[Federal Register: June 9, 2003 (Volume 68, Number 110)]
[Rules and Regulations]
[Page 34493-34515]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jn03-20]
[[Page 34493]]
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Part II
Department of Health and Human Services
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Centers for Medicare & Medicaid Services
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42 CFR Part 412
Medicare Program; Change in Methodology for Determining Payment for
Extraordinarily High-Cost Cases (Cost Outliers) Under the Acute Care
Hospital Inpatient and Long-Term Care Hospital Prospective Payment
Systems; Final Rule
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 412
[CMS-1243-F]
RIN 0938-AM41
Medicare Program; Change in Methodology for Determining Payment
for Extraordinarily High-Cost Cases (Cost Outliers) Under the Acute
Care Hospital Inpatient and Long-Term Care Hospital Prospective Payment
Systems
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
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SUMMARY: In this final rule, we are revising the methodology for
determining payments for extraordinarily high-cost cases (cost
outliers) made to Medicare-participating hospitals under the acute care
hospital inpatient prospective payment system (IPPS).
Under the existing outlier methodology, the cost-to-charge ratios
from hospitals' latest settled cost reports are used in determining a
fixed-loss amount cost outlier threshold. We have become aware that, in
some cases, hospitals' recent rate-of-charge increases greatly exceed
their rate-of-cost increases. Because there is a time lag between the
cost-to-charge ratios from the latest settled cost report and current
charges, this disparity in the rate-of-increases for charges and costs
results in cost-to-charge ratios that are too high, which in turn
results in an overestimation of hospitals' current costs per case.
Therefore, we are revising our outlier payment methodology to ensure
that outlier payments are made only for truly expensive cases.
We also are revising the methodology used to determine payment for
high-cost outlier and short-stay outlier cases that are made to
Medicare-participating long-term care hospitals (LTCHs) under the long-
term care hospital prospective payment system (LTCH PPS). The policies
for determining outlier payment under the LTCH PPS are modeled after
the outlier payment policies under the IPPS.
EFFECTIVE DATE: The provisions of this final rule are effective on
August 8, 2003.
FOR FURTHER INFORMATION CONTACT: Stephen Phillips, (410) 786-4548 (IPPS
Outlier Policy) Miechal Lefkowitz, (410) 786-5316 (LTCH PPS Outlier
Policy)
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.
I. Background
A. Description of the Acute Care Hospital Inpatient Prospective Payment
System (IPPS)
Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. This payment system is referred to as the
acute care hospital inpatient prospective payment system (IPPS). Under
the IPPS, each case is categorized into a diagnosis-related group
(DRG). Each DRG has a payment weight assigned to it, based on the
average resources used to treat Medicare patients in that DRG.
The IPPS base payment rate (also referred to as the average
standardized amount) is divided into a labor-related share and a
nonlabor-related share. The labor-related share is adjusted by the wage
index applicable to the area where the hospital is located, and if the
hospital is located in Alaska or Hawaii, the nonlabor-related share is
adjusted by a cost-of-living adjustment factor. This base payment rate
is multiplied by the DRG relative weight.
If a hospital treats a high percentage of low-income patients, it
receives a percentage add-on payment applied to the DRG-adjusted base
payment rate. This add-on payment, known as the disproportionate share
hospital (DSH) adjustment, provides for a percentage increase in
Medicare payments to hospitals that qualify under either of two
statutory formulas that are designed to identify hospitals that serve a
disproportionate share of low-income patients. For qualifying
hospitals, the amount of the DSH adjustment may vary based on the
outcome of the statutory calculation.
Also, if a hospital is an approved teaching hospital it receives a
percentage add-on payment for each case paid under the IPPS. This add-
on payment, known as the indirect medical education (IME) adjustment,
varies depending on the ratio of residents-to-beds for operating costs
and according to the ratio of residents-to-average daily census for
capital costs under the IPPS.
Additional payments may be made for cases that involve new
technologies that have been approved for special add-on payments. In
order to qualify, a new technology must demonstrate that it is a
substantial clinical improvement over technologies otherwise available,
and that, absent an add-on payment, it would be inadequately paid under
the regular DRG payment.
For particular cases that are unusually costly, known as outlier
cases (discussed below), the IPPS payment is increased. This additional
payment is designed to protect a Medicare-participating hospital from
large financial losses due to unusually expensive cases. Any outlier
payment due to the hospital is added to the DRG-adjusted base payment
rate, plus any DSH, IME, and new technology add-on adjustments.
The regulations governing payments for operating costs under the
IPPS are located in 42 CFR Part 412. The specific regulations governing
payments for outlier cases are located at 42 CFR 412.80 through 412.86.
Section 1886(g) of the Act requires the Secretary to pay for the
capital-related costs of inpatient hospital services ``in accordance
with a prospective payment system established by the Secretary.'' The
basic methodology for determining capital prospective payments is set
forth in our regulations at Sec. Sec. 412.308 and 412.312. Under the
capital prospective payment system, payments are adjusted by the same
DRG for the case as they are under the operating IPPS. Similar
adjustments are also made for IME and DSH as under the operating IPPS.
Hospitals also may receive a capital outlier payment for those cases
that qualify.
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B. Payment for Outlier Cases
1. General
Section 1886(d)(5)(A) of the Act provides for Medicare payments to
Medicare-participating hospitals in addition to the basic prospective
payments for cases incurring extraordinarily high costs. To qualify for
outlier payments, a case must have costs above a fixed-loss cost
threshold amount (a dollar amount by which the costs of a case must
exceed payments in order to qualify for outliers).
Hospital-specific cost-to-charge ratios are applied to the covered
charges for a case to determine whether the costs of the case exceed
the fixed-loss outlier threshold. Payments for eligible cases are then
made based on a marginal cost factor, which is a percentage of the
costs above the threshold. For Federal fiscal year (FY) 2003, the
existing fixed-loss outlier threshold is $33,560.
The actual determination of whether a case qualifies for outlier
payments takes into account both operating and capital costs and DRG
payments. That is, the combined operating and capital costs of a case
must exceed the fixed-loss outlier threshold to qualify for an outlier
payment. The operating and capital costs are computed separately by
multiplying the total covered charges by the operating and capital
cost-to-charge ratios. The estimated operating and capital costs are
compared with the fixed-loss threshold after dividing that threshold
into an operating portion and a capital portion (by first summing the
operating and capital ratios and then determining the proportion of
that total comprised by the operating and capital ratios and applying
these percentages to the fixed-loss threshold). The thresholds are also
adjusted by the area wage index (and capital geographic adjustment
factor) before being compared to the operating and capital costs of the
case. Finally, the outlier payment is based on a marginal cost factor
equal to 80 percent of the combined operating and capital costs in
excess of the fixed-loss threshold (90 percent for burn DRGs).
The following example simulates the IPPS outlier payment for a case
at a generic hospital that receives IME and DSH payments in San
Francisco, California (a large urban area). In the example, the patient
was discharged after October 1, 2002, and the hospital incurred
Medicare-covered charges of $150,000. The DRG assigned to the case was
DRG 286 (Adrenal and Pituitary Procedures), which has a FY 2003
relative weight of 2.0937. There is no new technology add-on payment
for the case.
Step 1: Determine the Federal operating and capital payment with
IME and DSH adjustment based on the following values:
Operating Portion
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National Large Urban Standardized Amounts:
Labor-Related......................................... $3,022.60
Nonlabor-Related...................................... $1,228.60
San Francisco MSA Wage Index.............................. 1.4142
IME Operating Adjustment Factor........................... 0.0744
DSH Operating Adjustment Factor........................... 0.1413
DRG 286 Relative Weight................................... 2.0937
Labor-Related Portion..................................... 0.711
Nonlabor-Related Portion.................................. 0.289
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Federal Payment for Operating Costs = DRG Relative Weight x
[(Labor-Related Large Urban Standardized Amount x San Francisco MSA
Wage Index) + Nonlabor-Related National Large Urban Standardized
Amount] x (1 + IME + DSH): 2.0937 x [($3,022.60 x 1.4142) + $1,228.60]
x (1 + 0.0744 + 0.1413) = $14,007.26
Capital Portion
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Federal Capital Rate...................................... $407.01
Large Urban Add-On........................................ 1.03
San Francisco MSA Geographic Adjustment Factor............ 1.2679
IME Capital Adjustment Factor............................. 0.0243
DSH Capital Adjustment Factor............................. 0.0631
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Federal Payment for Capital Costs = DRG Relative Weight x Federal
Capital Rate x Large Urban Add-On x Geographic Adjustment Factor x (1 +
IME + DSH): 2.0937 x $407.01 x 1.03 x 1.2679 x (1 + 0.0243 + 0.0631) =
$1,210.12
Step 2: Determine operating and capital costs from billed charges
by applying the respective cost-to-charge ratios.
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Billed Charges............................................. $150,000
Operating Cost-to-Charge Ratio............................. 0.50
Operating Costs = (Billed Charges x Operating Cost-to- $75,000
Charge Ratio) ($150,000 x .50)............................
Capital Cost-to-Charge Ratio............................... 0.06
Capital Costs = (Billed Charges x Capital Cost-to-Charge $9,000
Ratio) ($150,000 x .06)...................................
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Step 3: Determine outlier threshold.
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Fixed Loss Threshold....................................... $33,560
Operating Cost-to-Charge Ratio to Total Cost-to-Charge
Ratio:....................................................
(Operating Cost-to-Charge Ratio) / (Operating Cost-to- 0.8929
Charge Ratio + Capital Cost-to-Charge Ratio) (.50)/(.50
+ .06)..................................................
------------------------------------------------------------------------
Operating Outlier Threshold = {[Fixed Loss Threshold x ((Labor-
Related portion x San Francisco MSA Wage Index) + Nonlabor-Related
portion)] x Operating Cost-to-Charge Ratio to Total Cost-to-Charge
Ratio{time} + Federal Payment with IME and DSH: {$33,560 x
[(0.711x1.4142) + 0.289] x 0.8929{time} + $14,007.26=$52,797.78
Capital Cost-to-Charge-Ratio to Total Cost-to-Charge Ratio =
[(Capital Cost-to-Charge Ratio)/(Operating Cost-to-Charge Ratio +
Capital Cost-to-Charge Ratio)]: {(.06)/(.50+.06){time} = 0.1071
Capital Outlier Threshold = (Fixed Loss Threshold x Geographic
Adjustment Factor x Large Urban Add-On x Capital CCR to Total CCR) +
Federal Payment with IME and DSH: ($33,560x1.2679x1.03x0.1071) +
$1,210.12=$5,904.02
Step 4: Determine outlier payment.
Marginal Cost Factor = 0.80
Outlier Payment = (Costs--Outlier Threshold) x Marginal Cost Factor
Operating Outlier Payment = ($75,000-$52,797.78) x 0.80=$17,761.78
Capital Outlier Payment = ($9,000-$5,904.02) x 0.80=$2,476.78
2. Cost-to-Charge Ratios
Under our existing regulation at Sec. 412.84(h), the operating
cost-to-charge ratio and, effective with cost reporting periods
beginning on or after October 1, 1991, the capital cost-to-charge ratio
used to adjust covered charges are computed annually by the
intermediary for each hospital based on the latest available settled
cost report for that hospital and charge data for the same time period
as that covered by the cost report.
In the September 30, 1988 final rule with comment period published
in the Federal Register (53 FR 38503), we initiated the use of
hospital-specific cost-to-charge ratios to determine hospitals' costs
for assessing whether a case qualified for payment as a cost outlier.
Prior to that change, we determined the cost of discharges based on a
nationwide cost-to-charge ratio of 60 percent. We indicated at the time
that the use of hospital-specific cost-to-charge ratios is essential to
ensure that outlier payments are made only for cases that have
extraordinarily high costs, and not merely high charges.
Currently, cost-to-charge ratios are determined using the most
recent settled cost report for each hospital. At
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the end of the cost reporting period, Medicare charges from all claims
are accumulated through the Provider Statistical and Reimbursement
Report (PS&R). The PS&R contains data such as the number of discharges
and the actual charges from each hospital. The hospital also submits a
cost report to its fiscal intermediary, which is used to determine
total allowable inpatient Medicare costs. Once all these data are
available, the fiscal intermediary then determines the cost-to-charge
ratio for the hospital by using charges from the PS&R and costs from
the cost report.
