Medicare Compliance & Reimbursement

Hospitals will have until Oct. 1, 2003, before their most up-to-date cost data is used to calculate "outlier" payments under the final rule issued June 5 by the Centers for Medicare & Medicaid Services.

Outlier payments are designed to ensure that hospitals will not stint on care in extraordinarily complex, high-cost cases; they provide higher reimbursement than that associated with the relevant diagnostic-related group under the inpatient prospective payment system. However, some hospital operators, notably Tenet Healthcare, have gamed the system to obtain excessive outlier payments.

Until now, Medicare has calculated each hospital's "cost-to-charge" ratio using its most recent settled, or audited, cost report, which tends to run a year or so behind the most recent submitted cost report. This has allowed some hospitals to dramatically jack up charges, which when compared with an outdated CCR results in an artificially high number of apparent high-cost cases qualifying for outlier payments.

Under the new rule, CMS will base CCRs on the most recent settled or submitted cost report - whichever is later - but not until the beginning of the next fiscal year. Many hospital groups had called for a more substantial transition period, while CMS administrator Tom Scully had publicly opposed any delay.

Other provisions in the rule will go into effect sixty days after publication in the Federal Register, June 9. According to a CMS press release, those provisions include eliminating the use of statewide CCRs to determine a hospital's costs when a hospital's own CCR falls below established parameters; allowing fiscal intermediaries to review outlier payments, and to reconcile them and add interest if there are indications of potential abuse; and allowing a hospital to request that an FI change its CCR to avoid under- or overpayments for outlier cases.

By law, outlier payments are limited to between 5 and 6 percent of total payments under the IPPS, and CMS has set a target of 5.1 percent. For the past four years, because of the aggressive billing practices of Tenet and others, outlier costs have exceeded this target. CMS has responded by raising the outlier threshold - the amount by which the cost of care must exceed the DRG payment in order to qualify for outlier payments - from $14,500 in fiscal year 2000 to $33,560 in FY 2003. The agency proposed a threshold of $50,645 in its May 9 hospital inpatient proposed rule, on which comments are due by July 8.

Scully has argued that this escalation denies deserved outlier payments to hospitals that have been playing it straight, and he has said the threshold should be lowered as part of a regulatory curbing of outlier abuses. The new rule, however, does not change this year's threshold. As for next year, a CMS spokesperson says the agency will have to see "if there is any proof in the pudding. We obviously will not have very much data, but to the extent that we could identify any kind of trend" that shows the new rule is really reducing outlier costs, "it would be taken into account."