Why hospitals should develop a billable supply policy

The question of how best to charge and bill medical supplies to insurers has long been fraught with uncertainty for U.S. healthcare providers. The uncertainty arose from the decision by Congress in 1983 to implement the inpatient prospective payment system (IPPS) and, in 2000, the outpatient prospective payment system (OPPS), with the goal of controlling Medicare costs by moving payment away from a cost-based to a fee-for-service (or episodic) payment methodology.

This shift created a significant challenge for hospitals and health systems. Previously, they had been able to charge individually for all medical supplies based on separate charges listed in the chargemaster, regardless of cost. But under IPPS and OPPS payments, a hospital’s payment to cover the cost and expense for medical supplies is often packaged into the larger, procedure-based payment, creating a challenge for the hospital in being able to track whether and to what extent this cost and expense is covered by the larger payment.^a

The need for a billable supply policy

To effectively address this challenge, hospitals need a clearly defined billable supply policy that enables them to determine which supplies are routine versus which are not and are therefore separately billable.

Such a policy can alleviate confusion among the staff who are responsible for ensuring medical supplies are charged to the patient’s account, when appropriate.

Confusion can arise, for example, among hospitals and other large organizations that use a unit cost threshold to account for routine items and supplies, which can have an impact on their charging practices. This cost threshold addresses only low-cost items — typically ranging in price from $0.01 to $25 and packaged by the manufacturer as a bulk supply. These typically are supplies readily available across the hospital on floors/units and found in department closets. Having such a policy means the costs of all other items exceeding the threshold are deemed billable. But it is not necessarily so simple.

Case example: Ambiguity about when a supply should be billed separately

Consider, for example, the case of indwelling foley catheters (IFCs). A physician typically will order an IFC for toileting management of a bed-bound patient or for a patient who is experiencing urinary incontinence for a specific condition.

Depending on the manufacturer’s IFC packaging, the unit cost can range from $1.99 to over $50. If the hospital’s threshold policy is set at a maximum unit cost of $25, any IFC costing less than $24.99 does not get separately billed. The patient receiving an IFC that meets the cost threshold does not see a separate charge on their hospital account. However, another patient receiving an indwelling catheter costing more than $25 will be charged for the same type of supply that has been marked up using the hospital’s mark-up policy. Thus, one patient gets charged separately for use of an IFC and the other does not.

Using the unit cost threshold methodology therefore does not ensure all patients will be charged the same because, as the above example shows, one patient is charged only the room-and-board rate while the other patient is charged room and board plus the charge for the IFC. Meanwhile, the hospital’s reimbursement team must determine the best practice for reasonably setting rates for room and board, procedures and services that include the costs of routine items and supplies purchased and packaged in bulk.

Limited guidance on billable supplies from CMS and others

CMS and other nationally recognized organizations do not provide specific guidance on determining what is a billable supply, nor do they provide any list of billable supplies. Individual payers have published their own coverage policies using the language found in the CMS Provider Reimbursement Manual (PRM).^b Some payers have gone as far as hiring external auditors to help recoup payments made to hospitals, citing the PRM and claiming the payments for items or services are routine and that the hospitals were overpaid based on the payer’s interpretation of the manual language.

Meanwhile, CMS has been consistent in its directive that hospitals should report their charges under the revenue code that will ensure the charges are assigned to the same cost center to which the service costs are assigned in the cost report. (See the sidebar at the end of this article for details on CMS’s directive regarding billable supplies.)

How to develop a billable supply policy

Key steps and considerations for hospitals in developing such a policy include the following.

1 Assemble a team of individuals who are knowledgeable about the organization’s charge capture practices. The team should include, at minimum, staff from materials management, nursing, operating/surgical and reimbursement. The team also should include a revenue integrity expert who preferably has coding and billing expertise and/or clinical background.

The team should begin its work by reviewing all existing and current CMS guidance and gather and review payer policies and contracts where the payer has defined what is and is not separately billable.

2 Create supply categories with a specific definition based on the CMS and/or payer policy language. The dedicated team will need to participate in defining the categories and creating the definitions, because these individuals will later support others across the organization in determining which medical supply will be separately billed.

The number of categories should encapsulate all medical supplies, devices, implants and even minor equipment and associated supplies used by the organization. Examples of defined categories created with hospitals, for example, include floor stock, incontinence care, personal care, surgical device, implant, orthotics, personal protective equipment, kits and wound care supply.

3 Create a decision tree in which each of these categories is listed as not separately billable and separately billable. Under these categories, items or supplies that are not separately billable are identified as being routine, while those that are separately billable are designated as non-routine. See the exhibit below for a sample list.