The Congress intended that outlier payments would be made only in
situations where the cost of care is extraordinarily high in relation
to the average cost of treating comparable conditions or illnesses.
Under our existing outlier methodology, if hospitals' charges are not
sufficiently comparable in magnitude to their costs, the legislative
purpose underlying the outlier regulations is thwarted.
Recent analysis indicates that some hospitals have taken advantage
of two vulnerabilities in our methodology to maximize their outlier
payments. One vulnerability is the time lag between the current charges
on a submitted bill and the cost-to-charge ratio taken from the most
recent settled cost report. The second vulnerability, in some cases, is
that hospitals may increase their charges so far above costs that their
cost-to-charge ratios fall below 3 standard deviations from the
geometric mean of cost-to-charge ratios and a higher statewide average
cost-to-charge ratio is applied. In a March 5, 2003 IPPS proposed rule
(68 FR 10420) and a March 7, 2003 LTCH PPS proposed rule (68 FR 11234)
that are discussed in sections II., III., IV., V., and VI., and section
VII., respectively, of this final rule, we proposed to implement new
regulations to correct these vulnerabilities and to ensure outlier
payments are paid only for truly high-cost cases.
Because the fixed-loss threshold is determined based on hospitals'
historical charge data, hospitals that have been inappropriately
maximizing their outlier payments have caused the threshold to increase
dramatically for FY 2003, and even more dramatically for the proposed
IPPS FY 2004 outlier threshold of $50,645 (68 FR 27235, May 19, 2003).
As illustrated by the table below, the IPPS cost outlier threshold
increased by 80 percent from $9,700 in FY 1997 to $17,550 in FY 2001.
In addition, the cost outlier threshold increased by 91 percent from
$17,550 in FY 2001 to $33,560 in FY 2003. The proposed FY 2004
threshold would be a 51-percent increase over the FY 2003 threshold.
The table also demonstrates, for FYs 2000 and 2001, the level at which
the threshold would have to have been set in order to result in outlier
payments equal to 5.1 percent of total DRG payments (absent further
behavioral responses by hospitals).\1\ We are required by section
1886(d)(2)(E) of the Act to apply an offset to the average standardized
amounts equal to the projected outlier payments as a percentage of
total DRG payments. We have historically projected outlier payments to
be 5.1 percent of total DRG payments.
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\1\ We estimate the FY 2003 percent of outlier payments compared
to total DRG payments is 6.1 percent. Although in the May 19, 2003
FY 2004 IPPS proposed rule, we estimated this percentage to be 5.5
percent, we have now determined that this percentage was
underestimated.
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Payments in
excess of Threshold that
Outlier target of 5.1 Outlier would have
Fiscal year percentage percent\1\ threshold paid out 5.1
(in billions percent
of dollars)
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1997............................................ 5.5 $0.3 $9,700 ..............
1998............................................ 6.5 1.0 11,050 ..............
1999............................................ 7.6 1.8 11,100 ..............
2000............................................ 7.6 1.8 14,050 21,825
2001............................................ 7.7 1.9 17,550 26,200
2002............................................ 7.9 2.5 21,025 (2)
2003............................................ 6.1 (2) 33,560 ..............
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\1\ All payments are estimated and reflect operating payments only (not capital payments).
\2\ Not available.
II. Issuance of Proposed Rules
On March 5, 2003, we published in the Federal Register (68 FR
10420) a proposed rule that would change the methodology for
establishing how extraordinarily high-cost cases (cost-outliers)
qualify for an outlier payment. On March 7, 2003, as part of the
proposed rule published in the Federal Register (68 FR 11234) to update
the payment rates and policies under the LTCH PPS, we included a
proposal to apply a similar change in the methodology for establishing
outlier payments for LTCHs. We proposed these changes in the payment
methodology for both systems in order to correct situations in which
rapid increases in charges by certain hospitals have resulted in their
cost-to-charge ratios being set too high. Use of these cost-to-charge
ratios has resulted in excessive outlier payments to these hospitals.
We received approximately 582 timely pieces of correspondence on
the provisions of the March 5, 2003 IPPS outlier proposed rule. We
received approximately 22 timely pieces of correspondence on the
provisions of the March 7, 2003 LTCH PPS proposed rule that related to
payment for outlier cases. In this section of this final rule, we
discuss comments we received that are not related to the specific
changes we proposed, but are instead more general comments related to
outlier payment policies. We also discuss in this section the general
issue of allowing a transition period for the changes we are
implementing.
Comments directly related to specific proposals to revise the IPPS
outlier payment policy and our responses to those comments are
addressed in sections III., IV., V., and VI. of this final rule.
Comments directly related to the specific proposed LTCH PPS outlier
payment policy changes and our responses to those comments are
addressed in section VII. of this final rule.
We received a number of comments that, while directly or indirectly
related to outlier policy, were unrelated to the policies discussed in
the proposed rule. We have not responded to comments that are unrelated
to the changes that were proposed in the March 5, 2003
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proposed rule and that are implemented in this final rule. We also
received many detailed comments pertaining to specific implementation
issues associated with these changes. We also are not addressing them
in this final rule, but intend to issue implementation instructions
separately and will respond to these comments at that time.
Comment: One commenter suggested that we reinstitute day outliers
as an alternative to the current case methodology for outlier payments.
The commenter reasoned that day outliers would more fairly and
equitably pay hospitals for treating high-cost cases and would allow
for payment of an outlier based on the length of stay of a particular
Medicare beneficiary.
Response: Section 1886(d)(5)(A)(i) of the Act eliminates day
outlier payments for discharges occurring on or after October 1, 1997.
This provision was enacted in recognition of the fact that the high
costs of a case are a preferable indicator of whether a case merits
additional payments as an outlier than a long length stay. Furthermore,
although we recognize that the issues with our current methodology for
making outlier payments that are discussed in this final rule indicate
the need for changes to that methodology, we believe that, after
implementation of these changes, it will still be preferable to
continue to use high costs to identify outlier cases.
Comment: Several commenters argued that, in the past, CMS has
provided a transition period for the introduction of the capital PPS
and for the removal of graduate medical education salaries from the
calculation of the IPPS wage index. Therefore, the commenters
recommended that a similar transition period be applied for any changes
to outliers as well.
MedPAC recommended no transition period because, in recent years,
some hospitals have received extra payments as a result of substantial
outlier revenues. MedPAC further noted that this issue has been
prominent in the news media for many months and hospitals have had
sufficient opportunity to anticipate the end of these revenues and plan
accordingly.
Another commenter also suggested that a transition period was
unnecessary and recommended an immediate implementation date because
most of the proposed changes will benefit those hospitals that did not
try to game the system. In addition, the commenter believed that the
proposed changes are designed to correct program abuses and any
transition period would serve no legitimate public purpose and would
only delay the phaseout of an otherwise overstated threshold.
Some commenters asked that CMS implement the proposals beginning on
or after October 1, 2003, in order to allow fiscal intermediaries and
hospitals adequate time to update their processing systems. The
commenters added that if the proposals are implemented effective
October 1, 2003, no disruption would be made mid-year to the cost
report; that is, only entire cost reports would be reconciled once the
cost report is final settled.
Response: As discussed above, the current outlier payment
methodology includes two distinct vulnerabilities that some hospitals
have exploited to dramatically increase their outlier payments over a
brief period of time by raising their charges in excess of increases in
their costs. As these increases in outlier payments to those hospitals
are reflected in the data used to calculate the outlier thresholds,
they force the outlier threshold to rise so that the projected outlier
payout is equal to the outlier offset to the standardized amounts. The
result is that hospitals that do not aggressively increase their
charges do not receive outlier payments or receive reduced outlier
payments for truly costly cases.
An extended transition period would allow the effects of this
inappropriate redistribution of outlier payments to continue into the
future. We believe it is essential to eliminate those effects as soon
as possible in order to ensure that outlier payments are made only for
truly high-cost cases. Although, for reasons discussed below, we are
delaying implementation of some aspects of the changes we are making
until October 1, 2003, we are not transitioning any of these changes
beyond that date.
III. Updating Cost-to-Charge Ratios for IPPS Hospitals
A. Background and Provisions of the May 5, 2003 Proposed Rule
Currently, we use the most recent settled cost report when
determining cost-to-charge ratios for IPPS hospitals. Generally, the
covered charges on bills submitted for payment during FY 2003 are
converted to costs by applying a cost-to-charge ratio from cost reports
that began in FY 2000 or, in some cases, FY 1999 or even earlier. These
covered charges reflect all of a hospital's charge increases to date,
in particular those that have occurred since FY 2000 and are not
reflected in the FY 2000 cost-to-charge ratios. If a hospital's rate-
of-charge increases since FY 2000 exceeds the rate of the hospital's
cost increases during that time, the hospital's cost-to-charge ratio
based on its FY 2000 cost report will be too high, and applying it to
current charges will overestimate the hospital's costs per case during
FY 2003. Overestimating costs may result in some cases receiving
outlier payments when these cases, in actuality, are not high-cost
cases.
Because a hospital has the ability to increase its outlier payments
during the time lag between the current charges and the cost-to-charge
ratio from the settled cost report, through dramatic charge increases,
in the March 5, 2003 IPPS outlier payment proposed rule, we proposed
new regulations at Sec. 412.84(i)(1) that would allow fiscal
intermediaries to use more up-to-date data when determining the cost-
to-charge ratio for each hospital. As mentioned above, currently,
fiscal intermediaries use the hospital's most recent settled cost
report. We proposed to revise our regulations to specify that fiscal
intermediaries will use either the most recent settled cost report or
the most recent tentative settled cost report, whichever is from the
later cost reporting period.
Hospitals must submit their cost reports within 5 months after the
end of their fiscal year. CMS makes a decision to accept a cost report
within 30 days. Once the cost report is accepted, CMS makes a tentative
settlement of the cost report within 60 days. The tentative settlement
is a cursory review of the filed cost report to determine the amount of
payment to be paid to the hospital if an amount is due on the as-filed
cost report. After the cost report is tentatively settled, it can take
12 to 24 months, depending on the type of review or audit, before the
cost report is final-settled. Thus, using cost-to-charge ratios from
tentative settled cost reports, as we proposed in the March 5, 2003
proposed rule, reduces the time lag for updating cost-to-charge ratios
by a year or more.
However, even the later ratios calculated from the tentative
settled cost reports would overestimate costs for hospitals that have
continued to increase charges much faster than costs during the time
between the tentative settled cost report period and the time when the
claim is processed. That is, even though we proposed to reduce the lag
in time by revising the regulations to use the latest tentative settled
cost report rather than the latest settled cost report, if the cost
report is from a later cost reporting period, there would still be a
lag of 1 to 2 years during which a hospital's charges may still
increase faster than costs. Therefore, we proposed to add a new
provision to the regulations that, in the event more
[[Page 34498]]
recent charge data indicate that a hospital's charges have been
increasing at an excessive rate (relative to the rate-of-increase among
other hospitals), CMS would have the authority to direct the fiscal
intermediary to change the hospital's operating and capital cost-to-
charge ratios to reflect the high charge increases evidenced by the
later data. In addition, we proposed to allow a hospital to contact its
fiscal intermediary to request that its cost-to-charge ratios,
otherwise applicable, be changed if the hospital presents substantial
evidence that the ratios are inaccurate. Any such requests would have
to be approved by the CMS Regional Office with jurisdiction over that
fiscal intermediary.
B. Summary of Public Comments and Departmental Responses
Comment: Several commenters were troubled by our proposal that CMS
would have the authority to direct fiscal intermediaries to change a
hospital's cost-to-charge ratio based on excessive charges, and the
proposal that would allow a hospital to contact its fiscal intermediary
to request its cost-to-charge ratio be changed if the hospital presents
substantial evidence to support its request. Specifically, the
commenters requested that CMS establish clear guidelines for both
processes and define what constitutes ``excessive charges'' and
``substantial evidence.''
One commenter noted that some hospital cost reports from 1997 have
still not been settled. The commenter asked that there be a graduated
update of the cost-to-charge ratio data, updating the data by no more
than 2 years in any payment period. For example, the commenter stated,
a hospital currently paid using 1997 data would be updated to 1999 in
the first payment period under the new methodology and to 2001 in the
second period.
