The acronym OPPS stands for the Outpatient Prospective Payment System. This is the mechanism the Centers for Medicare & Medicaid Services (CMS) uses to reimburse hospitals for the majority of outpatient services provided to Medicare beneficiaries. OPPS determines a fixed payment amount for services before they are delivered, replacing the older cost-based model. This system was designed to standardize payments, increase efficiency, and control Medicare expenditures for outpatient care.
Defining the Outpatient Prospective Payment System
OPPS was implemented on August 1, 2000, following the mandate of the federal Balanced Budget Act of 1997. Before this system, hospitals were paid for outpatient services based on their incurred costs. The shift to a prospective system moved the financial risk to the hospitals, incentivizing them to deliver care more economically and efficiently.
OPPS governs the payment for services furnished in hospital outpatient departments, which covers a broad spectrum of care. These services include emergency department visits, observation stays, diagnostic procedures like X-rays and laboratory tests, and many minor surgical procedures. The system uses a predetermined, national payment rate that is adjusted for geographic wage differences, ensuring consistency across different regions.
The system focuses on the facility component of care, covering costs for supplies, equipment, and hospital overhead. It generally does not directly determine the payment for the physician’s professional services. This structured approach ensures predictable reimbursement for hospitals and encourages resource management. The methodology applies to virtually all hospital outpatient services unless specifically excluded by statute or regulation.
The Role of Ambulatory Payment Classifications
The core mechanism for calculating payment under OPPS relies on the Ambulatory Payment Classifications (APCs). APCs are a classification system that groups together various outpatient services that are similar both clinically and in terms of the resources required to provide them. When a patient receives an outpatient service, the Healthcare Common Procedure Coding System (HCPCS) code for that service is assigned to a specific APC.
Each APC is assigned a relative weight that reflects the typical resources needed for the services within that group. To determine the actual payment, this relative weight is multiplied by an annually updated conversion factor and then adjusted for the hospital’s geographic location. The resulting payment is a fixed rate that the hospital receives regardless of its actual cost for that specific patient’s care, driving the incentive for cost-efficiency.
The APC system utilizes “packaging,” where payment for certain ancillary items and services is bundled into the payment for the primary procedure. This means supplies, drugs, or minor procedures integral to the primary service are not paid for separately. For instance, the cost of standard surgical supplies used during a procedure is packaged into the payment for the main APC, simplifying billing and encouraging resource consolidation.
How OPPS Differs from Inpatient Billing
To understand the scope of OPPS, it is helpful to contrast it with the method used for hospital stays that require an overnight admission, known as inpatient care. Inpatient services are paid under the Inpatient Prospective Payment System (IPPS). The IPPS uses a different classification structure called Diagnosis-Related Groups (DRGs).
The fundamental difference lies in the unit of payment: OPPS, through APCs, classifies and pays for individual services or procedures provided in an outpatient setting. In contrast, IPPS, using DRGs, categorizes an entire hospital stay based on the patient’s primary diagnosis, any secondary diagnoses, and the procedures performed. The DRG payment covers all services provided from admission to discharge, bundling the entire episode of care.
While both systems are prospective payment models, APCs are resource-based groupings for short stays and procedures, whereas DRGs are diagnosis-based groupings for full hospital admissions. If a patient receives care under OPPS (such as in the emergency department) and is then formally admitted as an inpatient, the hospital’s payment switches entirely to the IPPS/DRG methodology for the entire stay. This distinction highlights the separate financial frameworks CMS uses to manage different settings of hospital-based care.
Services and Facilities Not Covered by OPPS
While OPPS covers most hospital outpatient services, several types of facilities and specific services are excluded from this payment methodology. Critical Access Hospitals (CAHs), typically small facilities in rural areas, are paid based on a percentage of their reasonable costs, not the OPPS fixed-rate structure. Certain comprehensive outpatient rehabilitation facilities are also paid under different fee schedules.
Specific services are statutorily excluded from OPPS payment and are paid through alternative fee schedules. These exclusions include ambulance services, physical therapy, occupational therapy, and speech-language pathology services. Payment for screening mammography and certain vaccines are also handled outside the OPPS structure. These carve-outs ensure payment is tailored to the unique cost structures and delivery models of specialized services and providers.