4 Give special attention to items such as operating room (OR) packs, kits and trays. These types of items require a second-level analysis because they include multiple products specific to the setup and performance of a procedure or service. A key consideration in this analysis for OR packs, kits or trays is determining whether they contain any items that ordinarily fall into the separately billable category. And if they do, the cost of such items should be considered for price setting, despite the inclusion in a kit that contains items that are not separately billable.

5 Outline the billable supply policy in a written document. The written policy should not only clearly outline the previous points and any others deemed important to consider, but also include measures that ensure the hospital’s charge capture practices follow CMS regulatory guidance and third-party payer policy specifics. (See the end of this article for a sample formalized billable supply policy.)

Regarding CMS guidance, the billable supply policy should include the use of revenue code assignments based on finalized billable categories, as well as the application of HCPCS codes where necessary. Having pre-defined revenue codes and eligible HCPCS code(s) for the categories ensures consistency of the hospital’s efforts for billing items and supplies that are separately billable.^c

The policy also should account for coding guidance from the Medicare Claims Processing Manual, Chapter 4, Section 60.4.3, to enable the hospital’s reimbursement and finance leadership to more easily account for the separately billable items in third-party contract negotiations.

6 Integrate specific payer requirements regarding medical supplies into the supply policy. Third-party and nongovernmental payers continue to expand on policies for medical supply coding and billing. In addition to relying on their own interpretation for what is considered routine, payers are beginning to require hospitals to submit HCPCS codes for supplies individually billed with revenue codes 270, 271 and 272 (medical/surgical supplies and devices).

Based on such payer trends, it is important that the policy consider the more restrictive payer coding and billing policies so that charge capture practices will be consistent across the entire organization, with few charge capture exceptions for payer-specific payment purposes.

Going forward, the hospital’s billable supply policy may require slight modifications to account for payer denials where the payer contract language or policy may not have sufficiently defined the status of certain items. Any material coding and billing changes may also need to be implemented later in the payer contract to minimize the impact on the hospital’s expected payments.

7 Educate all stakeholders within the hospital on the billable supply policy. Once the newly created billable supply policy has been reviewed and approved by the hospital’s reimbursement and financial leadership, staff in all applicable areas of the hospital will need to be educated on the policy. Specifically, patient financial services staff (and revenue integrity staff, if applicable) should also be informed of the need to escalate payer denials for supplies so that reimbursement and finance leaders can adjust payer contracts and pricing for room and board or procedures, where applicable.

8 Evaluate charge capture practices after the policy has been implemented. After the policy has been fully implemented, the hospital should perform a comprehensive evaluation using the supply categories to calculate the annual revenue currently being charged for the non-billable items. The hospital’s reimbursement and finance leaders should evaluate this revenue to determine where the costs and expenses need to be allocated (e.g., room and board, specific procedures, OR time charges). This effort may require adjusting prices for these items and services to account for potential revenue loss and determine how any pricing impacts payer reimbursements. Following is a sample routine supply analysis.

3 benefits of a supply policy

A billable supply policy offers the following primary benefits:

• Better informed healthcare teams and less confusion about what the hospital organization considers billable
• Consistent charge capture practices for separately billable items and ease of charge reconciliation
• More useful data for the reimbursement and financial leadership teams in preparing for contract negotiations, including costs of routine items in setting charges for room and board, ancillary services and procedures

A billable supply policy as a living document

Hospitals should review their billable supply policies annually and update them, as necessary, to account for changes in payer coverage policy and/or CMS guidance. The reimbursement and financial leadership team should be kept informed of material changes and asked to provide input on the changes because of their possible impact on the hospital’s reimbursement based on current (or existing) payer contracts.

It also is important to provide continuing education to staff responsible for billable supply charge capture and to consistently provide comprehensive education on the policy to newly onboarded staff. 

Footnotes

a. Notably, in 2015, under the OPPS, CMS implemented a subset of its ambulatory payment classifications (APCs) called comprehensive APCs (C-APCs) “to consolidate payment for the highest cost device dependent procedures into a single, global prospective payment rather than paying separate single APC payments for each component of the procedure.” See CMS, Medicare Fee-For Service Provider Utilization & Payment Data Outpatient Hospital Public Use File: A Methodological Overview, November 2020.
b. CMS.gov, The Provider Reimbursement Manual – Part 1, publication No. 15-1.
c. The team should keep in mind that, under the OPPS, CMS has prepared for the C-HCPCS codes an explanation of certain device pass-through category codes.

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