Response: Although we understand the commenters' desire that
thresholds and parameters established in advance be used to determine
when CMS will direct the fiscal intermediaries to apply a cost-to-
charge ratio different than one calculated using the latest tentative
settled cost report or the latest settled cost report, whichever is
from the latest period, we also believe it is important for CMS to have
the flexibility to respond appropriately in the future if unforeseen
evidence of similar manipulation of outlier payments comes to light. We
believe that establishing fixed thresholds in the regulations or in
preamble language could limit our ability to respond quickly to stop
such abuse. In addition, we believe that predetermined and public
thresholds can serve as benchmarks for those hospitals intending to
inappropriately maximize outlier payments in the future and would allow
hospitals to operate just below the threshold to avoid detection.
With regard to the standards we would apply to determine whether we
would direct the fiscal intermediaries to apply a different cost-to-
charge ratio (for example, ``excessive charges''), we would compare
hospitals' rate-of-increase in charges to the rate-of-increase among
other hospitals. Hospitals with increases in charges that are far above
the national average rate-of-increase, for example, would be likely to
have an alternative ratio assigned. These hospitals would then have the
opportunity to request that an alternative ratio be assigned by
presenting substantial evidence in support of their request. Such
evidence, for example, would be documentation that the hospitals' costs
had increased, leading to the increase in charges. At this time, we are
still developing the specific procedures involved and plan to issue
further guidance through program memoranda.
However, we recognize that, for some hospitals, updating to the
cost-to-charge ratio calculated using the latest tentative settled cost
reports may represent a substantial leap forward in the data and a
potentially large decrease in their cost-to-charge ratios. Although we
believe it is appropriate that all hospitals' charges are adjusted by
the most accurate cost-to-charge ratio when estimating costs, we
recognize the potential negative impact that may occur for some
hospitals solely due to the delay in settling their cost reports.
Therefore, in this final rule, we are not mandating use of the latest
settled or tentatively settled cost report for discharges occurring
prior to October 1, 2003. This delay in the effective date from that
proposed in the proposed rule should ease the burden of the change in
cost-to-charge ratios for most hospitals.
Although we are implementing the change to require the use of the
latest of the settled or tentative settled cost report to compute the
cost-to-charge ratio for discharges occurring on or after October 1,
2003, we believe that it is necessary to implement the other proposed
provision authorizing CMS to specify an alternative cost-to-charge
ratio for some hospitals, to be effective for discharges occurring on
or after August 8, 2003. Such an alternative would reflect available
data, such as the most recent rate-of-increase in charges, to
approximate the most accurate cost-to-charge ratio (which may include
data in the latest tentatively settled cost report or other data that
may be available).
Although this provision will be effective for all hospitals 60 days
after the date of publication of this final rule, we understand that,
given the large workload and limited resources of our fiscal
intermediaries, attempting to implement this provision for all
hospitals receiving outlier payments at the same time would create an
administrative burden. In addition, given the effective date of this
final rule, most of the changes in this regulation will apply only for
approximately the last 2 months of FY 2003. We are aware that hospitals
have projected their outlier payments for the current fiscal year based
on the policies in effect as of October 1, 2002, and any change in the
middle of the fiscal year could disrupt their budgets. As a result, we
intend to limit the impact of this provision during FY 2003 to ensure
that the limited resources of fiscal intermediaries are focused upon
updating the cost-to-charge ratios for those hospitals that appear to
have disproportionately benefited from the time lag in updating their
cost-to-charge ratios and to maintain the overall predictability of FY
2003 payments for most hospitals. Accordingly, we intend to issue a
program instruction in the near future to assist fiscal intermediaries
in implementing this provision during the remainder of FY 2003. The
criteria for FY 2004 will target a somewhat broader group of hospitals,
but will still be limited to those hospitals that have benefited the
most from the time lag in updating cost-to-charge ratios, and the
majority of hospitals will not be affected.
Comment: Some commenters suggested a transition period for
implementing the adoption of the latest tentative settled cost-to-
charge ratios and gave a detailed recommendation of how the transition
period would be implemented. The commenters recommended two different
methods for how a transition period could be implemented:
One recommendation was that FY 2002 would be considered the base
year amount. The commenter explained that, beginning with the effective
date of the final rule, hospitals would receive a blended cost-to-
charge ratio of its base year amount and the cost-to-charge ratio from
the most recent tentative cost report. In the first year, hospitals'
cost-to-charge ratios would consist of 66.7 percent from a base year
and 33.3 percent from the most recent tentative settled cost report. In
the second year the cost-to-charge ratio would consist of 33.3 percent
from the base year and 66.7
[[Page 34499]]
percent from the most recent tentative settled cost report. In the
third year, this gradual decrease from the base year could continue or
CMS could cease from blending the cost-to-charge ratio.
The second recommendation was a 3-year transition period using
blended cost-to-charge ratios as follows: The first year would be 75
percent of the old cost-to-charge ratio and 25 percent of the new. The
second year would be 50 percent of the old cost-to-charge ratio and 50
percent of the new cost-to-charge ratio. The third year would be 25
percent of the old cost-to-charge ratio and 75 percent of the new cost-
to-charge ratio. During the transition period, CMS would monitor
outlier payments to ensure they remain in statutory limits. Only those
hospitals that have not been identified by CMS as having excessive
outlier payments would qualify for the transition period.
Response: As noted previously, we believe it is essential to
eliminate the effects of the inappropriate redistribution of outlier
payments as soon as possible; that is, by not allowing hospitals that
have benefited from the time lag resulting from the use of the latest
settled cost-to-charge ratios to continue to do so. We do not believe
any transition period would be appropriate, as it would continue to
lead to lower outlier payments to those hospitals that have already
been harmed by the inappropriate redistribution of outliers described
above. Therefore, although in this final rule we are delaying the
effective date of this provision until discharges occurring on or after
October 1, 2003, so that most hospitals that had relied on outlier
payments based on existing policy may continue to do so for the
remainder of the Federal fiscal year, we are not adopting the
commenters' suggestions to further delay the effective date by allowing
for a blended cost-to-charge ratio.
Comment: Several other commenters offered different recommendations
on how CMS should administer updating of a hospital's cost-to-charge
ratio. One commenter recommended that hospitals be notified in advance
of any change to their cost-to-charge ratio and be given the
opportunity to appeal the fiscal intermediary's decision of any change
to their cost-to-charge ratio. Another commenter suggested that
parameters be set, such as those in Program Memorandums A-02-122
(released December 3, 2002) and A-02-126 (released December 20, 2002),
to determine when a cost-to-charge ratio should be updated. One
commenter proposed that CMS use an expedited process when a hospital is
requesting that its cost-to-charge ratio be decreased and not require
the use of ``substantial evidence'' for a reduction. For increases in
cost-to-charge ratios, the commenter suggested that CMS might want to
reserve final approval and substantial evidence standards. Other
commenters suggested that hospitals be provided with an expedited
appeals process to resolve quickly any disputes with the fiscal
intermediaries over the accuracy of their cost-to-charge ratios. Some
commenters supported using a hospital's tentative settled cost report
to update cost-to-charge ratios but believed that fiscal intermediaries
should have discretion to change a hospital's cost-to-charge ratio.
Response: As we proposed, in this final rule we are implementing a
new regulation that specifies that CMS may direct the fiscal
intermediary to change a hospital's operating and capital cost-to-
charge ratios to reflect the high-charge increases evidenced by the
later data. Fiscal intermediaries will not have their own discretion to
update a hospital's cost-to-charge ratio. Only CMS will have the
authority to direct the fiscal intermediary that an update is necessary
in the event more recent charge data indicates that a hospital's
charges have been increasing at an excessive rate (relative to the
rate-of-increase among other hospitals).
C. Provisions of the Final Rule Relating to Updating Cost-to-Charge
Ratios
We are establishing a new Sec. 412.84(i)(1), which specifies that,
for discharges occurring on or after 60 calendar days after the date of
publication of this final rule, in the event more recent charge data
indicate that a hospital's charges have been increasing at an excessive
rate (relative to the rate-of-increase among other hospitals), CMS may
direct the fiscal intermediary to change the hospital's operating and
capital cost-to-charge ratios to reflect the high-charge increases
evidenced by the later data. A hospital may also request that its
fiscal intermediary use a different (higher or lower) cost-to-charge
ratio based on substantial evidence presented by the hospital. Before
the change can go into effect, the CMS Regional Office must approve the
request.
We also are establishing Sec. 412.84(i)(2), which provides that,
for discharges occurring on or after October 1, 2003, the operating and
capital cost-to-charge ratios applied at the time a claim is processed
are based on either the most recent settled cost report or the most
recent tentative settled cost report, whichever is from the latest cost
reporting period.
IV. Statewide Average Cost-to-Charge Ratios
A. Background and Provisions of the March 5, 2003 Proposed Rule
As hospitals raise their charges faster than their costs increase,
over time their cost-to-charge ratios will decline. If hospitals
continue to increase charges at a faster rate than their costs increase
over a long period of time, or if they increase charges at extreme
rates, their cost-to-charge ratios may fall below the range considered
reasonable under the regulations (0.194 for operating cost-to-charge
ratios and 0.012 for capital cost-to-charge ratios in FY 2003 (67 FR
50125)), and, under current regulations at Sec. 412.84(h), their
fiscal intermediaries will assign a statewide average cost-to-charge
ratio. These statewide averages are generally considerably higher than
the threshold. Therefore, under existing regulations, these hospitals
benefit from an artificially high ratio being applied to their already
high charges. Furthermore, hospitals can continue to increase charges
faster than costs, without any further downward adjustment to their
cost-to-charge ratios.
For example, in a 3-year span, one hospital was found to have an
increase in charges of 60 percent from FY 1999 to FY 2000, 35 percent
from FY 2000 to FY 2001, and 13 percent from FY 2001 to FY 2002. This
hospital's actual operating cost-to-charge ratio for FY 2003 was 0.093.
Because this number is below the threshold of 0.194, the fiscal
intermediary assigned this hospital the statewide average cost-to-
charge ratio of 0.328 (from Table 8A of the August 1, 2002 IPPS final
rule (67 FR 50263)). In this case, the assignment of the statewide
average cost-to-charge ratio to this hospital increased the hospital's
estimated costs per case far above the estimate using the actual ratio,
leading to substantially higher outlier payments to the hospital as a
result of this policy.
In December 2002, we issued Program Memorandum A-02-122, which
requested fiscal intermediaries to identify all hospitals receiving the
statewide average operating or capital cost-to-charge ratio because
their cost-to-charge ratios fell below the floor of reasonable
parameters. We received a list of 43 hospitals that were assigned the
statewide average operating cost-to-charge ratio and 14 hospitals that
were receiving the statewide average capital cost-to-charge ratio.
Three hospitals were found on both lists. Prior to application of the
statewide average cost-to-charge ratios, the average actual operating
cost-to-charge ratio for the 43 hospitals was 0.164, and the average
actual capital cost-to-charge ratio for the
[[Page 34500]]
14 listed hospitals was 0.008. In contrast, the statewide average
operating cost-to-charge ratio for the 43 hospitals was 0.3425 and the
statewide average capital cost-to-charge ratio for the 14 hospitals was
0.035.
Because of hospitals' ability to increase their charges to lower
their cost-to-charge ratios in order to be assigned the statewide
average, in the March 5, 2003 proposed rule, we proposed to remove the
requirement in our existing regulations that specified that a fiscal
intermediary will assign a hospital the statewide average cost-to-
charge ratio when the hospital has a cost-to-charge ratio that falls
below the floor. We proposed that hospitals would receive their actual
cost-to-charge ratios, no matter how low their ratios fall.
We proposed that statewide average cost-to-charge ratios would
still apply in those instances in which a hospital's operating or
capital cost-to-charge ratio exceeds the upper threshold. We indicated
that cost-to-charge ratios above this range are probably due to faulty
data reporting or entry and should not be used to identify and pay for
outliers. In addition, we proposed that hospitals that have not yet
filed their first Medicare cost reports with their fiscal
intermediaries would still receive the statewide average cost-to-charge
ratios.
B. Summary of Public Comments and Departmental Responses
Comment: Many commenters supported the proposal to remove the
existing requirement that specified that a fiscal intermediary will
assign a hospital the statewide average cost-to-charge ratio when the
hospital has a cost-to-charge ratio that falls below the floor.
