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IN THE WAKE OF THE TENET INVESTIGATION,
CMS ISSUES PROGRAM MEMORANDUM ON DRG OUTLIERS
By
Robert G. Homchick
[December, 2002]
Last month, federal regulators launched a review of Medicare "outlier"
payments to Tenet hospitals. An outlier is an inpatient case that
is so expensive it exceeds the anticipated cost thresholds established
by the Medicare Program. As a consequence, instead of paying the
hospital on the diagnostic related group (DRG), the Medicare Program
pays the hospital at a higher or outlier rate. Outlier payments
are intended to encourage hospitals to treat acutely ill patients
where the cost of care exceeds the normal payment levels by a wide
margin.
The formula used to calculate outlier payments is complex. The
formula, which is defined by Medicare, includes among its components
a facility-specific cost-to-charge ratio; that ratio is necessarily
based on historical data. The formula also uses the hospital's current
aggregate charges for the services the outlier patient has received.
(Although patients and insurance companies rarely pay the prices
listed in the charge master, it is one of the components used by
Medicare to calculate a hospital's outlier payments.) The basic
idea is to calculate a higher payment that bears some relationship
to the costs the hospital incurred in the particular case. Some
observers have commented that outlier payments might be increased
if a hospital aggressively marks up current charges and the Medicare
Program applies an historical cost-to-charge ratio to those higher
charges to determine reimbursement.
Last week, The New York Times reported that the investigation
of hospital outlier payments has moved beyond Tenet to a number
of other institutions. Tom Scully, the administrator of CMS, commented
that many hospitals deserve their outlier payments but some hospitals
have been receiving payments inappropriately. “If they are
gaming the system, they’d better look out…Tenet wasn’t
the only one doing this.”
Reinforcing the Program's level of concern, on Dec. 3, 2002, the
Centers for Medicare and Medicaid Services (CMS) issued a program
memorandum to fiscal intermediaries (Transmittal A-02-122) regarding
cost-to-charge ratios and inpatient outlier payments. In discussing
cost-to-charge ratios, CMS noted that hospital charges since 1999
have grown at a much higher rate than the national average. Although
these increases will eventually result in lower cost-to-charge ratios,
the lag between when charges are increased and the availability
of final cost reports results in higher outlier payments than would
be the case if the cost-to-charge ratios were updated more timely.
CMS echoed Mr. Scully's comments, stating that it believes some
hospitals may be attempting to “game” the current payment
system for purposes of maximizing payments.
The Program Memorandum (PM) instructs the fiscal intermediaries
to review the available data to identify high outlier payment hospitals.
The PM provides the following guidelines for identifying such hospitals:
1. The hospital has an outlier payment of 80 percent or more of
its operating and capital and DRG payments for discharges during
October and November 2002; or
2. The hospital’s estimated outlier payments are greater than
10% of the operating capital and DRG payments for discharges during
October and November and the hospital has had an increase of average
charges per case of 20 percent or more from 2000 to 2001 and 2001
to 2002.
Fiscal intermediaries are to complete the outlier analysis no later
than Dec. 10. By Dec. 15, CMS will issue further instructions with
respect to hospitals that may be abusing the outlier system. Hospitals
found to have engaged in strategies to obtain excessive outlier
payments will be referred to CMS Program Integrity Unit for further
investigation and, if warranted, to the Office of the Inspector
General.
CMS expects to issue a regulation as soon as possible to revise
the current rules for determining outlier payments. These changes,
however, will be applied prospectively.
ABOUT THE AUTHOR
Robert G. Homchick
is a partner in the Seattle office of the Davis Wright Tremaine
law firm. His practice focus is on health law, regulatory compliance
and litigation and he represents hospitals, physicians, health plans,
skilled nursing facilities, home health agencies and other providers.
Bob has a broad range of experience in investigations, administrative
proceedings and litigation, including conducting internal investigations
of regulatory compliance issues and other matters and defending
health plans, providers and individuals in qui tam False Claims
Act lawsuits.
Any questions about this Advisory should be directed to:
Robert Homchick,
Seattle, (206) 628-7676, roberthomchick@dwt.com
This Health Law Advisory is a publication of
the Health Law Group of Davis Wright Tremaine LLP. Our purpose in
publishing this Advisory is to inform our clients and friends of
developments in health care law. It is not intended, nor should
it be used, as a substitute for specific legal advice as legal counsel
may only be given in response to inquiries regarding particular
situations.
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