Published May 2, 2023

Medicare Payment Primers: The Hospital Outpatient Prospective Payment System

This Insight is part of our Medicare Payment Primers Series.


The Medicare Outpatient Prospective Payment System (OPPS) provides reimbursement for most services furnished in hospital outpatient departments (HOPD) (e.g., nursing services, tests, supplies, and equipment). Separate fee schedules apply, however, for several services furnished in HOPDs:

• Professional services of physicians and nonphysician practitioners paid under the Medicare Physician Fee Schedule (MPFS)
• Physical and occupational therapy and speech-language pathology services paid under the MPFS
• Screening and diagnostic mammography services paid under the MPFS
• Certain laboratory services paid under the Clinical Laboratory Fee Schedule (CLFS)
• Services for beneficiaries with end-stage renal disease (ESRD) that are paid under the ESRD prospective payment system


Conversion Factor 

The conversion factor is the base rate used to calculate payments under the OPPS. It is intended to represent the national average cost for an average Medicare case. The annual conversion factor is based on estimated 1999 Medicare Part B amounts payable and patient coinsurance under the system in place prior to OPPS, trended forward by an annual update factor. The annual update factor is adjusted on a calendar year basis using the change in cost from one year to the next. This adjustment is referred to as the market basket update.

The wage-index conversion factor is multiplied by the relative weight for the ambulatory payment classification (APC) assigned to the services provided to the patient (see below the discussion of Differences in Area Wages and Ambulatory Payment Classifications).

Facility-Specific Adjustments

Differences in Area Wages: The OPPS uses the same area wage index established for a market under the Inpatient Prospective Payment System (IPPS), including any adjustments due to geographic reclassification or the rural floor (see our article, Medicare Payment Primers: The Fundamentals of Prospective Payment System, for additional information). This rate is divided into a labor-related amount and a nonlabor-related amount. The labor-related amount is adjusted for area wage differences using the hospital inpatient wage index value for the locality in which the facility is located. Currently 60 percent of the rate is wage-index adjusted.

Outpatient Quality Reporting (OQR) Program: Under OQR Program, hospitals must meet administrative, data collection and submission, validation, and publication requirements on identified quality measures. Hospitals that fail to meet these requirements are subject to a 2 percentage point reduction in payment calculated by applying a reporting factor of 0.980 to the OPPS payments and copayments for all applicable services.

Read the OQR Program measures, which are updated annually.

Rural Adjustment: Most sole community hospitals (SCHs), including rural area Essential Access Community Hospitals (EACHs), receive a 7.1 percent increase in the base rate.  

Off-Campus Services: Section 603 of the Bipartisan Budget Act of 2015 requires services furnished in off-campus provider-based departments (PBDs) that did not bill prior to November 2, 2015, (i.e., non-grandfathered PBDs) be paid at the equivalent of the MPFS rate or 40 percent of the applicable OPPS rate for the specific service. Medicare covers these services under the OPPS if provided in a dedicated emergency department or a PBD that is on campus or within 250 yards of the hospital or a remote hospital location or that meets the “mid-build” exception allowed under the 21st Century Cures Act. Hospitals meeting the “mid-build” exception are those that had, prior to November 2, 2015, a binding written agreement with an outside, unrelated party for the actual construction of the off-campus PBD.

Patient/Case-Specific Adjustments

Ambulatory Payment Classification (APC) Groups: Under the OPPS, Medicare pays for hospital outpatient services on a rate-per-service basis that varies according to the APC group to which

the service is assigned. The Centers for Medicare & Medicaid Services (CMS) uses the Healthcare Common Procedure Coding System (HCPCS), which includes certain Current Procedural Terminology (CPT) codes, to identify and group the services within each APC. Addendum B, found at the link in Resource below, provides a crosswalk between CPT codes and APCs. This list is revised quarterly.

All services and items within an APC group are comparable clinically and with respect to resource use. Items and services within an APC group cannot be considered comparable related to the use of resources if the highest median cost for an item or service in the APC group is more than two times greater than the lowest median cost for an item or service within the same APC group (referred to as the “2 times rule”).