However, they argued that the requirement to use the statewide average
ratio for those hospitals that are above 3 standard deviations from the
geometric mean should also be removed. The commenters reasoned that the
policy should be consistent for the floor and the ceiling. As an
alternative to using the statewide average (instead of ratios above the
ceiling), some commenters suggested that we reduce the parameter of 3
standard deviations above the mean to a lower standard. Another
commenter stated that CMS was acting in bad faith by eliminating the
statewide average for the floor but not the ceiling.
Response: The changes we are making in this final rule are in
response to a specific problem associated with hospitals intentionally
taking advantage of our policy to assign the statewide cost-to-charge
ratios when a hospital's own ratio fell below the floor. There is no
similar incentive for hospitals to increase their ratios to the
ceiling. Also, we believe it is unlikely a hospital would maintain a
cost-to-charge ratio as high as 3 standard deviations of the geometric
mean over a period of years. Therefore, we continue to believe the
statewide average should be assigned for those hospitals with ratios
above the ceiling.
Comment: One commenter argued that a transition period would be
necessary because this change would have an immediate impact on
affected hospitals' credit stability and patient service levels in
certain regions. Another commenter suggested a transition period for
those hospitals that did not engage in aggressive pricesetting. The
commenter suggested a gradual phaseout of the statewide average. On the
other hand, many commenters also supported the immediate elimination of
the statewide average from the floor.
Response: We believe that, for hospitals receiving the statewide
average cost-to-charge ratio because their actual ratio fell below 3
standard deviations below the geometric mean, their actual ratio is a
more accurate reflection of the relationship between their costs and
charges. Although it may not have been a specific objective of each
hospital currently in this situation to increase charges until its
ratio fell below the floor, we are not persuaded there is any
justification to continue making outlier payments to these hospitals on
the basis of a cost-to-charge ratio that clearly results in excessive
outlier payments. Therefore, we are adopting as final the proposed
change that eliminates the use of the statewide average for hospitals
below 3 standard deviations from the geometric mean effective for
discharges occurring on or after 60 calendar days after the date of
publication of this final rule.
C. Provisions of the Final Rule Relating to Statewide Average Cost-to-
Charge Ratios
We are implementing new regulations at Sec. Sec. 412.84(h) and
(i)(1) that are effective 60 calendar days after the date of
publication of this final rule, that remove the existing requirement
that a fiscal intermediary will assign a hospital the statewide average
cost-to-charge ratio when the hospital has a cost-to-charge ratio that
falls below the floor. Hospitals will receive their actual cost-to-
charge ratios, no matter how low their ratios fall.
The statewide average cost-to-charge ratios will still apply in
those instances in which a hospital's operating or capital cost-to-
charge ratios fall outside of reasonable parameters (that is, exceed
the upper threshold). In addition, hospitals that have not yet filed
their first Medicare cost reports with their fiscal intermediaries
would still receive the statewide average cost-to-charge ratios. CMS
will continue to set forth the reasonable parameters and the statewide
cost-to-charge ratios in each year's annual notice of prospective
payment rates published in the Federal Register in accordance with
Sec. 412.8(b).
V. Reconciling Outlier Payments Through Settled Cost Reports
A. Background and Provisions of the March 5, 2003 Proposed Rule
Under the IPPS, hospitals submit a bill for each Medicare patient
stay for which they expect a payment from Medicare. The bill includes
information needed to: (1) Classify the case to a DRG; (2) determine
whether the case was a transfer; (3) identify whether a new technology
eligible for add-on payments was involved; and (4) calculate the costs
of a case to determine whether it is eligible for an outlier payment or
a new technology add-on payment. This latter calculation is based on
the covered charges reported on the bill, which, as discussed above,
are also used to estimate the covered costs of the case by applying the
cost-to-charge ratio.
The information from the bill is processed through the fiscal
intermediary's claims processing system to determine the payment amount
for each case. Unless a hospital qualifies for periodic interim
payments under Sec. 412.116(b), or other interim payments, payment is
made on the basis of the actual amount determined for each bill
processed. For hospitals that qualify for periodic interim payments,
the fiscal intermediary estimates a hospital's IPPS payments and makes
biweekly payments equal to \1/26\ of the total estimated amount of
payment for the year. However, outlier payments are not made on an
interim basis, but are made on a claim-by-claim basis (even for
hospitals that qualify for interim payments under Sec. 412.116(b)),
and generally represent final payment (Sec. 412.116(e)). This policy
is in contrast to payments under the IME adjustment and the DSH
adjustment, both of which are routinely adjusted when hospitals' cost
reports are settled to reflect updated data such as the number of
residents or patient days during the actual cost reporting period.
However, as stated earlier in this preamble, we are increasingly
aware that some hospitals have taken advantage of the existing outlier
policy
[[Page 34501]]
by increasing their charges at extremely high rates, knowing that there
would be a time lag before their cost-to-charge ratios would be
adjusted to reflect the higher charges. The steps we proposed in the
March 5, 2003 proposed rule, and are implementing here, to direct
fiscal intermediaries to update cost-to-charge ratios using the most
recent tentative settled cost reports (and in some cases, even later
data) and using actual rather than statewide average ratios for
hospitals that have cost-to-charge ratios higher than 3.0 standard
deviations below the geometric mean cost-to-charge ratio, would greatly
reduce the opportunity for hospitals to manipulate the system to
maximize outlier payments. However, these steps would not completely
eliminate all such opportunity. A hospital would still be able to
dramatically increase its charges by far above the rate-of-increase in
costs during any given year. This possibility is of great concern,
given the recent findings that some hospitals have been able to receive
large outlier payments by doing just that.
Therefore, we proposed to add a provision to our regulations to
provide that outlier payments would become subject to reconciliation
when hospitals' cost reports are settled. Under this policy, payments
would be processed throughout the year using operating and capital
cost-to-charge ratios based on the best information available at that
time. We proposed that when the cost report is settled, any
reconciliation of outlier payments by fiscal intermediaries would be
based on operating and capital cost-to-charge ratios calculated based
on a ratio of costs to charges computed from the cost report and charge
data determined at the time the cost report coinciding with the
discharge is settled.
This process would require some degree of recalculating outlier
payments for individual claims. It is not possible to distinguish, on
an aggregate basis, how much a hospital's outlier payments would change
due to a change in its cost-to-charge ratios. This is because, in the
event of a decline in a ratio, some cases may no longer qualify for any
outlier payments while other cases may qualify for lower outlier
payments. Therefore, the only way to determine accurately the net
effect of a decrease in cost-to-charge ratios on a hospital's total
outlier payments is to assess the impact on a claim-by-claim basis. We
indicated in the proposed rule that we were still assessing the
procedural modifications that would be necessary to implement this
change.
Because, under our proposal, outlier payments would be based on the
relationship between the hospital's costs and charges at the time a
discharge occurred, the proposed methodology would ensure that when
final outlier payments are made, they would reflect an accurate
assessment of the actual costs the hospital incurred. Nevertheless, a
final vulnerability remains. Even though the final payment would
reflect a hospital's true cost experience, there would still be the
opportunity for a hospital to manipulate its outlier payments by
dramatically increasing charges during the year in which the discharge
occurs. In this situation, the hospital would receive excessive outlier
payments, which, although the hospital would incur an overpayment and
have to refund the money when the cost report is settled, would allow
the hospital to obtain excess payments from the Medicare Trust Fund on
a short-term basis.
Under section 1886(d)(5)(A)(iii) of the Act, the amount of any
outlier payment should ``approximate the marginal cost of care'' in
excess of the DRG payment and the fixed-loss threshold. Accordingly,
because a hospital would have had access to any excess outlier payments
until they are repaid to the Trust Fund (or, in the case of an
underpayment, would not have had access to the appropriate amount
during the same period), it may be necessary to adjust the amount of
the final outlier payment to reflect the time value of the funds for
that time period. Therefore, we proposed to add Sec. 412.84(m) to
provide that when the cost report is settled, outlier payments would be
subject to an adjustment to account for the value of the money during
the time period it was inappropriately held by the hospital. This
adjustment would also apply in cases where outlier payments were
underpaid to the hospital. In those cases, the adjustment would result
in additional payments to hospitals. Any adjustment would be based upon
a widely available index to be established in advance by the Secretary,
and would be applied from the midpoint of the cost reporting period to
the date of reconciliation (or when additional payments are issued, in
the case of underpayments). This adjustment to reflect the time value
of a hospital's outlier payments would ensure that the outlier payment
received by the hospital at the time its cost report is settled
appropriately reflects the hospital's approximate marginal costs, in
excess of the DRG payment and fixed-loss threshold, of providing the
care.
This proposed adjustment was also intended to account for the
unique susceptibility of outlier payments to manipulation. Hospitals
set their own level of charges and are able to change their charges,
without review by their fiscal intermediaries. As outlined above,
changes in charges directly affect the level of outlier payments. This
lack of fiscal intermediary review of a factor affecting a hospital's
payments is in contrast to other IPPS adjustments, such as the IME
adjustment or the DSH adjustment, where the fiscal intermediary must
agree to a change to the determining factor (the resident-to-bed ratio
or the share of low-income patients, respectively).
Under section 1886(d)(5)(A)(iv) of the Act, outlier payments for
any year must be projected to be not less then 5 percent nor more than
6 percent of the total estimated operating DRG payments plus outlier
payments. Section 1886(d)(3)(B) of the Act requires the Secretary to
reduce the average standardized amounts by a factor to account for the
estimated proportion of total DRG payments made to outlier cases.
Despite the fact that each individual hospital's outlier payments may
be subject to adjustment when the cost report is settled, we continue
to believe that the fixed-loss outlier threshold (discussed in section
VI. of this final rule) should be based on projected payments using the
latest available historical data without retroactive adjustments,
either midyear or at the end of the year, to ensure that actual outlier
payments are equal to 5.1 percent of total DRG payments. That is, our
proposed change was intended only to allow for use of the actual cost-
to-charge ratio from the cost reporting period that corresponds to the
discharges for which the outlier payments are made to adjust outlier
payments to reflect the hospital's true costs of providing care. This
adjustment would be made irrespective of whether the nationwide
percentage of outlier payments relative to total operating DRG payments
is equal to the outlier offset that is applied to the average
standardized amounts (generally, 5.1 percent).
Outlier payments are intended to recognize the fact that hospitals
occasionally treat cases that are extraordinarily costly and otherwise
not adequately compensated under an average-based payment system.
However, we can only estimate actual costs based on the charges for a
case because charges are the only data available that indicate the
resource usage for an individual case. Therefore, our ability to
identify true outlier cases is dependent on the accuracy of the cost-
to-charge ratios. To the extent some hospitals may be motivated to
maximize outlier payments by taking advantage of the lag in updating
the cost-to-charge
[[Page 34502]]
ratios, the payment system remains vulnerable to overpayments to
individual hospitals. Therefore, we believe the only way to eliminate
the potential for such overpayments is to provide a mechanism for final
settlement of outlier payments using actual cost-to-charge ratios from
final settled cost reports.
However, the fixed-loss outlier threshold is an important aspect of
the prospective nature of the IPPS. The outlier payment policy is
designed to alleviate any financial disincentive hospitals may have
against providing any medically necessary care their patients may
require, even those patients who become very sick and require
extraordinary resources. The preestablished threshold allows hospitals
to approximate their Medicare payment for an individual patient while
that patient is still in the hospital. Even though we proposed to make
outlier payments susceptible to a reconciliation based on the
hospital's actual cost-to-charge ratios during the contemporaneous cost
reporting period, the hospital should still be in a position to make
this approximation. Hospitals have immediate access to the information
needed to determine what their cost-to-charge ratio will be when their
cost reports are settled. Even if the final cost-to-charge ratio is
likely to be different from the ratio used initially to process and pay
the claim, as noted above, hospitals not only have the information
available to estimate their cost-to-charge ratios, but also have the
ability to control them, through the structure and levels of their
charges.
If we were to make retroactive adjustments to outlier payments to
ensure total payments are 5.1 percent of DRG payments (by retroactively
adjusting outlier payments), we would be removing this important aspect
of the prospective nature of the IPPS. Because such an across-the-board
adjustment would either lead to more or less outlier payments for all
hospitals, hospitals would no longer be able to reliably approximate
their payment for a patient while the patient is still hospitalized. We
believe it would be neither necessary nor appropriate to make such an
aggregate retroactive adjustment.
