Hefty outlier payments may look like fraud

Some charging structures gouge government

The federal investigation into alleged billing fraud and unnecessary surgeries at a Redding, CA, hospital has also shed new light on potential abuses of an unusual Medicare reimbursement mechanism designed to help hospitals that perform difficult procedures or care for very sick patients.

In addition to charges that two of its heart surgeons performed unnecessary procedures, federal officials allege that Redding Medical Center inappropriately charged more for services in certain diagnosis-related groups (DRGs) to take advantage of higher Medicare outlier payments. These are payments given in addition to standard reimbursement, when charges for specific cases are significantly higher than the amount paid for that DRG.

An analysis performed by the California Nurses Association and the Oakland, CA-based Institute for Health and Socio-Economic Policy found that California hospitals owned by Tenet Health care Corp., including the Redding facility, collected outlier payments as up to 10% of their total Medicare inpatient reimbursement, while national averages for outlier payments to hospitals run around 3% to 4% of total Medicare reimbursement.

Federal regulators allege Tenet hospitals have charged inappropriately high fees for certain DRGs to trigger the outlier calculation for higher payments.

Despite all the negative press outlier payments have received in the national media, it’s important to remember that they are not illegal or unusual, says Renee Leary, MPH, a hospital billing expert and president and chief operating officer of HHS, Inc., a medical billing software company in Hamden, CT.

"Sometimes there is no DRG that appropriately describes a patient’s condition," she notes. "The patient may have something that is relatively rare, and Medicare doesn’t have a classification for it. The hospital can report the nearest DRG, but the reimbursement is not really accurate. So the outlier payment would take care of that."

Also, the set DRG reimbursement amounts are based on averages of the cost of care for typical cases in that grouping. Very ill patients or those with complications may end up costing the facility a great deal more than the average amount. The outlier mechanism was set up for those instances.

"Hospitals pay a fixed amount for each DRG," explains Dean Farley, MS, PhD, HHS vice president for health policy and analysis. "What goes beyond that — the outlier calculation — starts with the charge reported on the patient’s bill, the total charge." The total charge is then multiplied by a set cost-to-charge ratio, a figure pre-set by the regional Medicare fiscal intermediary and which is based on the hospital’s prior reporting of costs in previous years. That calculation reveals the cost for that case.

The intermediary then has a set threshold amount above that cost before any other calculation takes effect, he adds.

"If the calculated cost exceeds the base DRG payment plus the threshold amount — which this fiscal year is about $20,000 — the government steps in and pays the hospital the difference," Farley explains. "Before a hospital can receive additional payment, they must incur costs well in excess of the normal DRG payment."

Gaming the system

However, it is true that the outlier payments are directly tied to a hospital’s reported charges for each case. Conceivably, hospitals could just hike charges for certain expensive procedures to the point that it would trigger the intermediary’s outlier calculation.

Although it is illegal for hospitals to charge Medicare higher rates than it does private insurers, it is unlikely that hospitals have one set charge for a specific service or procedure.

"It is a gray area," Farley notes. "You can have different payment arrangements for different payers. One payer might insist on paying for operating room services in 15-minute increments. Another payer might go along with that but negotiate different prices for inpatient and outpatient surgery. Another payer might want to carve out specific types of surgery. There are different ways of putting the pieces together."

If a hospital knows that its Medicare population uses more inpatient surgery than outpatient surgery, rather than set up a single price for surgical services, they may set up inpatient surgery a little higher, he adds. "All payers pay the same price, but because more of your inpatient surgeries are Medicare beneficiaries, this price differential may disproportionately affect them."

Regulators may take a dim view of pricing structures that appear to disproportionately impact Medicare patients.

Boosting charges

Because the cost-to-charge ratio set by intermediaries typically lags behind current cost data, some hospitals justify charging higher rates until the ratio catches up to current levels.

However, because charges are always reported to the intermediary for consideration in the overall cost calculations, the ratio can skew high over a period of time.

"The problem with that is the cost-to-charge ratio is going to catch up and then you start pushing charges to stay ahead of yourself," Farley says.

A simple example is the way the cost of hospital outpatient services skyrocketed before ambulatory payment classifications (APCs) were established.

"Beneficiaries were paying a flat 20% of the charge," Farley notes. "Hospitals kept pushing charges up and up, getting more money from copayments. Medicare wasn’t paying more, but the beneficiaries were."

The government eventually nudged out this practice and cracked down with set APC payments.

Given the attention that the federal Department of Health and Human Services’ Office of the Inspector General (OIG) is paying to the "outlier" payment issue, it is both ethical and practical for hospitals to monitor their reimbursement strategies to ensure they are fair, say Farley and Leary.

"Medicare has a set average for what percentage of its reimbursement typically goes through the outlier program," Farley says. "The average now is about 3.5%, and that is a number that a hospital ought to be watching."

If a facility notices that 5% to 6% of its inpatient Medicare reimbursement is in the form of outlier payments, then they ought to look at which DRGs are receiving the additional amounts.

"Look at the DRGs. Where are your outliers?" asks Leary. "You would expect to see the outliers group in a few DRGs. Hospitals may specialize in providing certain difficult procedures that naturally will mean more complications. Are the outliers in a couple of those DRGs, or are they in all of them? If you start seeing outliers in low-cost DRGs, that would be a much bigger alarm."

Once you notice the DRGs, it might be helpful to go in and pull out some specific cases to determine whether the documentation exists to support the additional payment.

"The worst thing that can happen to you is that the charges were appropriate, but you don’t have the documentation support it," she notes.

Hospitals must be sure to tell physicians to only render services that are needed and appropriate, and then to document them thoroughly, advises Paul Risner, JD, a health care attorney with the firm Akerman-Senterfitt in Orlando, FL.

"There is a very low tolerance for practitioners or institutions who are pushing the envelope and have no reasonable basis for what they are doing," he states. "They want to punish people for taking liberties with billing or overcharging or overcoding their cases."

CMS: Who’s been to a seminar lately?’

A few years ago, physicians routinely attended seminars coaching them on what elements of documentation would enable them to report a higher level of service. This is a no-no, Risner reports.

"If a hospital changes its coding or charging practices suddenly, that’s the first red flag," he adds. "CMS [the Centers for Medicare & Medicaid Services] may come in and ask, Who’s been to a seminar lately?’ If you just got back from the ABC School of Coding in Las Vegas, that tends to be a signal that you just learned how to code better, not that you’ve changed the way you practice."

Hospitals may indeed see large percentages of cases that justify the outlier payments, but the key is, they must have the documentation that supports the higher level, he emphasizes.

"That is the underlying principle that will save anyone we are reading about in the newspaper today," he notes. "Do they have their charts in order and can they justify what they charge?" n