Press release



The Centers for Medicare & Medicaid Services today issued a final rule revising Medicare policies governing outlier payments to hospitals for services to inpatients for whom the costs of treatment greatly exceed the fixed payment under the inpatient prospective payment system (IPPS). The rule will also apply to long-term care hospitals (LTCHs) for purposes of computing both high cost and short stay outlier payments under the LTCH PPS.


The rule will be applied in setting the final high-cost outlier threshold for inpatient acute care hospitals for fiscal year 2004, but will not change the current FY 2003 outlier threshold. In recent years, the outlier threshold has skyrocketed from $14,500 in fiscal year (FY) 2000, to $33,560 in FY 2003, and is tentatively set at $50,645 in the proposed IPPS rule for FY 2004.


The final outlier rule modifies the March 5 proposed rule in several ways. For instance, although most provisions of the rule will become effective sixty days from the date of publication, CMS will not require using the latest of either the most recent submitted or most recent settled cost report to calculate the cost-to-charge ratio (CCR) until October 1, 2003. Until then, in general, in response to hospital concerns, CMS will continue to use the most recent settled cost report – providing relief to some hospitals that were not chronic abusers of the system. 


In addition, in order to give hospitals the continued assurance of finality, the rule states that CMS will issue separate instructions to intermediaries with criteria to use to identify hospitals that may have received inappropriately high outlier payments and that should be subject to reconciliation of those outlier payments based on their settled cost reports. The criteria for reconciling outliers will be reviewed and if necessary, modified each year. Again, this was in response to comments from major hospital associations, and will avoid undue negative impacts to hospitals that have been charging appropriately.


Other key provisions in the final rule include:


  • Eliminating the use of statewide average CCRs to determine a hospital’s costs when the hospital’s own CCR falls below established parameters.


  •   Allowing fiscal intermediaries to review and, if necessary, reconcile outlier payments, even if the criteria are not met, if there are other indications of potential abuse.


  • Authorizing fiscal intermediaries to adjust reconciled amounts to account for the time value of money.


  • Allowing a hospital to request the fiscal intermediary to change its CCR to adjust its outlier payments, in much the same way that an individual taxpayer can adjust the amount of withholding from income, to avoid over- or underpayments for outlier cases.


Medicare pays hospitals a fixed amount for inpatient services based on the diagnosis related group (DRG) which reflects the patient’s diagnosis and the procedures performed. For any given case, a hospital’s costs may be somewhat more or less than the DRG payment, but overall DRG payment rates are set at a level that should yield an efficiently operated hospital a reasonable margin.


For those cases in which the hospital’s costs greatly exceed the DRG payment, Medicare law requires CMS to set aside (as a budget neutral withholding from total payments) between 5 and 6 percent of funds under the IPPS to use to partially reimburse the extraordinary costs. For many years, CMS has targeted 5.1 percent of total IPPS payments to be used to pay for outliers. In order to qualify for outlier payments, the cost of a case must exceed the DRG payment by an amount set each year by CMS in the IPPS update rule – the outlier threshold. Because CMS cannot determine the cost of the case until the cost report has been settled – which can take one to three years – CMS applied the hospital’s CCR from the most recent settled cost report from a prior year to the hospital’s current charges. So long as the hospital’s costs and charges change at roughly the same rate, this formula should yield a reasonable approximation of the hospital’s costs in the current case.


The current methodology also allows hospitals whose CCRs are either above or below a certain range to have their costs calculated using the statewide average CCR.


“Last year, CMS discovered that a small number of hospitals – a few hundred – had been manipulating the outlier formula by aggressively increasing their charges compared to their costs,” said CMS Administrator Tom Scully. “As a result, these hospitals received far higher outlier payments than they should have, costing taxpayers over $2 billion in 2002, and $1 billion to $2 billion a year in inappropriate overpayments for each of the last 4 years. Even now, we have been paying about $3 million per day to hospitals that are getting inappropriately high payments. With this rule, these inappropriate payments will end.”


The CMS review of outlier payments found that although outlier payments overall are projected to average 5.1 percent of total DRG payments under the IPPS, one California hospital received approximately $70.0 million in outlier payments in FY 2002, roughly 145 percent of their DRG

payments. In FY 2003, the same hospital’s payments will be about $64.5 million, roughly160 percent of its Medicare DRG payments of about $39.7 million. Other examples of hospitals receiving unusually high outlier payments were:


  • A hospital in Texas that received outlier payments of about $37.5 million in FY 2002 equal to more than 180 percent of its 2002 DRG payments, and that will receive outlier payments in 2003 of about $21.2 million, roughly 130 percent of its DRG payments of about $16.2 million.


  • A hospital in Pennsylvania that received about $14.4 million in outlier payments, or roughly 40 percent of its DRG payments in FY 2002, and that will receive about $26.2 million in outlier payments in 2003, roughly 92 percent of its DRG payments.


“The final outlier rule should benefit the great majority of hospitals that bill Medicare fairly under the IPPS, by reining in the increase in the outlier threshold that has resulted directly from unbelievably abusive billing by a few hospitals,” said Scully. “At the same time, we have revised our initial proposal in order to avoid major disruption to hospitals that will be adversely affected by the changes we are adopting.”


The final rule will be published in the June 9 Federal Register, and will be effective August 8, 2003.