Furthermore, we believe it is consistent with the intent of the
language at section 1886(d)(5)(A)(iv) of the Act not to do so. This
section calls for the Secretary to ensure that outlier payments are
equal to or greater than 5 percent and less than or equal to 6 percent
of projected or estimated (not actual) DRG payments. We believe this
language reflects the intent of Congress regarding the prospectivity of
the IPPS. However, we do not believe it prevents settling outlier
payments based on hospitals' actual cost-to-charge ratios during the
period when the discharge occurs.
B. Summary of Public Comments and Departmental Responses
Comment: Many commenters argued that it is inappropriate to
reconcile outlier payments through settled cost reports because IPPS
payments are prospective and any type of reconciliation would make
outlier payments retrospective.
In addition, some commenters claimed that cost report
reconciliation for outliers is inconsistent with the government's
position in prior litigation involving the Medicare outlier payment
methodology. The commenters cited County of Los Angeles v. Shalala, 192
F.3d 1005 (D.C. Cir. 1999), and stated that in this case the Secretary
succeeded in arguing to the United States Court of Appeals for the
District of Columbia that the Act does not require retroactive
adjustments to outlier payments in order to ensure that the actual
amount of outlier reimbursement furnished to hospitals is between 5 and
6 percent of the total payments made under IPPS, notwithstanding the
language in section 1886(d)(5)(A)(iii) of the Act (42 U.S.C.
1395ww(d)(5)(A)(iii)) mandating that outlier payments may not be less
than 5 percent nor more than 6 percent of the total payments projected
or estimated to be made based on DRG prospective payment rates. The
commenters further asserted that any reconciliation of outlier payments
would be inconsistent with the government's policy of refusing to make
retroactive adjustments to outlier payments when estimates and
projections prove inaccurate.
Response: As an initial matter, our position in the court cases is
more accurately presented as stating that the language of the statute
does not clearly mandate that the actual amount of outlier payments
must be between 5 and 6 percent of total payments and that our policy
of not making retroactive adjustments to ensure that actual payments
fall between that range is consistent with the intent of Congress.
However, the commenter is correct that we have scrupulously guarded the
prospective nature of the IPPS over the years. The IPPS has continued
and served as a model for prospective payment systems for other
provider types under Medicare because it is fair and predictable. We
believe any change to the system, especially one as significant as
making outlier payments subject to retroactive adjustments, must be
evaluated in terms of its impact on those key characteristics of the
IPPS.
As noted above and in the proposed rule, in light of the gross
abuses of the current methodology by some hospitals and the negative
impact such overpayments ultimately have on other hospitals due to
their effect on the threshold, we believe the option of reconciling
outlier payments based on the settled cost report for hospitals that
have been initially paid using a significantly inaccurate cost-to-
charge ratio compared to the actual ratio from the cost reporting
period is now appropriate. In our view, reconciling outlier payments
because they were originally paid on the basis of a significantly
inaccurate cost-to-charge ratio is similar to recovering outlier
payments when adjustments are made to covered charges for any services
that are not found to be medically necessary or appropriate Medicare
services upon medical or other review. This review is explicitly
provided for at Sec. 412.84(d). This provision was established when
the IPPS was first implemented for FY 1984 (48 FR 39785).
The court cases referenced by the commenters all addressed the
issue of whether outlier payments must be retroactively adjusted when
the level of the threshold determined in advance of the fiscal year to
which it applies ultimately results in actual outlier payments that are
a smaller percentage of total DRG payments than was originally
projected. We believe that an important goal of a PPS is
predictability. Therefore, we believe that the fixed-loss outlier
threshold should be projected based on the best available historical
data and should not be adjusted retroactively. A retroactive change to
the fixed-loss outlier threshold would affect all hospitals subject to
the IPPS, thereby undercutting the predictability of the system as a
whole.
However, if we deem it necessary as a result of a hospital-specific
data variance to reconcile outlier payments of an individual hospital,
such action on our part would not affect the predictability of the
entire system. Rather, because each hospital is on notice as to our
revised methodology for determining cost-to-charge ratios and that
outlier payments are subject to possible reconciliation, and because
each hospital has the necessary data regarding its own costs and
charges to predict its actual cost-to-charge ratio, we are able to
maintain the predictability of the system as a whole. Further, because
reconciliation of outlier payments will affect only certain hospitals,
the administrative burden of implementing such a policy is minimized.
[[Page 34503]]
Accordingly, we continue to believe that the fixed-loss outlier
threshold should be based on projected payments using the latest
available historical data without retroactive adjustments. This was our
position in the court cases cited by the commenter, and it has been our
consistent and often stated position, including above in this final
rule and the March 5, 2003 proposed rule.
Comment: Some commenters suggested that we clarify how
reconciliation will be implemented and only reconcile outlier payments
to those providers whose cost-to-charge ratios increased or decreased
outside of certain parameters. The commenters suggested that we
reconcile outlier payments only for those hospitals that would
otherwise receive substantial outlier overpayments or underpayments
(for example, where the cost-to-charge ratio increased or decreased by
15 percent). Limiting any reconciliation to those hospitals would have
the desired impact of focusing the attention of CMS on those hospitals
that deserve additional scrutiny without placing such a burden on all
hospitals. Another commenter believed the savings of reconciliation
would be offset by the additional workload for fiscal intermediaries
and hospitals.
One commenter suggested that we eliminate the proposal of
reconciliation and use a quarterly or semiannual review similar to
periodic interim payment reviews. The commenter explained that these
reviews would be performed by a joint effort of the provider and the
fiscal intermediary, resulting in interim cost-to-charge ratio
adjustments throughout the fiscal year (with no lump-sum adjustment or
individual claims adjustment), based on cost and charge data available
from hospital records.
Response: In the proposed rule, we proposed to establish the
authority for CMS to reconcile outlier payments, but we did not propose
to require that all hospitals' outlier payments be reconciled. We
acknowledge the commenters' concerns about the administrative costs
associated with reprocessing and reconciling all inpatient claims and
the desirability of limiting which hospitals' outlier payments will be
reconciled. Therefore, we agree that any reconciliation of outlier
payments should be done on a limited basis.
Moreover, although this provision is effective 60 days after the
date of publication of this final rule, given the large workload and
limited resources of our fiscal intermediaries, attempting to implement
this provision for all hospitals receiving outlier payments at the same
time would create an administrative burden. In addition, most of the
changes in this regulation will apply for approximately the last 2
months of FY 2003. We intend to limit the impact of this provision
during FY 2003 to ensure that the limited resources of fiscal
intermediaries are focused upon those hospitals that appear to have
disproportionately benefited from the time lag in updating their cost-
to-charge ratios and to maintain the overall predictability of FY 2003
payments for most hospitals. Accordingly, we intend to issue a program
instruction in the near future to assist fiscal intermediaries in
implementing this provision during the remainder of FY 2003.
In the same program instruction, we will issue thresholds for
fiscal intermediaries to reconcile outlier payments for other hospitals
during FY 2003.
For cost reporting periods beginning during FY 2004, we are
considering instructing fiscal intermediaries to conduct reconciliation
for hospitals whose actual cost-to-charge ratios are found to be plus
or minus 10 percentage points from the cost-to-charge ratio used during
that time period to make outlier payments, and that have total FY 2004
outlier payments that exceed $500,000. We believe these thresholds
would appropriately capture those hospitals whose outlier payments will
be substantially inaccurate when using the ratio from the
contemporaneous cost reporting period. Hospitals exceeding these
thresholds during their applicable cost reporting periods would become
subject to reconciliation of their outlier payments. These thresholds
would be reevaluated annually and, if necessary, modified each year.
However, fiscal intermediaries would also have the administrative
discretion to reconcile additional hospitals' cost reports based on
analysis that indicates the outlier payments made to those hospitals
are significantly inaccurate.
We continue to believe that cost report reconciliation is the most
appropriate way to ensure that outlier payments are made only for truly
costly cases. We believe the type of ongoing reviews suggested by the
commenter referenced above would be an inefficient approach to
addressing this problem, because it would require extensive ongoing
reviews of every hospital's cost and charge data. However, we believe
the problems leading to this final rule actually occur among a limited
number of hospitals.
Comment: Some commenters believed that reconciliation is
unnecessary because the proposed changes that would eliminate the use
of statewide averages and mandate use of the most recent tentative cost
report would suffice to keep hospitals from gaming outliers. Therefore,
they believed CMS should abandon its proposal to reconcile outlier
payments.
Response: The steps we are taking in this final rule to direct
fiscal intermediaries to update cost-to-charge ratios using the most
recent tentative settled cost reports and using actual cost-to-charge
ratios rather than statewide average ratios will greatly reduce the
opportunity for hospitals to manipulate the system to maximize outlier
payments. However, these steps will not completely eliminate all such
opportunity. A hospital would still be able to dramatically increase
its charges far above its rate-of-increase in costs during any given
year in order to obtain excessive outlier payments. Therefore, we
believe reconciliation is necessary to ensure that outlier payments are
appropriately paid in the future.
Comment: One commenter suggested the use of a rolling 3-year
average instead of reconciliation. The commenter explained that if a
hospital is found to have a cost-to-charge ratio that significantly
decreased over a short period of time, the cost-to-charge ratio that
would be used to pay outliers would be projected by applying the 3-year
average rate of change in cost-to-charge ratios over a rolling 3-year
period. Cost reports used from that 3-year period would include the
most recent audited or tentatively settled cost report for each year.
The commenter provided an example where the cost-to-charge ratio from
the most recent tentatively settled cost report is trended down to
reflect the fact that over a longer period of time, charge increases
have exceeded cost increases. This rolling 3-year average would be
applied to hospitals that trigger this mechanism for a period of
several years, until the period where the charge increases that gave
rise to the use of the projection has worked its way through the
method.
Response: The changes in this final rule are designed to take away
any incentive for hospitals to seek outlier payments that are
excessive. We believe the method recommended by the commenter still
leaves the potential to game the system. For example, a hospital with a
high cost-to-charge ratio can lower its charges substantially in any
given year and receive extra outlier payments until the 3-year average
is applied. Also, even after the 3-year moving average is applied, the
hospital can continue to raise its charges in any given year and
continue to receive outlier payments that do not reflect its
[[Page 34504]]
actual cost-to-charge ratio. At the end of the fiscal year, the
hospital would receive a new cost-to-charge ratio based on its 3-year
rolling average when in reality its actual cost-to-charge ratio is much
lower. A hospital could continue to stay ahead of the system every year
and receive outlier payments that do not reflect its actual cost-to-
charge ratio. This is the exact behavior we are trying to prevent and,
therefore, we believe we need to implement the process of
reconciliation to dissuade hospitals from gaming the system.
Comment: Other commenters believed reconciliation would lead to
further unpredictability and volatility in the Medicare payment system
and would have implications for cost report simplification. Another
commenter expressed similar concerns that some hospitals' cost reports
may not be settled for longer than 2 to 3 years and would be subject to
large overpayments that would then be subject to an adjustment for the
time value of money. Similarly, a hospital's cost report can be
reopened at a later date even after final settlement, which would cause
further uncertainty if reconciliation had been conducted in the past.
Response: We plan to issue further guidance through program
memoranda detailing the specific operational aspects of reconciling
outlier payments on the cost report. At this time, we are still
developing the specific procedures involved, including the exact timing
of any reconciliation in terms of the cost reporting settlement process
and the appeals process.
Comment: Several commenters argued that it would be inappropriate,
illogical, and inconsistent with current policies to single-out
outliers for adjustments to account for the time value of money. The
commenters pointed out that other IPPS payment adjustments, such as IME
and DSH, are subject to reconciliation but hospitals are not charged
for the time value of money when those overpayments or underpayments
are reconciled. However, another commenter agreed that outlier payments
are substantially different from IME and DSH payments and the premise
for adjusting for the time value of money with respect to outlier
payments (when it is limited to situations where the cost-to-charge
ratio is substantially inaccurate, and does not involve policy
disputes) is not applicable to other adjustments such as IME and DSH.
