On December 3, 2002, the U.S. Centers for Medicare and Medicaid Services (CMS) announced the adoption of a new initiative to crack down on what it deems "excessive claims for outlier payments" from acute care hospitals. Specifically, CMS directed fiscal intermediaries to identify hospitals with relatively high outlier payment revenues, scrutinize the billing practices at these facilities and refer appropriate cases to the CMS Program Integrity Unit or the Office of Inspector General for further inquiry. CMS also announced that it will likely revamp the existing outlier payment mechanism in order to "strengthen the agency’s efforts to further reduce inappropriate billing for Medicare services."
A hospital reimbursed through Medicare’s general acute care inpatient prospective payment system is generally paid a predetermined amount, based principally on the patient’s diagnosis. It is referred to as the DRG payment rate and is used to cover the capital and operating expenses incurred in furnishing inpatient care to a Medicare Part A beneficiary. The hospital is at risk for costs up to the full DRG payment rate as well as a fixed amount (approximately $33,560 for FY03) above that rate. Medicare will, however, make an outlier payment to the hospital to reimburse it for 80 percent of all reasonable costs in excess of the combined DRG payment rate and fixed amount. For purposes of this calculation, Medicare defines reasonable costs as actual billed charges for covered items or services furnished to the beneficiary discounted by the hospital’s specific cost-to-charge ratio from its most recent settled cost report (subject to a floor).
In Transmittal Letter A-01-122, issued to Medicare fiscal intermediaries on December 3, 2002, CMS states that "some hospitals may be attempting to ‘game’ the current payment system" by rapidly increasing their billed charges. Since the cost reports from these periods have not been settled, the fiscal intermediary continues to apply a dated cost-to-charge ratio in discounting the hospital’s billed charges to its actual costs for purposes of calculating the outlier payment. If the provider has increased its billed charges substantially since its last settled cost report, however, the older cost-to-charge ratio may no longer effectively convert billed charges to costs actually incurred in furnishing care. CMS believes that such situations may result in inappropriate outlier payments to the provider.
In Transmittal Letter A-02-122, CMS directed fiscal intermediaries that they had until December 10, 2002, to analyze available data and identify those hospitals "that may be abusing the outlier system." Hospitals so identified will be subject to further scrutiny in the form of "compliance action" from their fiscal intermediary and quality improvement organization. Although CMS intends to describe potential compliance actions in more detail by the end of 2002, officials indicated that they will vary among hospitals based upon data presented by the fiscal intermediaries and will include onsite visits, review of hospital chargemaster data, audit of cost-reimbursed expenses and review of outlier and non-outlier stays. CMS states that "[h]ospitals found to have engaged in strategies to obtain excessive outlier payments will be referred to the CMS Program Integrity Unit for further investigation and, if warranted, to the Office of Inspector General." Moreover, once initiated, compliance reviews will not be limited to analyzing outlier cases. In a press statement accompanying the transmittal letter, CMS Administrator Tom Scully stated, "[W]e will carefully scrutinize any billing trends or other indications of inappropriate reimbursement," so "although the fiscal intermediary reviews will be triggered by questionable outlier payments, all operations of the targeted hospitals will be thoroughly scrutinized for any other improper conduct."
When identifying suspect hospitals, fiscal intermediaries are instructed to automatically include all hospitals who had more than 200 discharges in FY02 and received outlier payments that collectively exceeded 10 percent of their Medicare DRG payments during that period. Fiscal intermediaries are also directed to include other hospitals that, in their discretion, may have abused the outlier payment mechanism. CMS instructs fiscal intermediaries to consider including at least the following additional categories of hospitals in identifying those worthy of scrutiny: hospitals that have received an outlier payment in October or November 2002 that exceeded 80 percent of the DRG payment associated with a case and hospitals whose average charge per case has increased more than 20 percent in each of the last two fiscal years and whose outlier payments exceeded 10 percent of DRG payments during October and November 2002. Fiscal intermediaries are also instructed to disclose to CMS those hospitals whose cost-to-charge ratios are more than three standard deviations from the mean ratio for all hospitals.
CMS also announced that it "expects to issue a regulation as soon as possible to revise the current rules for determining outlier payments" so as to "strengthen the agency’s efforts to further reduce inappropriate billing for Medicare services." No details regarding the forthcoming regulation were released.
In light of the new CMS enforcement initiative, hospitals should consider taking proactive measures. As an initial matter, hospitals should consider making independent financial calculations to determine whether they will likely be targeted for compliance action as a result of relatively high outlier payments. This review should focus initially on recent charge and claims data. If such an analysis indicates a relatively high volume of outlier payments, the hospital should then assess the breadth and scope of the charge increases it has implemented over the same period and the extent to which such charges were billed in cases resulting in outlier payments. A provider may have increased charge levels for a variety of reasons, such as increased expense associated with particular services or relative changes in marketplace. Providers should seek to document the legitimate commercial reasons for the charge increases and consider whether other potential responses may be appropriate based on their particular situations.