Although the government imposes policies to regulate the amount hospitals can bill Medicare, rising prices for complicated patient cases, or "cost outliers," often lead Medicare to overpay hospitals, according to the Wall Street Journal.
Here are 10 things to know about cost outliers and the effects on Medicare spending as prices increase.
1. The government is supposed to remain unaffected by increases to hospitals' list prices because Medicare doesn't pay them. Instead, Medicare usually pays fixed prices based on patients' conditions, which is intended to prevent the government from shouldering hefty price hikes. However, cost outliers allow hospitals to collect for such patients based on the actual costs of treating them.
2. Because there is a significant lag between when patients are treated and when Medicare receives updates to hospitals' cost data, the government has to estimate costs using a formula based off hospitals' own list prices, meaning they are subject to paying more as hospitals increase prices. When prices rise at a higher rate than actual costs, Medicare ends up overpaying. Although Medicare has the ability to "claw back" overpayments when it obtains updated cost data from hospitals, it rarely does, according to the Wall Street Journal.
3. According to a Wall Street Journal analysis of Medicare claims data and financial filings from medical facilities, many hospitals increased prices faster than costs, leading to higher outlier payments and overpayments by Medicare. Between 2010 and 2013, the Journal identified $2.6 billion in Medicare overpayments made to general hospitals as a result of overestimating hospitals' costs.
4. Conversely, when list prices rise at a slower rate than actual costs, Medicare can underpay hospitals. According to the Journal's analysis, Medicare underpaid some hospitals by about $550 million over the same time period.
5. Will Fox, an actuary with Milliman who advises hospitals on pricing strategies, told the Wall Street Journal, "there's still a big reward" for hospitals when increasing list prices. Hospitals primarily raise prices to increase revenue from private insurers, which sometimes reimburse based on list prices, though they often negotiate discounts with hospitals in their networks. Overpayments by Medicare are usually viewed as a smaller added "bonus," according to the report.
6. Monitoring outlier payments is difficult because Medicare uses a complex formula to identify them. Outlier payments are meant to cover 80 percent of hospitals' costs beyond certain thresholds, depending on the type of case, but determining the actual cost of care at the time it is provided isn't possible, according to the report. Hospitals send annual reports to CMS reflecting their actual costs — as opposed to billing rates — but those reports can be up to two years behind. According to the report, hospitals can raise prices and benefit from Medicare's use of older cost reports in the periods between hospitals' yearly cost reports.
7. Medicare rarely attempts to collect on overpayments to hospitals. According to the report, hospitals' annual financial reports indicate just 85 facilities have received requests from CMS to repay about $140 million in overpayments over the last decade.
"If we identify inappropriate outlier payments, we use our reconciliation process to recover dollars, or, if necessary, bring inappropriate billing patterns to the attention of law-enforcement authorities," Sean Cavanaugh, deputy administrator at Medicare, told the Wall Street Journal.
8. Medicare is required to reserve 5 percent of its hospital budget to pay for outlier costs. Therefore, reducing the rate of overpayments could allow more money to be allocated to hospitals that haven't raised prices ahead of costs, according to the report.
9. Increasing hospitals' list prices can create a far-reaching ripple effect. According the report, some insurers end up paying the full price, which can lead to increased premiums for members. Consumers with insurance plans that include high deductibles and copayments may be required to shoulder high costs as well.
10. One of the most publicized cases of Medicare overpayments to hospitals was revealed in the early 2000s involving hospital operator Dallas-based Tenet Healthcare. Between 1995 and 2003, Tenet allegedly submitted claims with artificially inflated prices, leading Medicare to overpay the system for outlier payments Tenet wasn't eligible to receive, according to the report. Although Tenet didn't admit to any wrongdoing, in 2006 it signed agreement with the Justice Department and agreed to pay nearly $800 million to settle the allegations that the system billed Medicare to generate lucrative payments it didn't deserve, as well as claims that physicians in one Tenet hospital were performing unnecessary heart surgeries and that Tenet paid physicians illegal kickbacks for patient referrals.
Another hospital cited by the Wall Street Journal, Jersey City, N.J.-based Christ Hospital, collected $2.93 million in special payments for treating outlier patients in 2013, more than four-times more money than the previous year, with the majority of the collections attributable to higher list prices charged by the hospital. During the first year and a half after Christ Hospital was acquired by Hudson City, N.J.-based CarePoint in July 2012, average list prices billed to Medicare for the 20 most common conditions increased by a range of 62 to 183 percent. The cost of Medicare patient stays in the hospital rose by about 42 percent in the same time period, according to the report.