Response: As we noted above and in the proposed rule, outlier
payments are uniquely susceptible to manipulation because hospitals set
their own level of charges and are able to change their charges without
notification to, or review by, their fiscal intermediary. Such changes
by a hospital directly affect its level of outlier payments, unlike IME
or DSH where the fiscal intermediary must agree to a change to the
underlying data. Therefore, even though the money may be recouped if
the outlier payments are reconciled, the hospital would essentially be
able to unilaterally increase its charges and acquire an interest-free
loan in the meantime. For that reason, we believe it is appropriate to
apply an adjustment for the time value of overpayments or underpayments
identified at cost report reconciliation. Because the other changes we
are making in this final rule will largely ensure the payments
hospitals receive for outlier cases are accurate, we do not anticipate
it will be necessary to apply this adjustment broadly. Therefore, the
actual total impact of this adjustment should be relatively small.
Comment: One commenter argued that there is no statutory
authorization for this adjustment. The commenter referenced section
1815(d) of the Act (42 U.S.C. 1395g(d)), which provides that interest
is charged when a final determination is made and payment is not made
within 30 days of the date of the determination. The commenter
concluded there is no authority to impose interest in any fashion
except in a manner consistent with this statutory authorization, and,
thus, the proposed time value adjustment should be withdrawn.
Response: The reference cited by the commenter authorizes Medicare
to charge and pay interest when an overpayment or underpayment is made.
However, the referenced statutory authority is not the basis for the
proposal to adjust outlier payments for the time value of money when
reconciliation is made. Rather, this adjustment is consistent with the
statutory requirement at section 1886(d)(5)(A)(iii) that outlier
payments approximate the marginal cost of care beyond the threshold.
That is, because hospitals are uniquely able to manipulate outlier
payments by increasing charges, it is necessary to establish a
mechanism whereby an adjustment can be made to ensure payments
appropriately reflect the true marginal costs of care for outlier
cases. As a result, the outlier adjustment can be distinguished from
other IPPS payment adjustments where interest is applied, such as IME
or DSH, because changes to these adjustments are subject to review by
the fiscal intermediary before additional payments are made.
C. Provisions of the Final Rule Relating to Reconciliation of Outlier
Payments Through Settled Cost Reports
We are adding Sec. 412.84(i)(3) to provide that, effective 60
calendar days after the date of publication of this final rule, outlier
payments will become subject to adjustment when hospitals' cost reports
coinciding with the discharge are settled.
Payments will be processed throughout the year using the
appropriate historical operating and capital cost-to-charge ratios,
consistent with the regulations. When the cost report is settled, any
reconciliation of outlier payments by fiscal intermediaries will be
based on operating and capital cost-to-charge ratios calculated based
on a ratio of costs to charges computed from the cost report and charge
data determined at the time the cost report coinciding with the
discharge is settled. We intend to issue program instructions to the
fiscal intermediaries that will provide specific criteria for
identifying those hospitals subject to reconciliation for the remainder
of FY 2003 and for FY 2004. These criteria for FY 2003 will allow the
fiscal intermediaries to focus their limited resources on only those
hospitals that appear to have disproportionately benefited from the
time lag in updating their cost-to-charge ratios. The criteria for FY
2004 will target a somewhat broader group of hospitals, but will still
be limited to those hospitals that have benefited the most from the
time lag in updating cost-to-charge ratios, and the majority of
hospitals will not be affected. Also, fiscal intermediaries will have
the administrative discretion to reconcile additional hospitals' cost
reports based on analysis that indicates the outlier payments made to
those hospitals are significantly inaccurate.
In addition, effective for discharges occurring on or after 60
calendar days after the date of publication of this final rule, for
those hospitals for which reconciliation is necessary, outlier payments
will be adjusted to account for the time value of any underpayments or
overpayments (Sec. 412.84(m)).
VI. Fixed-Loss Outlier Threshold for IPPS Hospitals
A. Background and Provisions of the March 5, 2003 Proposed Rule
As noted above, under section 1886(d)(5)(A)(iv) of the Act, outlier
payments for any year must be projected to be not less than 5 percent
nor more than 6 percent of total estimated operating DRG payments plus
outlier payments. Section 1886(d)(3)(B) of the
[[Page 34505]]
Act requires the Secretary to reduce the average standardized amounts
by a factor to account for the estimated proportion of total DRG
payments made to outlier cases. Similarly, section 1886(d)(9)(B)(iv) of
the Act requires the Secretary to reduce the average standardized
amounts applicable to hospitals in Puerto Rico to account for the
estimated proportion of total DRG payments made to outlier cases.
In the August 1, 2002, IPPS final rule, we established the FY 2003
outlier fixed-loss threshold at $33,560 (67 FR 50122). This was a
nearly 60-percent increase over the FY 2002 threshold of $21,025. The
primary reason for this dramatic increase was a change in our
methodology to use the rate of increase in charges rather than the
rate-of-increase in costs to determine the threshold. That is, because
we use FY 2001 cases to project the threshold for FY 2003, it is
necessary to inflate the charges on the FY 2001 bills to approximate
the charges on a similar claim for FY 2003. Prior to the calculation of
the FY 2003 outlier threshold, we used the rate-of-cost increase from
the most recent cost reports available to inflate actual charges on the
prior year's bills to estimate what the charges would be in the
upcoming year.
Our analysis indicated hospitals' charges were increasing at a much
faster rate than costs. Therefore, in the August 1, 2002, IPPS final
rule, we changed our methodology to inflate charges (67 FR 50122).
Rather than using the observed rate-of-increase in costs from the cost
reports, we inflated the FY 2001 charges by a 2-year average annual
rate of change in actual charges per case from FY 1999 to FY 2000, and
from FY 2000 to FY 2001, to estimate what the charges would be in FY
2003 for a similar claim.
The provisions of this final rule make several changes to better
target outlier payments to the most costly cases. As a result, outlier
payments to the hospitals that have been most aggressively increasing
their charges to maximize outlier payments will be dramatically
reduced. However, we are concerned that unrestrained charge increases
have continued to occur during FY 2003 prior to the implementation of
these final changes, and will likely result in outlier payments in
excess of the 5.1 percent offset established by the August 1, 2002,
IPPS final rule. (We now estimate FY 2003 outlier payments are equal to
6.1 percent of total DRG payments.) For example, hospitals intending to
maximize outlier payments during FY 2003 could continue to do so by
increasing charges enough to outpace the increase in the threshold. In
fact, given the public attention on this behavior over the past few
months and the potential for other hospitals to begin to aggressively
increase their charges, and consequently their outlier payments, it is
possible this type of aggressive gaming of the outlier policy has
become more widespread in recent months.
Because of the extreme uncertainty regarding the effects of
aggressive hospital charging practices on FY 2003 outlier payments to
date, we did not propose any change to the FY 2003 fixed-loss threshold
($33,560) in the March 5, 2003, proposed rule. However, we noted that
data for the first quarter of FY 2003 inpatient claims would be
available soon and these data would allow us to evaluate whether
outlier payments to date appear to be approximately 5.1 percent of
total DRG payments. We solicited comments and data from hospitals with
respect to the recent trends in hospital charges and the implications
for outlier payments if the fixed-loss threshold were to remain at
$33,560. We indicated in the March 5, 2003, proposed rule that, based
upon that analysis and the comments we received in response to the
proposed rule, we would adjust the threshold accordingly in the final
rule.
B. Summary of Public Comments and Departmental Responses
Comment: Many commenters recommended that we lower the outlier
threshold to ensure that hospitals have access to these special
payments to cover extremely high-cost Medicare patients. In addition,
they argued that because the threshold was raised from $21,025 in FY
2002 to $33,650 in FY 2003 based on policies in place at the beginning
of the year, the threshold should now be lowered to reflect these mid-
year changes.
Some commenters suggested that if a new threshold cannot be
calculated by the publication date of the final rule, we should apply
the FY 2002 threshold until a new threshold could be calculated. They
argued that use of this threshold would enable all legitimate claims to
qualify for cost outlier status.
MedPAC noted that failing to adjust the threshold would continue to
deny additional payments to hospitals that have extraordinarily costly
cases, thwarting the legislative purpose of the policy. One commenter
suggested we lower the threshold close to the FY 2002 amount because it
was not the intent of the Congress to have such a high outlier
threshold for those hospitals that did not try to manipulate the
outlier system and have sustained high losses for true outlier cases.
One commenter argued that last year, for purposes of setting a FY
2003 outlier threshold, CMS inflated charges using a 2-year average
annual rate of change in charges per case from FY 1999 to FY 2000, and
from FY 2000 to FY 2001, because CMS analysis demonstrated that charges
have been growing at a much faster rate than recent estimates of cost
growth. The commenter argued that, based on the new proposals in the
proposed rule, this methodology was now unnecessary because the
assumption of a lag in cost reports no longer applies.
One commenter recommended that we lower the threshold to the FY
2002 amount and implement this threshold retroactively to October 1,
2002. The commenter explained that many hospitals did not game the
system and have had their outlier payments reduced over the years
because the threshold has increased dramatically over the last 3 years
due to a limited number of hospitals who gamed the system.
Response: We reestimated the fixed-loss threshold reflecting the
changes implemented in this final rule that will be in effect during a
portion of FY 2003. To do that reestimation, we inflated charges from
the FY 2002 Medicare Provider Analysis and Review (MedPAR) file by the
2-year average annual rate of change in charges per case to predict
charges for FY 2004. We believe the use of charge inflation is more
appropriate than our previous methodology of cost inflation because
charges are increasing at a much faster rate than costs. Therefore, we
disagree that we should return to using the previous methodology based
on cost inflation. Originally, when the FY 2003 threshold of $33,560
was set, we used FY 2001 MedPAR records. Because more recent data are
now available, we believe it would be appropriate to use FY 2002 data
to reestimate the FY 2003 threshold, taking into account the changes
implemented by this final rule.
As noted previously, we continued to pay substantially more than
was projected for outlier payments in FY 2002. Our most recent estimate
is that we paid approximately 7.9 percent of total DRG payments in
outliers, well in excess of our original projection of 5.1 percent, and
higher than the percentage of total DRG payments for outliers in FY
2001. That percentage was 7.7. Therefore, using FY 2002 cases to
estimate the outlier threshold for FY 2003 would result in a threshold
of $42,300. However, after accounting for the changes implemented in
this final rule, we estimate the threshold would be only slightly
higher than the current threshold (by approximately $600).
[[Page 34506]]
We believe it is appropriate not to change the FY 2003 outlier
threshold at this time. Although our current empirical estimate of the
threshold indicates it could be slightly higher, there are other
considerations that lead us to conclude the threshold should remain at
$33,560. Increasing the threshold would result in lower outlier
payments for all hospitals, not just those that have been aggressively
maximizing their outlier payments. Changing the threshold for the
remaining few months of the fiscal year could disrupt hospitals'
budgeting plans and would be contrary to the overall prospectivity of
the IPPS. We do believe that we have the authority to revise the
threshold, given the extraordinary circumstances that have occurred (in
particular, the manipulation of the policy by some hospitals). However,
in light of the relatively small difference between the current
threshold and our revised estimate, and the limited amount of time
remaining in the fiscal year, we have concluded it is more appropriate
to maintain the threshold at $33,560.
We note that, in the May 19, 2003, IPPS proposed rule for FY 2004,
we proposed an outlier threshold of $50,645 for FY 2004 (68 FR 27235).
Because that proposed rule was published prior to the publication of
this final rule, the FY 2004 outlier threshold was calculated without
accounting for the changes implemented in this final rule. The changes
implemented here will be reflected in the calculation of the final FY
2004 outlier threshold.
C. Provisions of the Final Rule Relating to the Fixed-Loss Outlier
Threshold
We are maintaining the fixed-loss outlier threshold at $33,560 for
the remainder of FY 2003. We also are maintaining the marginal cost
factor, the percentage of costs above the threshold that is paid for
outlier cases, at 80 percent.
VII. Adjustment for High-Cost Outliers and Short-Stay Outliers Under
the LTCH PPS
A. Background
Under the LTCH PPS, as implemented in the regulations at Sec.
412.525(a), we make an adjustment for additional payments for outlier
cases that have extraordinarily high costs relative to the costs of
most discharges. In the LTCH PPS final rule for the 2004 LTCH PPS rate
year, we intend to summarize the proposals relating to outlier payments
under the LTCH PPS that were made in the March 7, 2003, LTCH PPS
proposed rule (68 FR 11250), and will explain that we have responded to
comments submitted on behalf of LTCHs and finalized the LTCH PPS
outlier policy in this final outlier rule. We believe it is appropriate
to finalize the changes to the IPPS outlier policies and the LTCH PPS
outlier policy at the same time because the LTCH PPS outlier policy is
modeled after the IPPS outlier policy. Accordingly, following is a
summary of the LTCH PPS outlier policy as proposed in the March 7,
2003, proposed rule and our responses to the public comments we
received on that proposed rule.
