Brush Up on Outpatient Billing and Coding Basics

The shift to outpatient services puts billers and coders with an understanding of the OPPS in demand.

Hospital outpatient services are all services provided to a patient in a facility that do not require inpatient admission. Outpatient is defined by the Centers for Medicare & Medicaid Services (CMS) as: “A person who has not been admitted by the hospital as an inpatient but is registered on the hospital records as an outpatient and receives services (rather than supplies alone) from the hospital or CAH [critical access hospital].” There are a variety of services performed in the outpatient setting, the most common including ambulatory surgical procedures (i.e., same-day surgeries), emergency room services, observation, diagnostic imaging, diagnostic and therapeutic testing, outpatient clinic encounters, and endoscopy procedures. Spending on these services has significantly increased as medical technology advances and makes it safer and more cost-effective to render certain medical care in the outpatient environment.

“Spending on fee-for-service (FFS) inpatient hospital services has declined as a share of total Medicare spending, falling from 26 percent in 2010 to 19 percent in 2019. Spending on physician fee schedule services has also declined as a share of Medicare spending, falling from 13 percent to 9 percent over this period. At the same time, spending on FFS outpatient services has grown (from 5 percent to 7 percent of Medicare spending) …” (

As opportunities abound for medical coders and billers in the outpatient setting, it’s never been a better time to learn more about the Outpatient Prospective Payment System (OPPS).

Inception of OPPS

When a medical service is performed in a hospital facility there are two claims generated: The physician’s services are submitted on a CMS-1500 claim form and the facility submits a UB-04 claim form for use of its operating room, endoscopy suite, equipment, lab services, supplies, staffing, etc. In general, CPT® code selection for surgical and diagnostic procedures is the same regardless of the place of service. However, the method of reimbursement to the facility is different than for professional services provided by the physician. Also, there are different modifiers required for use in some cases.

Medicare originally based payment on the facility’s cost for each service provided to the patient. To better predict and manage healthcare costs for the Medicare population, Congress passed The Balanced Budget Act of 1997, mandating the creation of the OPPS. Refinements were made to the OPPS in the Balanced Budget Refinement Act of 1999 and later by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). The OPPS was established by CMS and implemented Aug. 1, 2000.

Facilities licensed as hospitals and billing for services using the UB-04 are paid under the OPPS. Under the hospital OPPS, facilities are paid a set rate based on the medical service provided. The rate includes Medicare’s payment for the service, yearly Medicare Part B deductible, copayment, and coinsurance. Although intended for use with the Medicare population, many private payers are utilizing the OPPS to determine payment for their contracted providers.

All About APCs

CMS determines payment by classifying clinically similar, and similar in resources required to provide the service, to Ambulatory Payment Classifications (APCs). HCPCS Level II codes paid under the OPPS are assigned to an APC. Codes assigned to the same APC receive the same payment amount, so the payment rate will vary based on the assigned APC. CMS publishes an updated list of HCPCS Level II codes paid under the OPPS in Addendum B of the annual OPPS final rule. The updated list may contain APC, payment, and/or status indicator (SI) changes.

Medical coders should be diligent about assigning the correct HCPCS Level II code based on the service documented in the patient’s medical record because code assignment directly affects APC assignment and, therefore, reimbursement. Incorrect coding can result in overpayment or underpayment to the provider. Facilities are required to bill all services provided to the patient during the outpatient encounter on the same bill. (If the patient is admitted to the hospital as an inpatient, all services provided within a 72-hour window of admission will be paid under the Inpatient Prospective Payment System (IPPS) Medicare Severity-Diagnosis Related Group (MS-DRG) methodology.)

Reimbursement is determined by the primary procedure provided, and all related services are “packaged” into a single payment for that service. All services within the same APC are paid at the same rate. The OPPS significantly changed how hospitals receive payment. APC payment focuses on the primary procedure performed, rather than the cost of each individual service, and creates incentive for the facility to consider the entire cost of a service provided including all ancillary services related to the primary procedure. Special payment for new technology services, which includes high-cost drugs and biologicals, can be made as a transitional pass-through payment, or will be assigned to the New Technology APC.

