Medicare Payment for Hospital Outpatient Services

A Historical Review of Policy Options

by Barbara O. Wynn

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The Medicare prospective payment system for hospital outpatient services has been subject to continuing debate since it was implemented August 1, 2000. Policy issues include how the unit of payment is defined, how the payment rate is established, and how the costs of new technology and expensive drugs are recognized. In addition, there are concerns over using different payment methodologies across ambulatory settings and the lack of an effective mechanism to control aggregate Medicare expenditures for ambulatory services. This study reviews the alternative approaches that were considered for payment of hospital outpatient services when the outpatient prospective payment system was designed and considers their relevance today.

The research described in this report was prepared for the Medicare Payment Advisory Commission and performed under the auspices of RAND Health.

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