OPPS/ASC: Executive Summary and Model Architecture Analysis

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1. Executive Summary and Strategic Context

What This System Is and What Problem It Solves

The Hospital Outpatient Prospective Payment System (OPPS) and the Ambulatory Surgical Center (ASC) Payment System constitute Medicare's foundational payment infrastructure for services delivered outside of acute inpatient admissions. Unlike a discrete CMMI innovation model, OPPS/ASC is a permanent, statutory payment system operating under Medicare Part B, governing payment for the overwhelming majority of hospital outpatient encounters, surgical procedures, emergency department visits, infusion therapy, imaging, and an expanding range of complex interventional procedures.

OPPS operates as a hybrid payment architecture: some payments are fully prospective (services packaged into Ambulatory Payment Classification rates), while others remain retrospective (item- or procedure-specific payments, including separately payable drugs priced on Average Sales Price methodology). This structural duality creates significant financial risk exposure for hospitals when ASP-based drug rates are corrected retroactively on a quarterly basis—a compliance and revenue cycle management concern that is operationally distinct from purely prospective bundled systems.

The problem OPPS/ASC was designed to address is the appropriate financial boundary between Medicare Part A inpatient payment and Medicare Part B outpatient payment. Because payment rates, beneficiary cost-sharing obligations, and eligibility for downstream benefits (including the three-day inpatient stay requirement for skilled nursing facility coverage) differ materially between Part A and Part B, the site-of-care and patient status determination carries enormous financial consequences for hospitals, patients, and the program.

The Two-Midnight Rule: Core Structural Logic

The Two-Midnight Rule, originally adopted for admissions beginning October 1, 2013, represents CMS's primary regulatory mechanism for adjudicating the inpatient/outpatient boundary. The rule establishes that inpatient admissions are generally payable under Part A when the admitting practitioner reasonably expects the patient to require a medically necessary hospital stay crossing two midnights, supported by contemporaneous medical record documentation. Stays expected to last fewer than two midnights are generally not appropriate for Part A payment, with enumerated exceptions for procedures on the Inpatient-Only (IPO) list, cases identified as "rare and unusual exceptions" by CMS (including newly initiated mechanical ventilation), and case-by-case physician judgment for clinically appropriate short stays.

The CY 2016 OPPS/ASC final rule introduced greater flexibility for stays below the two-midnight benchmark, permitting inpatient admission on a case-by-case basis based on admitting physician judgment, provided the medical record supports necessity. CMS simultaneously signaled that minor surgical procedures expected to last only a few hours without spanning overnight would be unlikely to qualify and would be prioritized for medical review.

The CY 2026 OPPS/ASC final rule (published November 25, 2025, Federal Register 90 FR 53448) made a significant structural change to the medical review apparatus: effective September 1, 2025, responsibility for short stay inpatient hospital medical reviews (patient status reviews) transferred from Beneficiary and Family Centered Care Quality Improvement Organizations (BFCC-QIOs) to Medicare Administrative Contractors (MACs). MACs now conduct these reviews under the Targeted Probe and Educate (TPE) program, reviewing a sample of Medicare Part A claims according to instructions in Medicare Program Integrity Manual (PIM) 100-8, Chapter 6, with the specific review process outlined in PIM Exhibit 48. This is not merely an administrative reassignment—MAC-based TPE reviews have different audit dynamics, appeal pathways, and provider education feedback loops than QIO-administered reviews.

Inpatient-Only List: Resumed Phased Elimination

The CY 2026 final rule also resumed the phased elimination of the IPO list—reversing the CY 2022 decision to halt elimination. The CY 2021 final rule had established that procedures removed from the IPO list beginning January 1, 2021 would receive an indefinite exemption from certain Two-Midnight Rule medical review activities until the Secretary determined the service was more commonly performed in the outpatient setting. Although CY 2022 announced an intent to revert to a two-year exemption, a regulatory drafting oversight left the indefinite exemption in place. CY 2026 finalized continuation of the indefinite exemption for procedures removed from the IPO list in CY 2026 and subsequent years, until the Secretary determines the procedure is more commonly performed for the Medicare population in the outpatient setting.

Political and Administrative Context

Under the Trump administration's second term, CMS is led by Administrator Dr. Mehmet Oz and CMMI is directed by Abe Sutton. HHS Secretary Robert F. Kennedy Jr. presides over the broader regulatory agenda. The current administration's orientation toward deregulation and site-of-care neutrality is highly relevant to OPPS/ASC policy. The resumed phased elimination of the IPO list is consistent with a broader push to migrate procedures to lower-cost outpatient and ASC settings—a policy direction that predates the current administration but is reinforced by it.