Modifiers: A modifier is a two-position alpha or numeric code that is added to the end of a CPT or HCPCS code to clarify the services billed. Modifiers provide a means by which the description of a service can be altered without changing the procedure code. They add more information, such as the anatomical site, and help to eliminate the appearance of duplicate billing and unbundling. Modifiers are used to increase accuracy in reimbursement, coding consistency, and editing, and to capture payment data.

Comprehensive APCs: Comprehensive APCs (C-APCs) cover an entire outpatient encounter with a single payment rate. C-APCs combine a primary service with all adjunctive services that support the primary service and are included on a single claim. Adjunctive services include diagnostic procedures, visits and evaluations, and supplies. An example of a C-APC is outpatient observation.

Outliers: In addition to the base OPPS payment, outpatient facilities can receive an outlier payment for high-cost patients. The cost of the case must exceed 1.75 times the hospital’s usual payment for the specific APC plus a fixed-loss threshold (adjusted annually). If a case is determined to be an outlier, the claim is paid an amount in addition to the OPPS rate of 50 percent of the amount by which the cost of the case exceeds 1.75 times the APC payment rate.

Case costs are determined using a cost-to-charge ratio – the claim-specific charges multiplied by the facility’s overall cost-to-charge ratio from the most recent cost report (filed or settled). High-cost outliers are funded by reducing the base payment amount for all facilities paid under OPPS by an amount estimated to equal 1 percent of total OPPS spending.

Transitional Pass-Thru Payments: Section 1833(t)(6) of the Social Security Act provides for temporary additional payments, referred to as “transitional pass-through payments,” for at least two but not more than three years for certain drugs, biological agents, brachytherapy devices used for the treatment of cancer, and categories of other medical devices.  

New Technology and Services: For new technology services that are not eligible for transitional pass-through payments and for which CMS lacks sufficient clinical information and cost data to appropriately assign them to a clinical APC group, special APC groups have been established based on costs. These New Technology APCs are designated by cost bands, which allows Medicare to provide appropriate and consistent payment for designated new services that are not yet reflected in the claims data. Similar to pass-through payments, an assignment to a New Technology APC is temporary; a service is retained within a New Technology APC until there is sufficient data to assign it to a clinically appropriate APC group.

Partial Hospitalization Services

Partial hospitalization provides a structured program of outpatient psychiatric services as an alternative to inpatient psychiatric care. Payment for partial hospitalization falls under the Medicare OPPS; however, separate APCs have been established based on where the services were provided – a hospital outpatient department or a community mental health center (CMHC). If provided in a CMHC, the outlier threshold for these services is 3.4 times the APC payment rate, with an outlier percentage of 50 percent.

Ambulatory Surgical Centers (ASCs)

Medicare covers surgical procedures provided in freestanding or hospital-operated ASCs under the OPPS but with limited coverage and a reduced conversion factor. Covered services are those without a significant safety risk and not requiring an overnight stay. CMS updates the list of ASC-covered services annually.

While most ancillary services are packaged with the primary service provided, certain ancillary services considered integral to surgical procedures are paid separately. These include

  • Implantable devices eligible for pass-through payment under OPPS
  • Brachytherapy services
  • Corneal tissue acquisition
  • Certain radiology services
  • Most drugs

The APCs and their weights established under OPPS are used for ASC payments, and both the labor and non-labor components of the conversion factor are set at 50 percent. The labor component calculation uses the hospital wage index.

Similar to the hospital OQR Program, CMS has adopted an ASC Quality Reporting (ASCQR) Program, a pay-for-reporting program with a 2 percent reduction in an ASC’s annual update for failure to report the required quality measures.

Read the ASCQR Program measures, which are updated annually


CMS Hospital Outpatient PPS

This Insight is part of our Medicare Payment Primers Series. If you have questions about reimbursement, strategy and transactions, compliance, or valuation, one of our executive contacts would be happy to assist. You may e-mail them below or call (800) 270-9629.

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