Under the regulations at Sec. 412.525(a), we make an adjustment
for additional payments for outlier cases that have extraordinarily
high costs relative to the costs of most discharges. Providing
additional payments for outliers strongly improves the accuracy of the
LTCH PPS in determining resource costs at the patient and hospital
level. These additional payments reduce the financial losses that would
otherwise be caused by treating patients who require more costly care
and, therefore, reduce the incentives to underserve these patients. We
include a provision for outlier payments under the LTCH PPS and set the
outlier threshold before the beginning of the applicable rate update
year so that total outlier payments are projected to equal 8 percent of
total payments under the LTCH PPS.
Under Sec. 412.525(a), we make outlier payments for any discharges
if the estimated cost of a case exceeds the adjusted LTCH PPS payment
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the
amount used to limit the loss that a hospital will incur under an
outlier policy. This results in Medicare and the LTCH sharing financial
risk in the treatment of extraordinarily costly cases. The LTCH's loss
is limited to the fixed-loss amount and the percentage of costs above
the marginal cost factor. We calculate the estimated cost of a case by
multiplying the overall hospital cost-to-charge ratio by the Medicare
allowable covered charge. In accordance with Sec. 412.525(a), we pay
outlier cases 80 percent of the difference between the estimated cost
of the patient case and the outlier threshold (the sum of the adjusted
Federal prospective payment for the LTC-DRG and the fixed-loss amount).
We determine a fixed-loss amount, that is, the maximum loss that a
LTCH can incur under the LTCH PPS for a case with unusually high costs
before the hospital will receive any additional payments. We calculate
the fixed-loss amount by simulating aggregate payments with and without
an outlier policy. The fixed-loss amount results in estimated total
outlier payments projected to be equal to 8 percent of projected total
LTCH PPS payments.
Outlier payments under the LTCH PPS are determined consistent with
the IPPS outlier policy. Currently, under the IPPS, a floor and a
ceiling are applied to an acute care hospital's cost-to-charge ratio
and if the acute care hospital's cost-to-charge ratio is either below
the floor or above the ceiling, the applicable statewide average cost-
to-charge ratio is assigned to the acute care hospital. Similarly, if a
LTCH's cost-to-charge ratio is below the floor or above the ceiling,
currently the applicable statewide average cost-to-charge ratio is
assigned to the hospital. In addition, for LTCHs for which we are
unable to compute a cost-to-charge ratio, we also assign the applicable
statewide average. Currently, MedPAR claims data and cost-to-charge
ratios based on the latest available cost report data from the Hospital
Cost Report Information System (HCRIS) and corresponding MedPAR claims
data are used to establish a fixed-loss threshold amount under the LTCH
PPS.
B. Establishment of the Fixed-Loss Amount for Outlier Payments Under
the LTCH PPS
For FY 2003, based on FY 2001 MedPAR claims data and cost-to-charge
ratios based on the latest available data from HCRIS and corresponding
MedPAR claims data from FYs 1998 and 1999, we established a fixed-loss
amount of $24,450. In the March 7, 2003, proposed rule, for the 2004
LTCH PPS rate year, we proposed to continue to use the March 2002
update of the FY 2001 MedPAR claims data to determine a fixed-loss
threshold that would result in outlier payments projected to be equal
to 8 percent of total payments, based on the policies described in that
proposed rule, because these data were the best data available. We
calculated cost-to-charge ratios for determining the March 7, 2003,
proposed fixed-loss amount based on the latest available cost report
data in HCRIS and corresponding MedPAR claims data from FYs 1998, 1999,
and 2000.
Consistent with the proposed outlier policy changes for acute care
hospitals under the IPPS discussed in the March 5, 2003, proposed rule
(68 FR 10420), in the March 7, 2003, LTCH PPS proposed rule, we
proposed to no longer assign the applicable statewide average cost-to-
charge ratio when a LTCH's cost-to-charge ratio falls below the floor.
We proposed this policy change because, as is the case for acute care
hospitals, we believe LTCHs could arbitrarily increase their charges in
order to maximize
[[Page 34507]]
outlier payments. Even though this arbitrary increase in charges should
result in a lower cost-to-charge ratio in the future (due to the lag
time in cost report settlement), currently when a LTCH's actual cost-
to-charge ratio falls below the floor, the LTCH's cost-to-charge ratio
would be raised to the applicable statewide average. This application
of the statewide average would result in inappropriately higher outlier
payments. Accordingly, we proposed to apply the LTCH's actual cost-to-
charge ratio to determine the cost of the case, even where the LTCH's
actual cost-to-charge ratio falls below the floor. No longer applying
the applicable statewide average cost-to-charge ratio when a LTCH's
actual cost-to-charge ratio falls below the floor would result in a
lower future cost-to-charge ratio. Applying this lower cost-to-charge
ratio to charges in the future to determine the cost of the case would
result in more appropriate outlier payments. Therefore, consistent with
the proposed policy change for acute care hospitals under the IPPS, we
proposed that LTCHs would receive their actual cost-to-charge ratios no
matter how low their ratios fall. Also, consistent with the proposed
policy change for acute care hospitals under the IPPS, we proposed
under Sec. 412.525(a)(4), by cross-referencing proposed Sec.
412.84(i), to continue to apply the applicable statewide average cost-
to-charge ratio when a LTCH's cost-to-charge ratio exceeds the ceiling
by proposing to adopt the proposed policy at proposed Sec.
412.84(i)(1)(ii). Cost-to-charge ratios above this range are probably
due to faulty data reporting or entry, and, therefore, should not be
used to identify and make payments for outlier cases because such data
are clearly errors and should not be relied upon.
In addition, we proposed to make a similar change to Sec.
412.529(c), by cross-referencing proposed Sec. 412.84(i), for
determining short-stay outlier payments to indicate that the applicable
statewide average cost-to-charge ratio would be applied when a LTCH's
cost-to-charge ratio exceeds the ceiling, but not when a LTCH's cost-
to-charge ratio falls below the floor. Since cost-to-charge ratios are
also used in determining short-stay outlier payments, the rationale for
the proposed change mirrored that for high-cost outliers.
Therefore, consistent with IPPS outlier policy, in determining the
proposed fixed-loss amount for the 2004 LTCH PPS rate year in the March
7, 2003, LTCH PPS proposed rule, we proposed to use only the current
combined operating and capital cost-to-charge ratio ceiling under the
IPPS of 1.421 (as explained in the IPPS final rule (67 FR 50125, August
1, 2002)). We believe that using the current combined IPPS operating
and capital cost-to-charge ratio ceiling for LTCHs is appropriate
since, as we explained in the August 30, 2002, LTCH PPS final rule (67
FR 55960), LTCHs are certified as acute care hospitals that meet the
criteria set forth in section 1861(e) of the Act in order to
participate in the Medicare program. As we also discussed in the August
30, 2002, LTCH PPS final rule (67 FR 55956), in general, hospitals are
paid as a LTCH only because their average length of stay is greater
than 25 days in accordance with Sec. 412.23(e). Furthermore, prior to
qualifying as a LTCH under Sec. 412.23(e)(2)(i), the hospitals
generally are paid as acute care hospitals under the IPPS during the
period in which they demonstrate that they have an average length of
stay of greater than 25 days. Accordingly, if a LTCH's cost-to-charge
ratio is above this ceiling, we proposed to assign the applicable IPPS
statewide average cost-to-charge ratio. (Currently, the applicable IPPS
statewide averages can be found in Tables 8A and 8B of the August 1,
2002, IPPS final rule (67 FR 50263).) We also would assign the
applicable statewide average for LTCHs for which we are unable to
compute a cost-to-charge ratio. Accordingly, in the March 7, 2003, LTCH
PPS proposed rule, for the proposed 2004 LTCH PPS rate year, we
proposed a fixed-loss amount of $19,978. Thus, we proposed to pay an
outlier case 80 percent of the difference between the estimated cost of
the case and the outlier threshold (the sum of the adjusted Federal
LTCH payment for the LTC-DRG and the proposed fixed-loss amount of
$19,978).
C. Reconciliation of Outlier Payments Upon Cost Report Settlement
Under existing regulations at Sec. 412.525(a), we specify that no
retroactive adjustment will be made to the outlier payments upon cost
report settlement to account for differences between the estimated
cost-to-charge ratios and the actual cost-to-charge ratios for outlier
cases. This policy is consistent with the existing outlier payment
policy for short-term acute care hospitals under the IPPS. However, as
discussed earlier, in the March 5, 2003 IPPS proposed rule (68 FR
10420), we proposed to revise the methodology for determining cost-to-
charge ratios for acute care hospitals under the IPPS because we became
aware that payment vulnerabilities exist in the current IPPS outlier
policy. Because the LTCH PPS high-cost outlier and short-stay policies
are modeled after the IPPS outlier policy, we believe they are
susceptible to the same payment vulnerabilities and, therefore, merit
revision.
As proposed for acute care hospitals under the IPPS at proposed
Sec. 412.84(m) in the March 5, 2003, proposed rule, we proposed in the
March 7, 2003, LTCH PPS proposed rule under Sec. 412.525(a)(4)(ii), by
cross-referencing proposed Sec. 412.84(m), that, for LTCHs, any
reconciliation of outlier payments would be made upon cost report
settlement to account for differences between the actual cost-to-charge
ratio and the estimated cost-to-charge ratio for the period during
which the discharge occurs. As was the case with the proposed changes
to the outlier policy for acute care hospitals under the IPPS, we
indicated that we were still assessing the procedural changes that
would be necessary to implement this change for LTCHs under the LTCH
PPS. In addition, we proposed to make a similar change in Sec.
412.529(c)(4)(ii), by cross-referencing proposed Sec. 412.84(m), to
indicate that any reconciliation of payments for short-stay outliers
would be made upon cost report settlement to account for differences
between the estimated cost-to-charge ratio and the actual cost-to-
charge ratio for the period during which the discharge occurs.
In addition, because we currently use cost-to-charge ratios based
on the latest settled cost report, again consistent with the policy for
acute care hospitals under the IPPS, any dramatic increases in charges
by LTCHs during the payment year are not reflected in the cost-to-
charge ratios when making outlier payments under the LTCH PPS.
Consistent with the proposed policy change for acute care hospitals
under the IPPS at proposed Sec. 412.84(i) discussed in the March 5,
2003 IPPS proposed rule, because a LTCH has the ability to increase its
outlier payments through a dramatic increase in charges and because of
the lag time in the data used to calculate cost-to-charge ratios, in
the March 7, 2003 LTCH PPS proposed rule, we proposed that fiscal
intermediaries would use more recent data when determining a LTCH's
cost-to-charge ratio. Therefore, under Sec. 412.525(a)(4)(ii), by
cross-referencing proposed Sec. 412.84(i), we proposed that fiscal
intermediaries would use either the most recent settled cost report or
the most recent tentative settled cost report, whichever is later. In
addition, we proposed to make a similar change to the short-stay
outlier policy at Sec. 412.529(c)(4)(ii), by cross-referencing
proposed Sec. 412.84(i), to indicate that subject to the proposed
provisions in the regulations at Sec. 412.84(i), fiscal
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intermediaries would use either the most recent settled cost report or
the most recent tentative settled cost report, whichever is later.
In the March 7, 2003, LTCH PPS proposed rule, when we calculated
the proposed fixed-loss amount of $19,978 for the proposed 2004 LTCH
PPS rate year, we did not assign the applicable statewide average cost-
to-charge ratio when a LTCH's actual cost-to-charge ratio fell below
the floor, consistent with the proposed IPPS outlier policy. However,
because many features of the LTCH PPS are dependent upon IPPS outlier
policies, we did not believe it was appropriate to finalize the
proposed changes to the LTCH PPS outlier policy in the LTCH PPS final
rule. Therefore, in calculating the final fixed-loss amount, we intend
to apply the existing outlier policy (that is, not the policies
proposed in the March 7, 2003, LTCH PPS proposed rule), using the
statewide average for LTCHs whose cost-to-charge ratios fall below the
floor. In addition, after analyzing the data that we would use to
calculate the fixed-loss amount, we would only apply the statewide
average to one LTCH that would have a cost-to-charge ratio that falls
below the floor. Based on this analysis, we have concluded that it will
not be necessary to recalculate a new fixed-loss amount once this
outlier rule becomes effective because the difference between a fixed-
loss amount based on the elimination of the floor and a fixed-loss
amount based on the statewide average would be negligible. Thus, the
fixed-loss amount published in the LTCH PPS final rule will not be
affected by changes in the outlier policy.