The Section 603 Bipartisan Budget Act framework, effective January 1, 2017, constrains hospital outpatient revenue by requiring that non-excepted off-campus provider-based departments (PBDs) be reimbursed under the Medicare Physician Fee Schedule rather than OPPS rates—a significant per-service payment reduction. Only PBDs that were billing prior to November 2, 2015 (without impermissible relocation or ownership change), dedicated emergency departments, PBDs within 250 yards of the main hospital campus, and those qualifying under 21st Century Cures Act Sections 16001 and 16002 retain excepted OPPS payment status. This structural bifurcation directly impacts health system acquisition strategies and PBD expansion planning.

Market Transformation Implications

The CY 2027 preliminary ratesetting data (using CY 2025 claims data from January through September and cost report data through CY 2024) signals active rate recalibration across the New Technology APC tier structure. High-volume, high-cost procedures are receiving significant outpatient reimbursement—including histotripsy of malignant hepatocellular tissue (0686T) with a geometric mean cost of $14,670 in APC 1579, and implantable/replaceable carotid sinus device procedures (0266T) with geometric mean cost of $42,768 in the offline APC 1580O. The offline designation on APC 1580O (mean cost $44,491) indicates these claims are processed outside the standard rate-setting panel—a flag that merits monitoring for CY 2027 proposed rule treatment.

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2. Model Architecture and Payment Structure

Participation Structure

OPPS applies to acute-care hospitals (with statutory exceptions) paid under Medicare Part B for covered outpatient services. The ASC payment system applies to Medicare-certified ambulatory surgical centers. Critical Access Hospitals (CAHs) are subject to separately payable drug rules, including JW/JZ modifier requirements for drugs billed under Part B. Rural Health Clinics (RHCs) and Federally Qualified Health Centers (FQHCs) are explicitly excluded from JW/JZ modifier requirements because their drugs are not separately payable—payment is subsumed into the All-Inclusive Rate (AIR) or FQHC Prospective Payment System rate.

Off-campus PBDs must satisfy the Section 603 excepted status criteria to receive OPPS rates. Hospitals seeking a relocation exception for excepted PBDs must submit written requests to the applicable CMS Regional Office and demonstrate extraordinary circumstances (natural disasters, significant seismic building code requirements, significant public health or safety issues). For relocations occurring January 1, 2017 or later, requests must be filed no later than 30 days after the extraordinary circumstance. Regional Office determinations are final and not subject to appeal under section 1833(t)(21)(E)(ii) of the Social Security Act.

Payment Methodology: APC Rate Structure

OPPS organizes services into Ambulatory Payment Classifications (APCs), with payment based on the geometric mean cost of services within each APC. New Technology APCs span a tiered range from Level 3 ($101–$200) through Level 43 ($40,001–$50,000), providing transitional payment for emerging procedures before sufficient cost data accumulates for standard APC assignment.

APC	Level	Dollar Range	Representative HCPCS	CY2025 Geometric Mean Cost
1505	Level 5	$301–$400	M0222 (Bebtelovimab)	$174.49
1506	Level 6	$401–$500	M0224 (Pemivibart infusion)	$1,120.63
1508	Level 8	$601–$700	0722T (Quant CT tissue characterization w/CT)	$78.00
1512	Level 12	$1,001–$1,100	G2082 (Esketamine visit ≤56 min)	$1,171.85
1518	Level 18	$1,601–$1,700	G2083 (Esketamine visit >56 min)	$1,643.98
1522	Level 22	$2,001–$2,500	78431 (Myocardial PET rest & stress w/CT)	$2,304.99
1579	Level 42	$30,001–$40,000	0686T (Histotripsy hepatocellular)	$14,670.03
1580O	Level 43	$40,001–$50,000	0266T (Carotid sinus device implant/replace)	$42,767.66

High-volume clinic visit services cluster in APC 5012 (geometric mean cost $141.30), with G0463 (Hospital outpatient clinic visit) generating 15,641,677 claims in the January–September 2025 data sample—by far the dominant volume driver in the system.