Pay Attention to Status Indicators

Not all HCPCS Level II codes are assigned a specific APC. Whereas some are considered “packaged” services by CMS, others are considered only appropriate for the inpatient environment, and some are not considered payable under the OPPS (e.g., inpatient-only procedures). CMS publishes in Addendum B a list of all HCPCS Level II codes and assigns an SI to each that will identify how and if the code is considered payable under the OPPS. For example, a CPT® code assigned to SI J1 indicates a hospital Part B service paid through a comprehensive APC (C-APC). CPT® codes assigned to SI T indicates that the multiple procedure reduction rules apply. A CPT® code assigned to SI N indicates an item or service packaged into the C-APC rate. Packaged services are considered an integral part of another service being paid under the OPPS (CPT® codes with SI J1). Examples of packaged services include supplies, operating and recovery room, anesthesia, and ancillary services. Facilities often list packaged services on separate lines on the UB-04 claim form with a revenue code only because a HCPCS Level II code is not required. In the table to the right are other examples of OPPS SIs. A complete list of status indicators and the associated reimbursement rules are contained in Addendum D1 at (see table below).

Outlier Payments

In certain circumstances, the cost of the medical procedure provided may exceed the C-APC payment provided. Outlier payment adjustments will provide additional payment for extremely high-cost cases. To qualify for an outlier payment in 2021, the following conditions must apply, according to MLN Matters® No. MM12120, effective Jan. 4, 2021:

  • For hospital outlier payments under the OPPS, there will be no change in the multiple thresholds of 1.75 for 2021. This threshold of 1.75 is multiplied by the total line-item APC payment to determine eligibility for outlier payments. This factor also is used to determine the outlier payment, which is 50 percent of estimated cost less 1.75 times the APC payment amount. The payment formula is (cost-(APC payment x 1.75))/2.
  • The fixed-dollar threshold for OPPS outlier payments increased in 2021 relative to 2020. The estimated cost of a service must be greater than the APC payment amount plus $5,300 to qualify for outlier payments.

The outlier payment will equal 50 percent of the amount by which the cost exceeds the 1.75 multiplier. The facility cost-to-charge ratio (CCR) is used to validate the hospital’s costs. This is obtained from the hospital’s most recent cost report. In the absence of that report, the statewide default CCR is used to determine what the reasonable cost would be for the specific geographical region.

Calculating Outlier Payments

Here’s an example of the way an outlier would be calculated:

A patient had an outpatient procedure in an urban area in Connecticut on Oct. 18, 2020. The total charges were $38,500, the CCR was 0.248, and the APC payment was $3,000. To determine if this qualifies for an outlier payment, calculate as follows:

Total charges $38,500 x 0.248 (hospital’s outpatient CCR) = $9,548 total costs

APC payment rate $3,000 x 1.75 (outlier cost threshold) = $5,250

Fixed dollar threshold 2021 = $5,300 + APC payment $3,000 = $8,300

Does the cost of service ($9,548) exceed the APC outlier cost threshold ($5,250) – Yes

Does the cost of service ($9,548) exceed the fixed dollar threshold plus the APC payment ($8,300) – Yes

The cost of service ($9,548) exceeds both and, therefore, qualifies for an outlier payment. The outlier payment amount will be 50 percent of the amount by which the cost exceeds the APC outlier cost threshold ($5,250). The outlier payment would be $2,149.

The Shrinking Inpatient Only List

More medical procedures and services are now being performed in the outpatient facility as medical technology progresses. The Medicare program’s goal is to provide beneficiaries with more choices and the option to reduce out-of-pocket expenses. Procedures that can be done as an outpatient can be more cost-effective. To that end, Medicare is slowly phasing out their Inpatient Only (IPO) list. In 2021, Medicare has removed almost 300 procedures from the IPO list, making them eligible for payment in the outpatient setting. Also, 11 procedures have been added to the freestanding Ambulatory Surgical Center Covered Procedures list. This ultimately gives patients more options on where to receive care. (For more information, see the August issue for the article “The Impact of the Vanishing Inpatient Only List.”)

Facility billing and payment is more complex than billing for physicians. As with all reimbursement methodologies, it is very important to any organization to fully understand the way the facility will be reimbursed to ensure consistency in the revenue stream.


CMS: Hospital Outpatient PPS. Addendum A and Addendum B Updates

Medicare Payment Advisory Commission. July 2020 A Data Book: Health Care Spending and the Medicare Program

MLN Matters® No. MM12120, Dec. 31, 2020

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