Ambulatory Payment Classifications (APCs) were launched an Aug. 1, 2000 after numerous delays. APCs represent the main payment system that comprises the OPPS, or the Outpatient Prospective Payment System. The RACs (Recovery Audit Contractors) also were launched early in the 2000s, and their activities have grown significantly over the years.

Today, the Centers for Medicare & Medicaid Services (CMS) refer to the RACs simply as recovery auditors, although the use of the RAC acronym is still common.

The RACs have concentrated their efforts on hospitals, with a main area of focus being the Inpatient Prospective Payment System (IPPS) that utilizes DRGs (Diagnosis-Related Groups) as the main payment mechanism. The RACs have pursued many inpatient issues, including proper DRG classification, medical necessity for services, and improper short-stay hospital admissions. However, what have the RACs pursued relative to APCs and the OPPS?

Up to this point APC issues appear not to be a priority for RACs. This raises the questions of why APCs are not a priority and also when and if APCs will become of significant concern. There are multiple answers to these questions. One factor is that the reimbursement amount for a typical APC encounter is not nearly as high as for those associated with typical inpatient encounters. Thus, logically, the RACs prefer to address cases that involve thousands of dollars (such as hospital inpatient stays).

Both APCs and physician services paid under the MPFS (Medicare Physician Fee Schedule) share the common link that there are large numbers of encounters with relatively low payments, as compared to inpatient hospital stays. There are also crossover issues that can involve both physicians and hospitals, such as outpatient surgery services. In theory, there should be some gold nuggets out there waiting for the RACs to swoop in, make recoupments, and collect fees.

Volumes of Services

Both APCs and MPFS make payments for high volumes of similar services. For instance, in a provider-based clinic 1500, professional, and UB-04 facility claim forms are filed for evaluation and management of patients. While payments certainly vary, a RAC can hardly afford to expend the resources needed to examine cases that involve less than, say, a couple hundred dollars. The resources expended to obtain the records and perform a complex review of a single case could easily cost a RAC more than they could possibly expect from their percentage of any possible recoupment.

This means that for both APCs and MPFS, payment system statistical extrapolation will be needed in order to hold down overall costs to the RACs. However, even statistical extrapolation is not inexpensive. Going through the rigorous process of establishing a sound statistical basis for applying extrapolation is certainly not trivial. Thus, continuing the mining metaphor, in order for the RACs to find the gold, there will be some up-front expenses.

Even before a RAC can consider any audits, including statistical extrapolation, the coding, billing, and reimbursement policies within the payment system must be well-established. Given the degree of change within APCs each year, recognizing specific issues that the RACs can address is challenging.

APCs Represent an Unstable Payment System

As we enter the 16th year of APCs, it has become clear that this is a payment system that continues to undergo significant changes each year. Payment levels for individual services can go up and down significantly with considerable regularity. In recent years, CMS has been instituting significant bundling and packaging changes as well. Additionally, there are significant policy issues that have been addressed. One of the most key areas has been changes in physician supervision requirements.

For the RACs (or other auditors, for that matter), addressing payment issues within a payment system that experiences significant changes from year to year is a daunting challenge in itself.

We will examine three issues that can be of concern to the RACs.

E/M Levels – Evaluation and management coding is performed by both physicians on the professional side as well as hospitals on the facility side. For physicians, there are extensive coding documentation guidelines. Until this year, hospitals were directed by CMS to simply develop their own mappings and then to follow the mappings. The original intent was for CMS to develop guidelines within a year or two of implementing APCs. CMS encountered great difficulty in developing documentation guidelines for facility E/M coding.

For 2014, CMS made a bold and major change. For APCs, the 10 E/M levels for both new and established patients (i.e., 99201-99215) were coalesced into a single HCPCS code, G0463, that maps into APC 0634 with a payment in the $90 range. With this rather startling development, the whole compliance issue of coding correct levels of E/M services now appears moot.

A moment’s reflection and you will realize that this may not be the end of the story. The facility costs for a Level 1 established patient (i.e., 99211) versus the cost for a new Level 5 patient (99205) can be quite significant. This fact shows up immediately in that the new 0643 APC violates the “two times” rule. This rule is a rather liberal statistical measure that indicates when there is too much variation of costs within the given APC.

When there is too much variation, the typical approach is to break out the offending APC into two or three or more different APCs in order to reduce the variation in costs within the new APC categories. Thus, the E/M level issue may be moot at this time, but it may arise again in the future.

-25 Modifier – The -25 modifier is used only on E/M codes and indicates that the E/M service was distinct and separately identifiable from an associated service, typically a surgical procedure. This modifier is used both by physicians and hospitals. However, there is definite guidance for physicians, but little guidance for hospitals on the facility side. Let us consider a simple example.

Case Study – A physician is at a provider-based wound care clinic. A Medicare patient who is new to both the physician and the clinic presents. There is a partially healed wound. The physician examines and documents the wound and then performs debridement and schedules the patient for a follow-up visit in a week.

At issue are two related questions:

  1. Can the physician code a low-level E/M, say, 99201, with the -25 modifier along with the surgical service?
  2. Can the hospital code an E/M level (i.e., G0463) along with the surgical service?