D. Application of Outlier Policy to Short-Stay Outlier Cases
Under some rare circumstances, a LTCH discharge could qualify as a
short-stay outlier case (as defined under Sec. 412.529) and also as a
high-cost outlier case. In such a scenario, a patient could be
hospitalized for less than five-sixths of the geometric average length
of stay for the specific LTC-DRG, and yet incur extraordinarily high
treatment costs. If the costs exceeded the LTCH PPS outlier threshold
(that is, the short-stay outlier payment plus the fixed-loss amount),
the discharge would be eligible for payment as a high-cost outlier.
Thus, for a short-stay outlier case, the high-cost outlier payment is
based on 80 percent of the difference between the estimated cost of the
case plus the outlier threshold (the sum of the fixed-loss amount and
the amount paid under the short-stay outlier policy).
E. Summary of Public Comments on the LTCH PPS Outlier Policy in the
March 7, 2003, Proposed Rule and Departmental Responses
Of the approximately 30 pieces of correspondence we received on the
March 7, 2003, LTCH PPS proposed rule, 22 pieces contained public
comments on the proposed LTCH PPS high-cost and short-stay outlier
policies that were included in the proposed rule. A summary of those
comments and our departmental responses follow.
Comment: Many commenters supported our proposal to use the most
recent tentatively settled Medicare cost report to determine the cost-
to-charge ratios to be used for outlier payments under the LTCH PPS,
since this policy would provide the most current data reviewed by the
fiscal intermediaries for purposes of the outlier payment. A number of
commenters also agreed with the proposal to eliminate the use of
statewide averages for hospitals with cost-to-charge ratios below the
minimum floor cost-to-charge ratio, stating that this proposal would
remove incentives to rapidly increase charges relative to costs.
Response: We agree with the commenters and we are adopting the
proposal to use the most recent tentatively settled Medicare cost
report to determine the cost-to-charge ratios and the proposal to
eliminate the use of statewide averages for hospitals with cost-to-
charge ratios below the minimum floor cost-to-charge ratio. However, we
want to take the opportunity in this final rule to clarify some points
about the application of these policies.
The IPPS outlier policy in this final rule, which requires applying
a hospital's actual cost-to-charge ratio to determine the cost of a
case, even where the hospital's actual cost-to-charge ratio falls below
the floor, will become effective 60 calendar days after the date of
publication of this final rule. This policy will similarly become
effective for LTCHs 60 calendar days after the date of publication of
this final rule. For purposes of making actual outlier payments for
discharges between July 1, 2003, and the effective date of this outlier
rule (60 calendar days after the date of publication), LTCHs' cost-to-
charge ratios that are below the floor will be replaced by the
statewide average as under existing policy, while any outlier payments
made on or after the effective date of this outlier rule will be
determined under the new policy using the LTCHs' actual cost-to-charge
ratio, even if that cost-to-charge ratio is below the floor.
Following is an example of how the policy eliminating the floor
cost-to-charge ratio will apply beginning July 1, 2003:
As of July 1, 2003, Hospital A has a cost-to-charge ratio of 0.250,
which is above the current cost-to-charge ratio floor of 0.206.
Therefore, for purposes of determining outlier payment in the 2004 LTCH
PPS rate year (July 1, 2003, to June 30, 2004), Hospital A would
continue to use its cost-to-charge ratio of 0.250 (unless the fiscal
intermediary changes Hospital A's cost-to-charge ratio due to tentative
settlement of a cost report) and use the fixed-loss amount to be
published in the LTCH PPS final rule for the 2004 LTCH PPS rate year.
Hospital B has a cost-to-charge ratio of 0.200, which is below the
cost-to-charge ratio floor of 0.206. For purposes of determining
outlier payments from July 1, 2003, until the effective date of this
final rule (60 calendar days after the date of publication), Hospital B
continues to use the statewide average cost-to-charge ratio. However,
beginning with the effective date of the final rule, Hospital B uses
its actual cost-to-charge ratio of 0.200 (unless the fiscal
intermediary changes Hospital B's cost-to-charge ratio due to tentative
settlement of a cost report), and continues to use the fixed-loss
amount to be published in the LTCH PPS final rule.
Comment: Numerous other commenters representing LTCHs disagreed
with our proposed policy that, for LTCHs, any reconciliation of outlier
payments would be made upon cost report settlement to account for
differences between the actual cost-to-charge ratio and the estimated
cost-to-charge ratio for the period during which the discharge occurs.
One commenter stated that the proposal would create accounting
difficulties for hospitals and fiscal intermediaries, and suggested
that if CMS is concerned about ``gaming'' related to outlier payments,
then, as an alternative, the fiscal intermediaries could monitor
charges per diem using PS&R data, or a quarterly reporting mechanism
can be established similar to the HCFA-91. Other commenters wrote that
constant updates to the cost-to-charge ratios for outlier payments
would be a costly and burdensome process for LTCHs and fiscal
intermediaries to administer. The commenters recommended that CMS
maintain its current policy of using the most recent final cost report
for cost-to-charge ratios with no changes until the following fiscal
year.
Another commenter stated that requiring the fiscal intermediary to
notify providers every time a change is
[[Page 34509]]
made to the cost-to-charge ratio in the fiscal intermediary's system
will cause the provider to make multiple unnecessary adjustments to
properly account for the difference in payment for high-cost outliers
and short-stay outlier cases. The commenter proposed that the fiscal
intermediary should be required to send the provider notification each
time the cost-to-charge ratio will be changed in its system.
Response: As explained in response to comments on the IPPS outlier
proposed rule, although the provision concerning reconciliation is
effective 60 days after the date of publication of this final rule, we
understand that, given the large workload and limited resources of our
fiscal intermediaries, attempting to implement this provision for all
hospitals receiving outlier payments at the same time would create an
administrative burden. Accordingly, we intend to issue a program
instruction in the near future to assist fiscal intermediaries in
implementing this provision during the remainder of the LTCH rate year.
Notably, however, for LTCHs, particularly because the universe of
LTCHs is relatively small, we do not believe it will be overly
burdensome for the fiscal intermediaries to rerun a LTCH's claims to
determine the accurate outlier payment amount. We also do not believe
that the reconciliation of outlier payments for LTCHs will be overly
burdensome because LTCHs are on notice of the revised methodology.
We also are not adopting the commenter's recommendation to
establish a system for monitoring PS&R data or for quarterly reporting.
While those procedures might aid in detecting aberrant charge
increases, we believe that the reconciliation process is preferable
because it allows for outlier payments to be ultimately determined
based on actual cost-to-charge ratios, rather than on estimates.
Finally, we agree with the commenter that the fiscal intermediaries
should notify the hospitals whenever a change is made to the cost-to-
charge ratio. We plan to provide more details on this procedure in
program instructions to be issued after the publication of this final
rule.
Comment: Several commenters questioned whether CMS has the
authority to retroactively adjust outlier payments, stating that it is
``completely contrary to the entire concept of a prospective payment
system,'' and would generate budgeting uncertainty and administrative
burden for hospitals and CMS.
One commenter claimed that the Secretary of the Department of
Health and Human Services has argued in court that the Medicare statute
does not allow retroactive adjustments to outlier payments. (See County
of Los Angeles v. Shalala, 192 F.3d 1005 (D.C. Cir. 1999).)
Another commenter argued that since the LTCH PPS is uniquely
different from the IPPS in that a much greater percentage of overall
payment under the LTCH PPS is dependent upon cost-to-charge ratios
(high-cost outliers and short-stay outliers combined), subjecting such
a large portion of payments to a cost-based settlement approach defeats
the purpose and benefits of a PPS. Specifically, the commenter noted
that since the cost-to-charge ratio is used to determine payment for
both high-cost outliers and for short-stay outliers, which combined,
can represent a significant percentage of all discharges from a LTCH,
both the classification of a case as a short-stay or high-cost outlier
and the resulting payment amount would have to be reassessed and
possible retroactive adjustments would have to be made following an
audit of more recent cost report data. Therefore, the commenter
believed that a policy that allows for retroactive adjustments to prior
payment amounts introduces a large amount of uncertainty and complexity
that the PPS was intended to eliminate.
Response: As an initial matter, our position in the court cases is
more accurately presented as stating that the language of the statute
does not clearly mandate that the actual amount of outlier payments
must be between 5 and 6 percent of total outlier payments under the
IPPS, and that our policy of not making retroactive adjustments to
ensure that actual payments fall between that range is consistent with
the intent of Congress. However, the commenters are correct in pointing
out that a basic premise of a PPS is predictability of payment, the
prospectivity of the system is undermined when it is manipulated and
abused in order to maximize reimbursement. Under the IPPS, in light of
the gross abuses of the current methodology by some hospitals, and the
negative impact such overpayments ultimately have on other hospitals
due to their impact on the fixed-loss amount, we believe the option of
reconciling outlier payments based on the settled cost report for
hospitals that have been initially paid using a significantly
inaccurate cost-to-charge ratio compared to the actual ratio from the
cost reporting period is now appropriate. We believe that at this time
it is appropriate to adopt this policy for the LTCH PPS because it will
contribute to the overall accuracy and fairness of the fixed-loss
amount under the prospective payment system.
As we stated above, in our view, reconciling outlier payments
because they were originally paid on the basis of a significantly
inaccurate cost-to-charge ratio is similar to recovering outlier
payments when adjustments are made to covered charges for any services
that are not found to be medically necessary or appropriate under
Medicare upon medical or other review. This review is explicitly
provided for under the IPPS policy at Sec. 412.84(d). This provision
was established when the IPPS was first implemented for FY 1984 (48 FR
39785).
The court cases referenced by the commenters all addressed the
issue of whether outlier payments must be retroactively adjusted when
the level of the fixed-loss amount under the IPPS determined in advance
of the fiscal year to which it applies ultimately results in actual
IPPS outlier payments that are a smaller percentage of total IPPS DRG
payments than was originally projected. We believe that an important
goal of a PPS is predictability. Therefore, we believe that the fixed-
loss outlier threshold, whether under the IPPS or the LTCH PPS, should
be projected based on the best available historical data and should not
be adjusted retroactively. We believe that a retroactive change to the
fixed-loss outlier threshold would affect all hospitals subject to a
PPS, thereby undercutting the predictability of the system as a whole.
However, if we deem it necessary as a result of a hospital-specific
data variance to reconcile outlier payments of an individual hospital,
such action on our part would not affect predictability of the entire
system. Rather, because each hospital is on notice as to our revised
methodology for determining cost-to-charge ratios and that outlier
payments are subject to possible reconciliation, we are able to
maintain the predictability of the system as a whole. Further, because
reconciliation of outlier payments will affect only certain hospitals,
the administrative burden of implementing such a policy is minimized.
Accordingly, we continue to believe that the fixed-loss amount should
be based on projected payments using the latest available historical
data without retroactive adjustments. This was our position in the
court cases cited by the commenter, and it has been our consistent and
often stated position, including earlier in this final rule and in the
March 5, 2003, IPPS outlier proposed rule.
Comment: One commenter recommended that subregulatory
[[Page 34510]]
guidelines for the review of outlier payments be established,
specifying what changes to the cost-to-charge ratios would trigger a
review and what entity is responsible for determining whether a review
is necessary. The commenter added that CMS should ensure that outlier
thresholds are estimated to reflect 8 percent of total payments.
Another commenter stated that the proposed reconciliation to cost-to-
charge ratios should be limited only to those hospitals that meet
certain criteria, such as hospitals that cross a defined threshold of
charge increases combined with a high level of outlier payments
compared to the norm. The commenter requested that the final rule
include specific criteria to be used for the determination of hospitals
that will be subject to such an adjustment.
Response: As we stated earlier in this final rule, we intend to
issue a program instruction to the fiscal intermediaries in the near
future that will provide specific criteria to be used in the
reconciliation of outlier payments for the remainder of the LTCH PPS
rate ye 