Emergency department services are stratified by type and acuity:

APC	ED Visit Type	Acuity Level	Geometric Mean Cost
5021	Type A	Level 1	$90.59
5022	Type A	Level 2	$165.34
5023	Type A	Level 3	$296.89
5024	Type A	Level 4	$453.56
5025	Type A	Level 5	$647.87
5031	Type B	Level 1	$74.28
5032	Type B	Level 2	$92.35
5033	Type B	Level 3	$183.75
5034	Type B	Level 4	$294.14
5035	Type B	Level 5	$478.92
5041O	Critical Care	—	$917.16
5045O	Trauma w/Critical Care	—	$1,399.70

Surgical procedure APCs span from Level 1 Skin ($221.30) through complex breast/lymphatic procedures (APC 5094O: $14,750.19 for tissue expander placement). Excision, biopsy, and incision/drainage APCs range from APC 5071 ($768.14) through APC 5073O ($3,107.65).

Hyperbaric oxygen therapy (G0277) is assigned to APC 5061O at a geometric mean cost of $147.91, with 171,460 claims in the partial-year 2025 data—the offline status (Y) flagging it for special rate-setting treatment.

Drug Payment: JW/JZ Modifier Requirements

Separately payable drugs under OPPS are assigned Status Indicator G (pass-through) or Status Indicator K (nonpass-through); packaged drugs carry Status Indicator N and are explicitly excluded from JW/JZ modifier requirements. In the ASC, the requirement applies to drugs with payment indicator K2.

Key compliance milestones:

Date	Requirement
January 1, 2017	JW modifier required for discarded amounts from single-dose containers
January 1, 2023	JZ modifier available for use (zero discard attestation)
July 1, 2023	JZ modifier required on all single-dose container drug claims with no discard
October 1, 2023	Claims without proper modifiers may be returned as unprocessable
January 1, 2025	JW modifier required for suppliers discarding amounts during preparation before supplying drug
January 1, 2026	Non-BLA skin substitutes reclassified as incident-to supplies; JW/JZ modifiers no longer applicable to discarded skin substitute units

Drug overfill is explicitly excluded from JW modifier billing; overfill amounts have been prohibited from billing since January 1, 2011. Vaccines specified under section 1861(s)(10) of the Act (influenza, pneumococcal, COVID-19) are exempt from JW/JZ modifier requirements due to roster billing practicalities.

Telehealth Payment Under OPPS

OPPS payment for remotely furnished outpatient therapy, diabetes self-management training (DSMT), and medical nutrition therapy (MNT) services by hospital staff is aligned with Medicare telehealth policy. Under the Full-Year Continuing Appropriations and Extensions Act, 2025, this alignment extends through September 30, 2025, permitting physical therapists, occupational therapists, and speech-language pathologists to furnish hospital-billed telehealth services to beneficiaries in their homes through that date.

Audio-only telehealth is permitted through September 30, 2025, in all originating sites under the continuing appropriations authority. After that date, audio-only is permissible only for beneficiaries in their homes, where the practitioner is technically capable of audio-video communication but the beneficiary is not capable of or does not consent to it. Remote behavioral health services furnished by hospital-employed staff may permanently be delivered via audio-only technology.

In-person visit requirements for behavioral health telehealth services billed by professionals are delayed until October 1, 2025; for behavioral health visits furnished by RHCs and FQHCs with patients present virtually, in-person requirements are delayed until January 1, 2026.

PC/AC IOL Payment

CMS maintains a recognized list of Presbyopia-Correcting (PC) IOLs and Astigmatism-Correcting (AC) IOLs, updated as of March 18, 2026, under CMS Rulings 05-01 (May 3, 2005, for PC IOLs) and 1536-R (April 27, 2007, for AC IOLs). Manufacturers currently holding recognition include Johnson & Johnson Vision (including TECNIS Symfony, Synergy, Odyssey, and PureSee lines), Alcon (PanOptix, Vivity, and Clareon lines), Bausch + Lomb (Crystalens AO, enVista Envy, Trulign), AcuFocus (IC-8 Apthera), RxSight (Light Adjustable Lens), STAAR Surgical, and Lenstec (SBL-3). The list governs differential payment for non-standard IOLs in cataract surgery, with beneficiary cost-sharing implications for the premium presbyopia-correcting or astigmatism-correcting features not covered by standard OPPS rates.

CY 2027 Ratesetting: Forward Signal

The CY 2027 preliminary ratesetting two times file (posted reflecting data through September 2025) constitutes panel run data using CY 2025 claims and CY 2024 cost reports. CMS has explicitly stated that posting this data does not commit CMS to this methodology for the CY 2027 proposed rule. Hospital executives should treat this data as a directional signal—particularly for New Technology APC assignments—rather than a confirmed rate structure. Notably, several high-cost APC codes (e.g., APC 1532, 1534, 1537) show zero geometric mean costs because no qualifying claims were processed in the data window, creating uncertainty about their CY 2027 proposed rule treatment.