On the physician side there is clear guidance from the Medicare program. Here is a quote from the NCCI (National Correct Coding Initiative) Policy Manual:

“If a procedure has a global period of 000 or 010 days, it is defined as a minor surgical procedure. In general E&M services on the same date of service as the minor surgical procedure are included in the payment for the procedure. The decision to perform a minor surgical procedure is included in the payment for the minor surgical procedure and should not be reported separately as an E&M service. However, a significant and separately identifiable E&M service unrelated to the decision to perform the minor surgical procedure is separately reportable with modifier 25. The E&M service and minor surgical procedure do not require different diagnoses. If a minor surgical procedure is performed on a new patient, the same rules for reporting E&M services apply.”

The policy enunciated operates under the MPFS. Assuming that the physician’s documentation involves only a description of the wound and thus the decision to debride, the physician cannot bill the 99201 with the -25 modifier. Only the debridement would be billed.

Guidance on the facility side is much less clear. For APCs there is no definition of minor and major surgeries. Thus, the guidance from the NCCI Policy Manual cannot really be applied. There is an open question as to whether a hospital can use the G0463 with a -25 modifier along with the debridement service.

Note: For those of you who are really into the Federal Register, in the July 14 issue that proposes changes to APCs for 2015, there is a definition of major procedures and minor procedures. These proposed definitions do not seem to apply to these concepts in other payment systems:

“We (CMS) note that, under the proposed CY 2015 OPPS packaging policy, we are proposing to delete status indicator ‘‘X’’ and revise the title and description of status indicator ‘‘Q1’’ to reflect that deletion, as discussed in sections II.A.3. and XI. of this proposed rule. We note that we also are proposing to create status indicator ‘‘J1’’ to reflect the comprehensive APCs discussed in section II.A.2.e. of this proposed rule. For CY 2015, we are proposing to define major procedures as any HCPCS code having a status indicator of ‘‘J1,’’ ‘‘S,’’ ‘‘T,’’ or ‘‘V’’; define minor procedures as any code having a status indicator of ‘‘F,’’ ‘‘G,’’ ‘‘H,’’ ‘‘K,’’ ‘‘L,’’ ‘‘R,’’ ‘‘U,’’ or ‘‘N’’; and classify ‘‘other’’ procedures as any code having a status indicator other than one that we have classified as major or minor. For CY 2015, we are proposing to continue to assign status indicator ‘‘R’’ to blood and blood products; status indicator ‘‘U’’ to brachytherapy sources; status indicator ‘‘Q1’’ to all ‘‘STV-packaged codes’’; status indicator ‘‘Q2’’ to all ‘‘T-packaged codes’’; and status indicator ‘‘Q3’’ to all codes that may be paid through a composite APC based on composite specific criteria or paid separately through single code APCs when the criteria are not met.”

Now the possible use of the -25 modifier on the facility side could become quite widespread. For instance, a hospital may have pre-surgery clinics in which patients are seen several days before surgical procedures are performed and there is a nursing assessment and radiological services provided. The -25 modifier is used to separate the radiological procedure from the nursing assessment. Similar situations arise in the ER, where a physician may only assess a laceration and then repair it. In this case, according to the NCCI Policy Manual guidance, the ER physician would code and bill only the laceration repair. However, will the hospital bill both the E/M level (99281-99285) using the -25 modifier along with the laceration repair?

Whenever there is any sort of ambiguous guidance, there is the potential for possible RAC audits.

Physician Supervision

Physician supervision for outpatient services has endured a five-year cycle starting in 2008 and then settling down by 2013. Direct physician supervision is the base requirement for all outpatient therapeutic services. Physician supervision for diagnostic outpatient services is now governed by the supervision rules found in the MPFS.

While we can have long discussions about the clarifications in the physician supervision requirements, the very real concern is whether this issue will be of interest to the RACs or other federal auditing entities. Additionally, we must understand what guidelines the RACs would use to audit and then possibly demand recoupment. At this point such guidelines are not apparent.

Let us consider a simple example.

Case Study: A hospital has a nice infusion center in a separate building next to the hospital. Chemotherapy, infusions, injections, and blood transfusions are provided from early morning until early evening. No physicians or qualified mid-levels are specifically assigned to the center. Specially trained nurses provide all of the services.

The challenge for the hospital is to be able to affirmatively document that there was a physician or qualified non-physician practitioner who was in close proximity and immediately available. Of course, there could be more than one such individual who could meet this supervisory requirement. One question is this: What constitutes affirmative documentation? Are there any standards or guidelines for determining it?

For discussion purposes, let us assume that a RAC is auditing the documentation relating to physician supervision for this infusion center over the time period of one month. What if the RAC determines that there were three days out of the month in which there was no documented physician supervision? Presumably, recoupment will be demanded for all Medicare services provided on the given three dates of service.

Also, how far will the RACs or other auditors go to investigate proper physician supervision? Will they actually track down the physician to determine that the physician was indeed in close proximity and immediately available? In this area there are certainly a number of unanswered questions that are of concern.

Summary and Conclusion

In the coming years the RACs will probably increase consideration for both hospital outpatient issues and physician issues. Now is the time to examine the possible issues, determine what the RACs might do relative to the issues, and then make certain you are properly prepared to defend your activities. All of this must be accomplished in areas where there is occasionally ambiguous guidanc

About the Author

Duane C. Abbey, Ph.D., CFP, is an educator, author and management consultant working in the healthcare field. He is President of Abbey & Abbey Consultants, Inc., which specializes in healthcare consulting and related areas. His firm is based in Ames, Iowa. Dr. Abbey earned his graduate degrees at the University of Notre Dame and Iowa State University.

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