August 3, 2001

House Letter Recommends Changes to Outpatient Pass-Through Payment for Drugs, Devices and Technologies

Expressing concern that Medicare hospital "pass-through" payments for outpatient drugs, devices, and technology are inadequate and inappropriate, Reps. Bill Thomas (R-Calif.), Nancy Johnson (R-Conn.) and Pete Stark (D-Calif.) July 27 wrote a letter to Centers for Medicare and Medicaid Services (CMS) Administrator Tom Scully recommending administrative and legislative changes be made.

In a Ways and Means Committee press release, Rep. Johnson stated, "There are problems in the way these payments are calculated that pose barriers to providing them in outpatient settings." Said Rep. Thomas, "CMS needs more time to develop adequate and appropriate Medicare payments for these services, reducing the need to lower payments."

The payment problems stem from the "unintended consequences" of the Balanced Budget Refinement Act of 1999. Under current law, Medicare "pass-through" payments for outpatient drugs, devices and technologies cannot exceed 2 percent of total Medicare hospital outpatient payments. If the total amount of pass-through payments exceeds the 2 percent cap, payments must be reduced on a pro-rated basis. CMS has unofficially indicated that the pro-rated reduction proposed for 2002 will be between 60 and 80 percent, which would significantly reduce reimbursements made to teaching hospitals for their use of outpatient drugs, devices and technologies.

"We recommend that CMS accelerate the process of including these costs within the base payment rates, which would create more accurate payment rates and reduce the need for a pro-rata reduction," said the letter. Costs for the pass-through items would therefore be moved more quickly into the base payment rates for outpatient services. In addition, the authors recommended two additional administrative actions: reassess eligibility criteria for purposes of pass-through payments; and move the update of the payment rates from Jan. 1 to April 1 due to unavailability of data. (The AAMC, along with other hospital organizations, supports delaying next year's implementation by six months instead of three.) The authors recommend hospital and beneficiaries be held harmless from a delay in implementation.

Reps. Thomas, Johnson, and Stark also indicated their interest in making three legislative changes to "ensure that the rates are updated and the underlying methodology is improved." They include:

• Changing the payment methods for the pass-through items to better reflect acquisition costs;
• Eliminating the outlier pool created by BBRA and adding the outlier pool dollars to increase the amount money available for pass through payments; and
• Making pass-through payments on a budget neutral basis.

Information: Lynne L. Davis, AAMC Office of Governmental Relations, 202-828-0526.