight states do not offer this optional PT benefit.
Concerns about the proposed calculations for demonstrating compliance with the UPL for private
facilities were also expressed. One comment letter noted that it was unclear whether compliance
with the UPL for OPH services must be demonstrated in the aggregate, for each individual
provider, and/or at the cost center level. Different descriptions of the proposed UPL calculations
in both the preamble and the new regulatory language in the proposed rule contributed to this
confusion.
Several commenters argued that specific provisions in the proposed OPH rule violate the one-
year moratorium in P.L. 110-28 on implementation or further action on two other rules: (1) the
final rule establishing Medicaid cost limits for public providers (72 Federal Register 29748, May
29, 2007) and (2) the proposed rule on graduate medical education (GME) expenditures under
Medicaid (72 Federal Register 28930, May 23, 2007). Specifically, the proposed OPH services
rule incorporates the new definition of hospital categories that was adopted in the final rule
regarding cost limits on public providers, which eliminates references to provider ownership
status; commenters argue that including this language directly contravenes the moratorium on
implementing any provision of the public provider rule. Commenters also argue that the OPH

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services rule violates the moratorium on the GME rule, because the proposed UPL calculations ¹⁴
use Medicare cost report calculations that have excluded GME costs. Other procedural concerns
have been noted. Specifically, commenters objected that the proposed rule was more than a
clarification of existing policy and that implementation of the rule would impose substantial
administrative changes on state Medicaid programs and significantly decrease hospital revenues.
CMS’s determination that no regulatory impact analysis was necessary was considered by
commenters to be inaccurate and did not constitute appropriate notification or provide sufficient
data to the affected parties. This shortcoming was compounded by the length of the comment
period (30 days and not 60 days), which also undermined the ability of interested parties to
submit informed comments.
Certain commenters raised substantive technical objections to the proposed UPL methodologies.
For instance, a UPL calculated using the Medicare payment-to-charge ratio established from the
cost report worksheets referenced in the proposed rule would not include the beneficiary co-
payment and coinsurance amounts, which constitute at least 20% of Medicare’s allowed payment
amounts under OPPS. The other UPL calculation that would potentially limit Medicaid payments
for OPH services to costs was challenged as well. The statement by CMS that the cost-to-charge
ratio would produce the highest amount that CMS would pay for hospital outpatient services was
seen as inaccurate, because under the Medicare OPPS, efficient hospitals are allowed to retain
APC-based payments above service costs. Also, CMS did not address the application of this
proposed rule to critical access hospitals, which receive Medicare payments based on 101% of
their allowable costs. Finally, the proposed methodology to establish the UPL for freestanding
clinic services was criticized, because it did not recognize the prevalence of cost-based
reimbursement for private clinic services by Medicaid and would result in significant access
problems for these services.
The final rule, issued on November 7, 2008 (73 Federal Register 66187), made a major change to
the proposed rule. As noted above, commenters on the proposed OPH rule argued that, because it
incorporated the new definition of hospital categories adopted in the final rule regarding cost
limits on government providers, this rule violated the moratorium on implementing any provision
of the rule on cost limits for government providers. In light of these views, and given this
moratorium, CMS elected to exclude from its final OPH rule the proposed regulatory language
delineating methods for demonstrating compliance with the Medicaid upper payment limit on
outpatient hospital and clinic services provided in privately operated facilities.
During the 110^th Congress, legislation to delay implementation of the OPH services rule, as well
as other recent Medicaid regulations, was introduced (e.g., S. 2460 and S. 2819). H.R. 5613, as
passed by the House, and H.R. 2642 (a war supplemental spending bill), subsequently passed by
the Senate, would provide for a moratorium until April 1, 2009, on any administrative action with
respect to the OPH services rule, if that action is more restrictive than policies in place on

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September 27, 2007 (the day preceding the publication of the proposed OPH services rule).¹⁵
However, on June 19, the House passed an amendment to the Senate-passed version of H.R. 2642
that did not include a moratorium on the OPH services rule. Subsequently, on June 26, the Senate
agreed to the House version that excluded such a moratorium on this rule. On June 30, this bill
became P.L. 110-252. Subsequent legislation (e.g., H.R. 7219, H.R. 7241, S. 3656) would also
establish a moratorium on the OPH services rule.
To date, there is no moratorium on the OPH services rule. The American Recovery and
Reinvestment Bill of 2009 that was approved by the House Energy and Commerce Committee on
January 22, 2009, includes such a moratorium. That moratorium would prohibit the Secretary of
Health and Human Services from taking any action until June 30, 2009 (through regulation,
regulatory guidance, use of federal payment audit procedures, or other administrative action,
policy, or practice, including a Medical Assistance Manual transmittal or state Medicaid director
letter), to implement the final regulation covering outpatient hospital facility services.
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